Bankruptcy and car repossession

Dear Bankruptcy Adviser,
My daughter and son-in-law made a mistake by purchasing a financed vehicle with a HUGE interest rate. They are struggling financially and cannot afford the payment. They have been “robbing Peter to pay Paul” and it has caught up with them. The finance company is threatening repossession and they are on the verge of bankruptcy. If the vehicle is repossessed, are they still responsible for the outstanding debt if they are in bankruptcy?
— Tracy

Dear Tracy,
Car loans with high interest rates and payments commonly put people into financial distress. It is something that fascinates me when people believe that car dealers and car lenders actually care if the person can comfortably afford the car payment.

In reality, car dealers want to get cars off the lot and into the consumers’ hands. In most cases, little or no regard is given to the financial stability of the borrower because “the deal must get done,” whether or not payments are affordable. I have seen deals in which the salesperson has asked for the income of the purchaser’s entire household just to qualify the applicant for a loan. The applicant lived at home, was unemployed and stated her parent’s income to qualify. Both the applicant and the salesperson should be on the hook for this illegal statement of income, but rarely do these shenanigans come to light.

Furthermore, a car is typically an individual’s most prized possession and he or she will incur credit card debt to make the payment and file bankruptcy just to keep the car. Bizarre, but common.

The good news is that the balance remaining after the car is repossessed ought to be discharged, i.e., eliminated, in bankruptcy. The remaining balance after the car has been sold is called a deficiency balance, and unless your daughter or son-in-law committed blatant fraud when applying for the car loan, the debt can be included in their bankruptcy petition and eliminated.

There are a few options to consider prior to filing for bankruptcy. Your daughter should try to salvage her credit by selling the car immediately. Hopefully, the resale value will be somewhat close to the amount owed. If a balance remains, she can buy a cheap, used car while trying to pay off the remaining balance.

She might know a friend or acquaintance who would be willing to take over the car payments and finish paying off the loan. This may be unlikely since the interest rate is high, but it is worth a try.

Most types of consumer debts can be eliminated in a bankruptcy. Four of the major exceptions are student loans, federal and state income taxes less than three years old, domestic support obligations and any damage caused through a car accident while driving under the influence. But credit card debt, personal loans, federal and state income taxes (under certain conditions), vehicle loans and even mortgage loans all can be eliminated in bankruptcy.

You are right to be concerned for your kids, as they appear to have made a very bad decision. And the most difficult battle you will face is getting them to listen to you and heed your advice. Try to let them know that ignoring the problem or incurring credit card debt to make the payments will only increase the chances that they will need to talk to me one day.

Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser go to the ” Ask the Experts” page, and select “bankruptcy” as the topic.