How Will Used Auto Prices Affect Bankruptcy?

auto inflation bankruptcyAccording to research firm J.D. Power, the average price of a preowned vehicle in the U.S. has exceeded $25,000 for the first time ever.

A Global Computer Chip Shortage

The climb began last year and experts do not see the trend ending any time soon. A global computer chip shortage has strained new-car inventories, leading more to shop the pre-owned market — leading to shrinking supplies and more demand.

At the same time, the average price for a new model climbed to $37,572 in April, up about 7 percent from a year earlier.

How does all this affect someone proceeding through bankruptcy?

Well, what normally is a depreciable asset has been appreciating, and current consumers are finding they have more equity in their vehicles.  But what happens if you cannot afford to make your payments on that appreciating asset?  Bankruptcy may be an option.

There are two main types of bankruptcy: Chapter 7, which liquidates some of your assets, and Chapter 13, which focuses on repaying debts. What happens to your car in bankruptcy depends both on the type of bankruptcy you file and how much equity you have in your vehicle.

Chapter 7 Bankruptcy

Under Chapter 7 bankruptcy, you can keep the car as long as you continue making the regular monthly payments to the lender.  In some cases, you can redeem the car, i.e., pay the lender what the car is worth.  (This only works if the value of the car is much less than the loan balance.) You can also try asking the lender to enter into a reaffirmation agreement and to include the missed payments in the new payment arrangement. However, your lender is under no obligation to modify your payment when you’re behind.

Chapter 13 Bankruptcy

For most people who are behind on their car payments, Chapter 13 is the better option. In Chapter 13, you can rewrite the car loan to lower the interest rate and possibly lower the payments.

In some cases, you can reduce the amount you have to repay based on the current value of your car.  That’s where the rising values for used cars can hurt you.  For example, if your car was worth $10,000 and you owed $15,000, you could file a Chapter 13 and offer to pay back $10,000 (the value of the car).  But today, that same car might be worth closer to $14,000.  If that’s the case, you could still “save” $1,000 by offering to pay the loan through Chapter 13.  But as they say in the fine print, “your savings may vary.”

To make sure, your best bet, if you are behind on your car payments, is to call us before your car is repossessed!

Find out where you stand and receive a detailed bankruptcy plan during these tumultuous times. Call Guenther Miller Law Group at 831-783-3440.