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Bankruptcy Articles

Monday, November 3rd, 2008

by Theodore Sliwinski, Esq.

1. Vehicle Repossession

When you finance or lease a car, truck or other vehicle, your creditor holds important rights on the vehicle until you’ve made the last loan payment. These legal rights are established by a signed contract and by New Jersey state law. For example, if your payments are late or if you default on your contract in any way, then your creditor may have the legal right to repossess your vehicle. In New Jersey your creditor has the legal authority to seize your vehicle as soon as you default on your loan or lease. If you default on your loan, then New Jersey law  allows the creditor to repossess your car. A creditor must repossess any vehicle in a commercially reasonable manner. Moreover, the creditor must not “breach the peace” in any of their efforts. Basically, the creditor can’t bust into your garage and take the vehicle.

Once your car has been repossessed then your creditor must decide whether to keep the car as compensation for your debt, or to sell it in either a public or private sale. In New Jersey your creditor must advise you as to what will eventually happen to the car. For example, if a creditor should choose to sell the car at a public auction, then New Jersey law requires that the creditor advise you of the date of the sale so that you can attend and participate in the bidding process. If the vehicle is to be sold privately, then you may also have a right to know the date when it will be sold.

In either of these circumstances, you may be entitled to buy back the vehicle by paying the full amount that you owe, plus any expenses connected with its repossession, such as storage and the preparation for sale. In New Jersey the law allows you to reinstate your contract—reclaim your car by paying the amount you owe, as well as repossession and related expenses (such as attorney fees). If you reclaim your car, then you must make your payments on time, and also satisfy the terms of your reinstated or renegotiated contract to avoid another repossession.

The sale of a repossessed vehicle must be conducted in a commercially reasonable manner—according to standard custom in a particular business or an established market. For example, the sale price might not be the highest possible price—or even what you may consider a good price—but a sale price far below fair market value may indicate that the sale was not commercially reasonable. The failure to sell the car in a commercially reasonable manner may give you either a claim against your creditor for damages or a defense against a deficiency judgment—a court order mandating you to pay the debt you owe. Regardless of the method used to dispose of a repossessed car, a creditor usually may not keep or sell any personal property found inside.

2. Paying the Deficiency

A deficiency is any amount you still owe on your contract after your creditor sells the vehicle, and then applies the amount received to your unpaid obligation. For example, if you owe $10,000 on the car and your creditor for $5,000, the deficiency is $5,000 plus any other fees you owe under the contract, such as those related to the repossession and early termination of your lease or early payoff of your financing. In New Jersey a creditor who has followed the proper procedures for repossession and sale is allowed to sue you for a deficiency judgment to collect the remaining amount owed on your credit or lease contract.

If you are sued for a deficiency judgment then you should be notified of the date of the court hearing. This may be your only opportunity to present any legal defense. If your creditor has  breached the peace when seizing the vehicle or failed to sell the car in a commercially reasonable manner, you may have a legal defense against a deficiency judgment.

It is easier to try to prevent a vehicle repossession from taking place than to dispute it afterward. Contact your creditor when you realize you will be late with a payment. Many creditors will try to work out a reasonable payment plan with you. Sometimes you may be able to negotiate a delay in your payment or a revised schedule of payments. If you reach an agreement to modify your original contract, then it is imperative to get it in writing to avoid any potential problems that may arise.

Nonetheless, it is still possible that your creditor  may refuse to accept late payments or make other changes in your contract, and they may demand that you return the car. By voluntarily agreeing to a repossession, you may reduce your creditor  expenses, which you would be responsible for paying. Remember that even if you return the car voluntarily, you are responsible for paying any deficiency on your credit or lease contract, and your creditor or lessor still may enter the late payments and/or repossession on your credit report.

3. Vehicles and Bankruptcy

Debtors often file bankruptcy to keep their vehicles from being repossessed. If your lender is threatening to repossess your vehicle, then you should immediately contact the New Jersey Bankruptcy Center. Filing for bankruptcy will generally stop the repossession of your vehicle. The automatic stay goes into immediate effect after you file. However, there are aspects of the new bankruptcy code that may affect the automatic stay, and they depend on your particular financial circumstances.  Once you file then your lender must immediately stop any attempts to  repossess your vehicle. Thereafter, a debtor will then have a “breather” to decide what his next step will be. In some instances, you may even be able to reclaim your repossessed vehicle back.

If you qualify and file bankruptcy under a chapter 7 then you can choose whether to reaffirm your loan and keep your vehicle. Alternatively, you can elect to turn your vehicle in back to the dealer. Nonetheless, if you are behind on your payments, then you must catch up on them before you can reaffirm your loan. If do not have the ability to bring your payments up to date, then your lender can request that the bankruptcy court  vacate the automatic stay. If the stay is vacated then your creditor can send out the repo man to snatch your vehicle. If your vehicle is repossessed then the lender must sell your vehicle. The debtor is given credit for the amount that the vehicle is sold for at the auction. If there is any money left over after the auction, then the lender must pay these proceeds  to you. In most auction sales the debtor still will owe a sizable deficiency. In the vast majority of the cases, the vehicle is sold for far less than the amount of the loan. If a debtor files for bankruptcy then the court will discharge the outstanding loan balance along with your other unsecured credit card and medical debts.

If you file bankruptcy under a  chapter 13 then you can also choose to retain your vehicle. You must continue to make your current payments and catch up on your arrears. Unlike a chapter 7 you do not have to pay off your past-due balance all in one lump sum. You can pay off your arrears through your repayment plan. The bankruptcy code also requires that you cure your default within a reasonable time over a three to five year period. If you are eligible to file for bankruptcy then the exemptions will permit you to protect a certain amount of equity in your home, your personal property, and also your vehicle. If you should choose to retain your vehicle, then a debtor must execute a reaffirmation agreement to repay the loan.

Hopefully you will never have to experience the terrifying prospect of having the repo man hunt you down. However, if you should suffer from unexpected financial problems, and if you trying escape the repo man, then you can stop the repossession by filing for bankruptcy. A chapter 13 case can allow a debtor to repay the missed payments over a period of time. A chapter 13 also allows debtor who is facing repossession to regain control of his life and finances, and to make a repayment of his arrears. The amount and the length of the repayment plan is based on the debtor’s budget and on his disposable income. For most people their vehicle is their only means of transportation, and it is an important investment. The loss of their vehicle might stop them from obtaining to work to pay their other financial obligations. Therefore, it is critically important to get all the facts when you are facing the repo man.