Bankruptcy is an important legal instrument which makes it possible for consumers to clear their debt and start life afresh. The two broad categories of bankruptcies are; insolvency and debt reorganization. Insolvency is provided for under Chapter 7 of the bankruptcy code while debt reorganization is provided for under Chapter 11, for businesses, and Chapter 13, for individuals. Under Chapter 7 bankruptcy, the assets of the debtor are sold to pay off their debt. The difference between the outstanding debt and the proceeds of the sale is then written off. Under Chapter 11 and 13, the debtor proposes a reasonable debt repayment plan which must be approved by the court. Once the plan is approved, the debtor pays monthly installments, through the trustee, for a given number of years. Once this period is over, the unpaid debt is written off. When filing for bankruptcy, one of the things you must ask is should I do a voluntary repossession?.
What is Not Covered by Bankruptcy
Bankruptcy does not cover student loans, child support payments and alimony. These payments must be made regardless of the debtor’s financial situation. While you may be allowed to keep your home and car, you must continue making the necessary payments without defaulting. Usually, the debtor must indicate on the Statement of Intention whether he or she wishes to retain their vehicle. Debtors can also choose to voluntarily surrender their vehicle.
What is Voluntary Repossession Mean During Bankruptcy
Car loans can sometimes be too costly for the average person to afford. On the other hand, the value of a new car reduces faster than the loan can be paid off. After a year, the value of the car can be as little as half the outstanding balance, or even much lower, which means that refinancing is not an option. In fact, some people often choose to surrender their vehicles without bankruptcy and work on settling the deficiency balance. Another option is to sell the car at the highest price possible, pay the loan partially and continue making monthly payments to settle the difference. If the deficiency balance is too great for the borrower to pay comfortably, declaring bankruptcy may be the only option.
When filing for bankruptcy to have your personal loans and credit card debt settled, you can take advantage of the opportunity to get rid of your costly car loan. If you are going through a divorce, you will also likely need to hire a good Rancho Cucomonga divorce lawyer. A good family lawyer can help sort out the details. All you need to do is indicate on the Statement of Intention that you do not wish to retain the car. While you will obviously lose the car, you will not be required to pay the deficiency balance since it’s covered under Bankruptcy Law.
It is important to note that when you file for bankruptcy, an automatic stay comes into effect. This means that the car financier cannot call you or try to repossess the car if you default. You have to voluntarily surrender the car. If you are current on your payments, you can retain the car and continue making regular payments. Voluntary repossession can be done at any time, but doing it during bankruptcy will protect the debtor from the deficiency balance.
How to Voluntarily Surrender your Car
Once you opt for voluntary repossession during bankruptcy, the first thing you need to do is indicate on the Statement of Intention about your plan to surrender the car. Next, you can agree with the financier to lift the automatic stay and choose a suitable place to turn in the vehicle. Alternatively, the financier can go to court and ask for an order to lift the automatic stay and repossess the vehicle. The creditor can also wait until the automatic stay is no longer valid – when your case is closed – before repossessing the vehicle. Once the vehicle is repossessed, the creditor will sell it at auction. The deficiency balance will be written off afterwards and the creditor can claim a tax deduction on the same. If there is a cosigner on the car loan, the deficiency balance will be transferred to them.
Benefits of Voluntary Repossession During Bankruptcy
By voluntarily surrendering your vehicle during bankruptcy, you can get legal protection from any debt which may arise from the deficiency balance. If there is a big difference between the value of your car and the outstanding balance of the car loan, voluntary repossession can be hugely beneficial. Secondly, if the monthly car payments are too costly for you to afford, surrendering the vehicle will leave you with more money to spend on other important financial obligations.
Before surrendering the vehicle, however, you should look for an alternative means of transportation. If you cannot use public transportation, you may be forced to buy a cheaper car. Please note that getting financing will be next to impossible once you’re declared bankrupt, so you may want to start saving early to buy a cheaper car on a cash basis. This is because the bankruptcy will be reported to credit bureaus, which will lower your credit score. If you had a friend or relative cosign the car loan, voluntary repossession during bankruptcy may not be such a good idea. This is because they will be legally responsible for the deficiency balance.