By Ryan C. Wood

What can I do if I cannot afford my monthly vehicle loan payment anymore? The problem is you have a vehicle loan payment that is too high and causing you problems each month with your bills. What can you do about it? There are any numbers of options to try and reduce the payment or get rid of the vehicle in the real world. Most of them end with the vehicle loan company sending you a bill once the vehicle is gone. This article focuses on forcing a set of terms, more favorable loan terms, on loan companies by filing for bankruptcy protection.

Depending upon the circumstances bankruptcy can reduce the principal amount owed on a loan and reduce the loan percentage rate thereby reducing your vehicle loan payment amount each month. The entire point of filing for bankruptcy protection is to eliminate, reorganize and reduce debts. Here we are talking about redeeming a vehicle for its fair market value in a Chapter 7 bankruptcy or cramming down on a vehicle loan in a reorganization case under Chapter 13, 9, or 12 by filing a motion to value the collateral of the secured loan.

So What Are The Savings To You?

The simplest answer is the savings will be the difference between what your vehicles is worth and what is owed on the vehicle loan, plus any reduction in the loan percentage rate. The larger the gap between the value and loan balance the larger the savings. If you vehicle is only worth $10,000 and the balance on your loan is $18,000 filing bankruptcy can reduce the amount you have to pay back to what your vehicle is worth ($10,000), not what is owed on the vehicle loan. So in our example the difference or savings is potentially $8,000. See below for issues that could make the savings less though.

Redeeming A Vehicle For Its Retail Value or Fair Market Value In Chapter 7 Bankruptcy

In a Chapter 7 the result is substantially the same as in a Chapter 13 reorganization case, but the law is different in reducing the vehicle loan. In Chapter 7 liquidation cases vehicle loans are reduced by redeeming the vehicle for its fair market value with new financing. A new loan is obtained for the retail or fair market value of the vehicle, as in our example $10,000, and the old loan company is forced to take the $10,000 in satisfaction of the original $18,000 vehicle loan. This is a 722 redemption. A motion has to be filed with the court and depending upon the jurisdiction a hearing may have to be held. In the Northern District of California we can notice motions on scream or die notice and seek a default if no opposition or request for hearing is filed with the court. The motion should cost anywhere from $500 – $1,400 depending upon your bankruptcy attorneys. The catch here is usually the new financing, new loan to pay off old loan, has a high percentage rate and there are process and origination fees usually. I have to say I am not a fan of redeeming vehicles for their fair market value under 722 of the Bankruptcy Code.

Courts have previously articulated its general approach to redemption under § 722 in the case of In re Lopez, 224 B.R. 439 (Bankr. C.D. Cal. 1998). Under that approach, the proper date for valuation of property under Bankruptcy Code §722 is the date of the hearing on the redemption motion. In re Lopez, 224 B.R. at 444. But see In re Eagle, 51 B.R. 959, 962 (Bankr. N.D. Ohio 1985) (date of valuation is petition date).

Cramming Down A Vehicle Loan In A Reorganization Case

In a Chapter 13 or some other reorganization case a motion to value the collateral, the vehicle, is filed and the value of the collateral is determined. This is the amount that has to be paid through the chapter 13 plan to the original vehicle loan company. Again, in our example a motion to value the vehicle would be filed valuing the vehicle at $10,000. What many bankruptcy attorneys do not tell you is you have to add in the attorneys’ fees and the chapter 13 trustee fee to truly calculate the savings via a chapter 13 case and chapter 13 plan. In our example I will use attorneys’ fees of $4,000 [$67 of the monthly chapter 13 plan payment] and the chapter 13 trustee gets a percentage of the monthly plan payment. I will use $67 a month for the chapter 13 trustee too, or $4,000 over the life of the chapter 13 plan. Even if the savings is not huge, no matter what, the monthly payment will decrease significantly since the chapter 13 plan will re-amortize the loan in the three to five year chapter 13 plan. For example the original loan in our example has a principal balance owed of $18,000 at 17% interest. The total amount financed is $28,841 and the monthly vehicle loan payment is $447 a month for five years. After filing for chapter 13 bankruptcy and valuing the vehicle/collateral at $10,000 with percentage rate of only 5% the total payoff is reduced to $11,323 and the monthly vehicle loan payment is reduced to $189, a reduction of $258 each month. For many people this reduction allows them to keep the car and pay their other living expenses on time each month without stress.

How To Value The Vehicle Under The Bankruptcy Code?

There is no absolute formula when determining the value of a vehicle. Courts will generally begin with determining the retail value figure based upon the year, make, model and mileage for the vehicle.

As a general principle, absent unusual circumstances, the retail value of a vehicle should be calculated by adjusting the Kelley Blue Book or N.A.D.A. Guide retail value for a like vehicle by a reasonable amount in light of any additional evidence presented regarding the condition of the vehicle and any other relevant factors. See In re Coleman, 373 B.R. 907, 912-13 (Bankr. W.D. Mo. 2007); In re Carlson, No. 06-40402, 2006 WL 4811331, at *2 (Bankr. W.D. Wash., Dec. 8, 2006); In re Eddins, 355 B.R. 849, 852 (Bankr. W.D. Okla. 2006).

There are usually competing appraisals provided to the bankruptcy court. One from N.A.D.A. or another from KBB. Or two different valuations from KBB. Regardless the court has to make a determination of what value to start at. After that the bankruptcy court should look at the specific condition of the vehicle as of the date the petition for bankruptcy protection was filed. If the vehicle in excellent (less than 5% of vehicles) good or fair condition. The will then make a reasonable adjustment to the starting point valuation discussed above.

What Evidence Should I Present To Prove Value?

I am of the opinion that more is more and not more is less under these circumstances. A picture does speak a thousand words. Take a picture of each scratch in the pain and each dent. That could result in 30 pictures of every little scratch or dent. So be it. Take pictures of the interior of the vehicle and each and every discoloration or stain on the upholstery. Every crack in windows and even measure what is left on the tire tread. Does the timing belt need to be changed? When was the last oil change? Are the windshield wipers new or in need of replacement? You can sure assume the vehicle loan company will provide value of the vehicle as if everything is perfect on the vehicle. Declarations describing the condition of the vehicle and pictures showing the condition of the vehicle is essential. Then there are the vehicles currently being sold and advertised prices. There is what KBB and N.A.D.A. says about value and then there is the real world. Just because KBB says the retail value is one number does not mean the real world market agrees. Review advertisements for the sale of vehicles similar to your own. Are the retail advertisements higher or lower than what KBB or N.A.D.A. says your vehicle is worth? The bottom line here is to leave nothing out for the Bankruptcy Court to consider in determining the value of your vehicle.

A debtor may also wish to submit photographs of the vehicle and evidence as to the retail values of other like vehicles for sale by retail merchants in the debtor’s geographic area. Evidence of this nature will assist the court in determining whether an adjustment to the guide retail value is warranted.

At the very minimum include the following basic information:

(1) a description of the vehicle, including any options installed and special features;
(2) a description of the condition of the vehicle as of the petition date, including any damage, general deterioration, and past or necessary repairs;
(3) the vehicle’s mileage as of the petition date; and
(4) the age of the vehicle as of the petition date.