Bankruptcy law has changes that can cost you money on your car

Much has been written, here and elsewhere, about the new bankruptcy bill called the Bankruptcy Abuse and Consumer Protection Act. There isn’t really any consumer protection; the name is just Congress’ cute way of making a bill that’s bad for consumers look like a good thing. The bill was designed to eliminate frivolous bankruptcy filings by making harder and more expensive for consumers to file for debt relief through the courts. The bill was misguided; it assumed, incorrectly, that most bankruptcy filers just didn’t feel like paying their bills. In truth, most filers do so because of a catastrophic illness or a loss of job.

Nevertheless, the bill is in effect and only time will tell if it will accomplish its stated goal. The portions of the bill that have received the most press are the section that requires filers to demonstrate that they cannot pay and the section that holds bankruptcy attorneys responsible for the information provided by their clients. A less-noted provision of the bill is one that affects how bankruptcy will affect filers who have outstanding car loans.

Under the old bill, if a filer had a car loan and wished to keep the car, the difference between the amount owed and the value of the vehicle was listed as an unsecured debt. The consumer, in effect, was only required to pay back an amount equal to the car’s market value and not the total amount owed. According to lenders, this led to a number of cases of people taking out loans on expensive vehicles immediately prior to filing for bankruptcy in order to get a discount on the price of the car. As soon as the vehicle is driven off the lot, it depreciates to a point where it is worth considerably less than the amount of the loan. If the buyer filed for bankruptcy then and there, he or she would only have to pay back the depreciated amount.

It’s debatable whether or not people who were up to their eyeballs in debt were actually going out to buy new cars just to annoy lenders, but it won’t be happening any longer. Under a provision of the new bill, consumers who wish to keep their cars will have to pay back the full amount owed. An exception will be granted if the vehicle is at least 30 months old. At that time, it is generally accepted that the value of the vehicle and the amount owed upon it will probably be about equal.

Again, it seems unlikely that debtors were intentionally cheating auto lenders, but then again, the entire bill assumes that consumers have been filing for bankruptcy with the intention of defrauding their creditors.  In light of that view, the portion of the bill that deals with cars is at least consistent with the rest of the law. It may be misguided, but at least it is misguided in a consistent manner.

If you have a new car and you file for bankruptcy, you are going to have to pay for it. And that is that.

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