Exploring Civil Case Proceedings

Reaffirming Auto Loans Can Expose You To Deficiency Judgments

8 January 2015 by Becky Freeman

Filing for a chapter 7 or chapter 13 bankruptcy eliminates your liability for an auto loan once the debt has been discharged. If you want to retain the vehicle, however, you can do so by signing a reaffirmation agreement with the lender. It's important you thoroughly weigh the pros and cons of this option, because the reaffirmation agreement allows the lender to pursue you for its losses if you can't keep up with the payments and the vehicle is repossessed. One thing you may be liable for is a deficiency judgment. Here's what you need to know about this issue.

Calculating the Deficiency

When a lender repossesses a vehicle, it attempts to sell it to recoup some of its losses. If the car sells for less than what's owed on the loan, this is called a deficiency and the lender is within its rights to hold you liable for that money.

Even if you have enough equity in the vehicle to cover the balance of your loan, you may still be hit with a bill for expenses associated with retrieving and selling the car. In many states, lenders can charge you for

• Hiring a repossession company
• Storing the vehicle
• The cost to sell the car (e.g. auction fees)
• Reasonable attorney fees

Additionally, the money obtained from the sale may be applied to the fees first and then to the balance of the loan. For example, say you owe $5,000 on a car but it costs $1,000 to repossess and sell the vehicle. If the car sells at an auction for $5,000, the fees would be paid first and only $4,000 of that money would be applied to the loan balance, leaving $1,000 still owing on your account.

To determine if this is how your lender applies the proceeds from a repossessed vehicle, read the fine print in your contract.

Defending Against a Lawsuit

Federal law prohibits creditors from attempting to collect on debts that were included in chapter 7 or chapter 13 bankruptcies. Reaffirmation agreements remove this protection and allow creditors to use any lawful means to collect on debts owing. The law also limits how soon after declaring bankruptcy that you can file another petition for debt relief. At minimum you would have to wait two years between filings, so you could not use this tool to stop the collection action until you became eligible again.

If you do end up facing off against the lender in court, there are several defenses you can use that may get the court deciding in your favor.

+The Lender Broke the Law

Lenders must take possession of the vehicle in a lawful manner. If they or their agents violate the law white retrieving the cars or trucks, then the courts may throw out the cases. For instance, states require lenders to take possession of the vehicle in a peaceful manner. If the agent causes a ruckus, damages your property, or illegally accesses your home (e.g. breaks into your garage), then the court will likely decide in your favor.

+You Weren't In Default

A late payment doesn't automatically mean you are in default. Typically, your contract will outline exactly what constitutes defaulting on a loan. For example, you may be considered in default if your account is 30 days past due. Even then, the lender must notify you regarding the status of your account prior to taking possession of it. Failing to provide notice or taking the vehicle too early are both grounds for negating a deficiency judgment.

+Violating Special Protections

In some cases, the lender may be violating special protections provided to you by law. Before a lender can repossess a vehicle from a military service member, for instance, the company must obtain a court order.

Although signing a reaffirmation agreement may seem like the best way to retain secured property you may want or need, you should explore other options before signing on the dotted line. If you've already signed an agreement, you have 60 days after filing it with the court to change your mind and end the contract. It's best to click here to investigate or consult with a bankruptcy attorney for assistance with this issue.

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