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Motor Vehicle Loans & Bankruptcy: Your Top Questions, Answered

Topics: Bankruptcy

If you’re a creditor in the automotive space, you can’t afford to take a back seat when it comes to bankruptcy law. With chapter 13 filings on the rise, you’ll likely face a flurry of debtors who fail to make payments or default on their auto loans. A basic understanding of key principles goes a long way in protecting your financial interests – and keeping you in the driver’s seat. 
 
Our talented group of attorneys possess first-hand experience in this area. In a recent edition of our Ask a Pro webinar series, shareholder Milos Gvozdenovic and attorneys Garry Masterson and Erin McCabe answered YOUR top questions related to auto loans and bankruptcy. Topics ranged from bankruptcy plans and motions for relief from stay to reaffirmation agreements, vehicle liens, and more.  
 
In previous Ask a Pros, our panel put together a list of the top FAQs they receive, but this time the questions came directly from YOU, our audience, during this open mic conversation. 
 

Watch the full Ask a Pro webinar here.

Here’s a quick overview of some of the most frequently asked questions – and their respective answers – from this interactive session. 
 

1. When is the best time to file a motion for relief from stay?

A motion for relief from stay is a written request (by a creditor) to allow the creditor to take action against the debtor or the debtor's property that would otherwise be prohibited by the automatic stay. When filing for relief from stay, consider these account-specific questions:
 
How is your vehicle being paid currently?
What are the terms of bankruptcy plan? (Are you being paid by the owner, the bankruptcy plan trustee, or a combination of both?)
What is the current status of the debtor making plan payments?
 
If this relates to a chapter 7 bankruptcy case, it’s important to know the statement of intention under the petition. Was the debtor proposing to reaffirm the debt or retain and pay? Or, were they proposing to surrender the vehicle? Generally, if the debtor opts to surrender the vehicle and more than 30 days have lapsed from the time you review the statement of intention and the potential discharge, you should file for relief to avoid any bad occurrences. Also, in a chapter 7 case, if they intend to maintain payments or request to reaffirm some or all of the debt but you choose not to participate in the agreement, you can file for relief. 
 
The same provisions apply in a chapter 13 bankruptcy case. If you have a confirmation hearing that is more than 30 days away, you may want to file for relief if your vehicle is listed as a surrender in the plan. As far as payments go, if you’re a direct pay under the bankruptcy plan and are not receiving payments after more than 60 days (since the confirmation hearing), you should file for relief. Also, in the cases that you don’t receive payments or get a “discontinued notice” from the debtor’s insurance company, it’s a good idea to contact your attorney and file a motion for relief. 
 

2. If you have a relief order and the debtor hasn’t surrendered the vehicle, do you have any recourse aside from a replevin?

In general, this depends on your court district. Some judges may not entertain any requests from you to pressure or persuade the debtor to turning over the vehicle after you’ve filed a motion for relief from stay. Their perspective may be that they no longer have jurisdiction over the case and you should pursue state law remedies to recover the collateral. 
 
Ultimately, it depends on the jurisdiction as to whether or not the debtor will be compelled to turn over the vehicle. 
 

3. If you repossess the vehicle 60 days before the bankruptcy filing, should you file for relief? 

Yes, you should file for relief out of an abundance of caution. We recommend this course of action so you can avoid a litigious situation with the debtor and their counsel in case they claim a stay violation was made on your part. However, if the vehicle was sold before the date of the bankruptcy filing, you don’t need relief from the automatic stay. 
 
If the vehicle is a total loss and the automatic stay is already in place, you should file for relief. 
 

4. What are good terms when negotiating a reaffirmation agreement?

Reaffirmation agreements, which lay out the terms of the auto loan for the debtor and the court, have become a hot issue for creditors, especially in terms of what you can do with it and your obligations as a creditor.  
 
Fortunately, the terms are completely at your discretion as the creditor. 99% of the time, you send out the terms as they are in the original loan agreement that was signed by the debtor. Under certain circumstances, you may consider altering the terms of the agreement. However, you are under no obligation to provide favorable terms in a reaffirmation agreement. 
 
With that said, you should consider terms that will entice the debtor to enter the agreement unless your goal is to simply get the vehicle back and resell it. There are certain times where the terms may be modified, but it depends on what’s beneficial to you.
 

5. Should you change the loan due date to the reaffirmation agreement due date so the debtor is not past due in your system?

The short answer is: yes. Your record-keeping system should match up with the reaffirmation agreement terms signed by the debtor. You need to account for every single penny that’s owed to you, including unpaid interest, late fees, force-placed insurance, written agreements, due dates, etc. 
 
This is where problems can arise with reaffirmation agreements. Once the agreement has been negotiated and signed by all parties – and filed with the court – your records, whether digital or a manual spreadsheet, need to keep track of all due dates and payments. If your system contains errors, you run the risk of the court ruling in the debtor’s favor down the road should you run into any issues.
 

6. Do all bankruptcy courts abide by the 910-day rule?

Yes, the 910-day rule is laid out in bankruptcy code. All courts must follow it. However, the burden is going to be on you, the creditor, to ensure your terms are listed correctly within the debtor’s proposed bankruptcy plan. 
 
For example, if you have a vehicle loan that’s 500 days old since the debtor signed the contract and the proposed bankruptcy plan crams down your value, you need to file an objection. Typically, those are some of the easier objections to resolve in bankruptcy cases. If you don’t object, you’re bound to the cram down. 
 

7. When should a creditor object to a proposed interest rate in the bankruptcy plan?

According to the case law, a creditor is entitled to receive the prime rate of interest plus 1-3%. Currently, the prime rate is 3.25%, so you can seek anywhere from 4.25-6.25%. If the proposed plan doesn’t fall within this range, you can file an objection.
 
It’s important to keep in mind that the Federal Reserve can change this rate, and they may do so as soon as next month. Our team will keep you informed of any changes or news in this area. For now, keep an eye on what the prime rate is because that will form the floor for what you can seek, plus add your 1-3%. 
 
For more comprehensive FAQs and insights about auto loans and bankruptcy, watch our Ask a Pro Open Mic: Keeping Your Hands on the Wheel in Bankruptcy - Motor Vehicle Loans. If you have additional questions that need to be answered, please contact our bankruptcy team.
 
This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way. 

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