Bankruptcy clients are usually very worried about losing their car(s) when filing. The car is essential for work, family and various mobility needs. Debtors fear the bank is going to take back the vehicle which will make their lives even worse, if not financially crippled (e.g. no car, no job).
Sometimes the client has read the loan contract. Standard boilerplate agreements with banks now even contain a clause that says that filing bankruptcy is a default under the contract and all of the money is then due! As a result, the hesitancy to use bankruptcy and the fear this misunderstanding of the law generates are huge.
My first question to these people is, how much equity do you have in the vehicle? Usually clients owe more then the car is worth, which means the loan is underwater and a lender taking back the vehicle by repossession or surrender will lose money. Some lenders do not seem to want to minimize the loss but most are more conservative if the debtor has been paying, so are not in a hurry to take back the car. But even if there is a perverse desire by the creditor to lose money or is substantial equity in the vehicle there is still a factor that favors the debtor.
Are you current in your payments to the bank? Clients who have been worried about the vehicle usually say yes, they have been paying religiously (or often it is an automatic withdrawal). Well, that means in bankruptcy law, for states like Iowa, that a debtor can ride through the bankruptcy, a phrase bankruptcy attorneys like to use. This is not true for all states but it certainly is true for Iowa–regardless of what the loan agreement or the collecting agent says about bankruptcy as a default (called an ipso facto clause).
The reason for this is that the Iowa consumer law holds that the only way a car can be repossessed under the contract is if one is in arrears (i.e. behind under the contract terms).** If one is current and continues to pay during the bankruptcy and into the future after the bankruptcy is closed then the lender may not repossess the vehicle because the law says there is no default. The trick is to keep current. Lenders do stopsending monthly statement so there is no reminder, which had been the crutch for many people. Also, one must not only keep on top of paying on time but should also keep very careful records as lenders are notorious for botching up books–sometimes intentionally.
In the situation in which there were automatic monthly withdrawals one must be very cautious because these will immediately stop after the lender receives notice of the bankruptcy filing. Besides your bankruptcy lawyer telling you this is going to occur you will not get reminders that the withdrawal has stopped (or that you will no longer receive a statement) –until of course the bank calls to say that you are in arrears and they want to repossess!) Saying “I forgot” does not cure the late payment–which does violate the contract. The client needs to keep on her toes until the loan is paid in full.
Another trick the lending bank proposes is called a reaffirmation requirement (actually, just a request) to the debtor during the bankruptcy. This is a newly executed contract under bankruptcy law that removes the agreement from the protection of bankruptcy. Many creditors insist that clients must sign these if they want to keep their vehicle. In some unfortunate states the courts have held that this is what the bankruptcy law means. That is not the case in Iowa. Reaffirmations do not have to be signed to keep the vehicle if the debtor remains current on the payments. As long as current there is no violation of the contract and a repossession may not take place. (Although some creditors, especially credit unions, still repossess the vehicle. The situation requires state court intervention so the client can assert her rights. Too many times though clients concede rather than facing another court hearing).
What happens when one does sign the reaffirmation agreement in Iowa then after the bankruptcy can no longer stay current? As a result, there is a default, repossession and a deficiency on what is owed (i.e the car is worth less than the outstanding loan balance plus costs). The problem is that bankruptcy protection does not cover the deficiency because of the new contract. The debtor will now owe it. On the other hand, if no reaffirmation was signed, a subsequent default and deficiency IS covered by the bankruptcy retroactively. The debt has already been liquidated and not owed.
So baby, you can drive your car–ride through the bankruptcy and beyond in Iowa–as long as you stay current.
**The car needs to be insured also.
Iowa Bankruptcy Attorney Robert Liptak
Fairfield, Iowa