Over the past 30 years, explains Michael Wink of Wink and Wink P.C., the average American’s debt has doubled in relation to his income, while his wages have steadily declined. This has also translated into more Americans facing the real possibility of losing many of their most prized possessions, such as their home and car, to lenders who are adamant about settling owed debts. However, when the time comes that your home or car must be sold in order to repay your debts, it may not always work out as you had planned.
Unfortunately, because of the current housing market, in which homes are often selling for a fraction of what they would have been worth a few years ago, it’s pretty likely that the money you’ve received from the sale won’t be enough to cover your outstanding mortgage. The same idea is also true for cars because of depreciation rates. This means that selling your vehicle won’t provide you with enough money to pay back the lender in full, plus the cost of the repossession process.
When this happens, explains Wink, your lender isn’t going to call it even and accept the difference between what you can pay and what you owe as a personal loss. Instead, lenders in many states, including Colorado where Wink practices, have the right to file a lawsuit against you to regain the rest of the money still left unpaid. Legally, he says, this is referred to as a deficiency judgment.
Bankruptcy and Deficiency Judgment
If this sounds like the type of predicament that you are currently or might soon be facing, Wink suggests meeting with a bankruptcy attorney to review your options and proactively create a plan of action. The only way to clear a deficiency judgment, besides paying out of pocket, is to file for bankruptcy. Unfortunately, filing won’t keep the lender from taking your home or car, but it will clear your deficiency judgment and prohibit the lender from moving forward with a suit against you for the rest of the money owed.
When you file for Chapter 7 bankruptcy, says Wink, you have the option to redeem your current loan. Essentially, this means that you can take out a new loan that covers the cost of what the car would be worth on today’s market, but the loan has to be in one lump sum. If you currently have a job, this may be a wise option for you, he adds, because although the interest rate is pretty steep at 24%, you can essentially cut your balance in half. For example, if you owe lender X $8,000 for your car, you can take out a redemption loan for the current price of the car, $5,000, from lender Y. Now, under new terms and conditions, you can pay off lender Y, while only owing lender X $3,000 instead of $8,000. Then, Wink adds, you can wipe away the loan you’ve taken out with lender Y once you file for Chapter 7 bankruptcy.
If you instead choose to file for Chapter 13 bankruptcy, you can negotiate with the same lender that originally financed your loan, instead of borrowing money from a second source. You can renegotiate the lien on the car, and essentially cram down your loan and pay it off over the course of a few years, he says.
In the end, with the help of your bankruptcy attorney, filing for either Chapter 13 or Chapter 7 bankruptcy can prevent you from having a deficiency judgment placed on your credit, which can negatively affect your financial future.
This article is for informational purposes only. You should not rely on this article as a legal opinion on any specific facts or circumstances, and you should not act upon this information without seeking professional counsel. Neither publication of this article nor your receipt of this article creates an attorney-client relationship.
