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Repossession and Filing Bankruptcy


Has your vehicle been repossessed?

If your ride has been repo'd and sold by the lender, you may get a letter from the lender saying you still owe money on the vehicle loan and demanding payment. Few things will make you madder than being forced to make payment on a car or truck payment you don't even have any more! Nor does it matter that you may have politely delivered the vehicle and keys to the lender without a fight (the lender didn't have to use a tow truck). A "voluntary repo" counts the same as an ordinary repo except for the towing expense.

The reason you get a letter asking for more money after the repo sale is that the lender didn't get enough money from the sale to pay off your loan balance. The amount still owed after the repo sale (the "deficiency") is often in the range of $4,000-$10,000 and can go higher. If you don't pay the deficiency, the lender will usually take you to court and almost always will win a judgment against you and it may even include attorneys fees, pushing to total higher. Does this sound familiar? Repo debts are one of the leading reasons that people file for bankruptcy. In a normal Chapter 7 case, the debtor never has to pay back the repo debt even if the lender has gone to court and obtained a judgment for the repo balance.

That's the short version. The details of a vehicle repossession in Florida begin with the normal scenario:

1. You buy a new car or truck and finance it through a bank, credit union, or auto finance company.
2. You run low on funds and you miss payments.
3. One day, you go outside to start your car, but it has vanished. For a moment you think it has been stolen! Your ride has repossessed (or "popped").
4. You get a letter, telling you the obvious, that your vehicle has been repossessed, and giving you 3 to 10 days to pay off the entire loan balance, failing which the bank will sell the car.
5. Unable to make even the regular payments, you are unable to pay off the whole loan by the deadline.
6. The bank hires someone to wash and wax your car, perhaps even repair it, then sells it for an unbelievably low price, often to a used car lot or at an auto auction where bidders are limited to used car dealers anxious to pay bottom dollar to stock their inventory. The car is sold for a song.
7. The bank increases the loan balance to cover the cost of the towing, storage, clean up and repairs, resulting in your new loan balance. The bank then subtracts from this balance the amount your car sells for. Since the car usually doesn't sell for enough to pay off the entire loan, there is still a balance owed. This remaining balance, after crediting you with the sale proceeds of the car, is called the "deficiency" amount and you are expected to pay it.
8. The bank then sends you another letter demanding payment of the deficiency amount and, when you fail to pay it, they file suit in court to collect it. The court backs up the bank and enters a final judgment against you.
9. Now you find yourself in the unhappy circumstance of still owing on a car you don't even have. The deficiency amount is, as stated above, often above $4,000.00 and can go higher.

What about repossession of mobile homes?

You can end up in the same situation, but with a much larger deficiency balance than a car. The only difference between vehicle repo and mobile home repo is that sometimes mobile home dealers are more reluctant to "pop" a mobile home than a bank is to pop a car. The reason may be that the mobile home dealer is afraid that if he pops a mobile home, grandma may awake in the back bedroom and have a heart attack when she realizes her bedroom is heading down the highway resulting in a juicy lawsuit against the mobile home dealer. So mobile home dealers often first ask court permission to repo the mobile home through a legal proceeding called a "replevin" resulting in a deputy sheriff assisting the dealer in taking possession of the mobile home -- and ordering grandma out before the towing gets underway.

But they didn't even tell me first they were going to repossess my car -- isn't that illegal?

I hear this more often than you might think, yet it never fails to amuse me. Think about it: if banks were obligated to tell owners that the repo man was on the way, would the car still be there when the repo man arrived? The owner would naturally hide the vehicle (by the way, in Florida it is a crime to hide the car from the bank).

Voluntary repossession.

What if you are cooperative and voluntarily return your car to the bank when you realize you can't keep up payments? Sometimes this is called a "voluntary repo." No tow truck is involved. A common misconception is that if you return the vehicle voluntarily, the bank forgives the loan and everyone is happy. Sometimes the lender will encourage you to believe that your driving the car back to the bank will cause the bank "to go easy" on you. In fact, the only difference between a regular repo and a voluntary repo is the cost of the towing. You are still responsible for the balance of the loan and the bank is highly unlikely to forgive the rest of the debt -- they are just getting warmed up.

Why did the bank sell my car so cheaply?

This is the big issue in repossession cases, but the courts almost always side with the banks. In all fairness to banks and credit unions, they have a bit of a problem when they repo a car. On the one hand, banks actually do want to sell your car for as much as they can. After all, they get to keep whatever they can get from the sale and apply it against your loan balance. On the other hand, banks are not really in the car sales business, they are in the car loan business. After a bank pops a car, the bank's problem is how to sell it for the most money. Selling the car may seem simple, but the banks are faced with three problems: Selection, Security, and Time.

(1) Selection. Consider the difference between a regular used car lot and a bank with 4 or 5 repossessed cars for sale. A regular used car lot has dozens of cars to choose from in all makes, colors, and model years. The poor bank doesn't have nearly the selection - if you don't like one of these five cars, then you will shop somewhere else. Fewer potential buyers means a lower price.

(2) Security. Banks are located on prime retail land and they don't have extra fenced-in places to store repossessed cars. If they leave repossessed cars on the bank parking lot overnight, vandals will slash tires and break windows. Maybe the angry car owner will come and do some damage himself. The bank could tell the repo man to tow the car to his own lot and store it there. That solves security because the repo man has fences and Dobermans, but who is going to window shop there? Nobody will ever see the car because the repo man's lot is out where land is cheap, out in the boondocks, and nobody wants to drive that far. Again, fewer potential buyers means a lower price.

(3) Time. The purpose of the repo is to sell ("liquidate") the car and the bank wants to get on with it. If the bank takes months and months to sell the car, the "owner" may argue that the car eventually sold for so little because it dropped in value just waiting forever to be sold. So the bank wants to and needs to sell the car quickly. A hurried sale means a lower price.

How can the bank sell the car?

There are just a few choices:
Choice #1 --Sell the car right on the bank parking lot by putting an ad in the classifieds and selling the car to a member of the public quickly before vandals get it. Result - a hurried sale and the bank doesn't get much for your car.
Choice #2 -- Sell the car to a nearby used car lot. This can be done quickly because used car dealers always have ready cash and are always ready to buy a used car -- if the price is right. The problem here is that there is no lower number in the universe that the amount a used car dealer is willing to pay for a used car. Result -- the bank doesn't get much for your car.
Choice #3 -- Sell the car through an "auto auction." Auto auctions are typically not open to the general public. They are open only to used car dealers. Auto auctions result in a quick sale, but the buyer is again a used car dealer who must buy low and sell high to stay in business. Result - the car doesn't sell for much.

Upside down

No matter how you slice it, a repossessed car doesn't sell for top dollar. Now compare the repo sales price to what the owner actually paid for the car. If the car was bought new, the owner probably paid retail at a brand name dealership - and retail is a high price. In turn, that means the owner had to borrow a lot of money from the bank. Then the owner started making car payments, but the debt didn't drop very fast because much of the monthly installment payment just paid interest and only a little reduced debt principal. So while the debt was s-l-o-w-l-y coming down, what was happening to the value of the new car? Common wisdom is that a new car "drops in value just being driven off the lot." Then the car really starts depreciating, and the sharpest depreciation occurs in the first two or three years of ownership. Result: the car loan balance was not coming down fast but the value of the car was plummeting. The gap between debt amount and the car's value continued to widen. The car was simply not worth what was still owed on it. When you owe more on your car than it is worth, banks say you are "upside down" on your car loan. Most repossessed cars are upside down loans. Combine being upside down with the fact that the bank will not get much from the sale of the repossessed car, and you have the recipe for a large deficiency balance.

Aggressive collection measures

Banks and credit unions will not ignore the deficiency balance. $4,000 to $7,000 it is simply too large a sum to give up on without a fight. So they will sue you or hire a lawyer to do so. Banks don't have much choice. If they fail to sue you, the government bank examiners will give the bank officers grief for not being vigilant in collecting their debts.
End result -- you are being sued for a lot of money you don't have for a car you can no longer drive. An unhappy situation for all involved, excepting the repo man and the bank's attorney.

Effect of Bankruptcy on an auto deficiency.

What happens to the deficiency balance in a bankruptcy case? Deficiencies from auto loans are no different from other unsecured debts (the security, the car, has exited stage left) like credit cards and medical debts. As a result, in a normal chapter 7 the auto deficiency debt is forgiven or "discharged." Even if the bank has obtained a judgment against you, the debt is forgiven.

Note: sometimes judgments can result on a lien on other property you have, so discuss that with an attorney.

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