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Car loans and options in bankruptcy

High interest rates on auto loans are common when purchasing a used car. The New York Times recently reported on how the problem has worsened since major banks entered the market. Big banks buy car loans, repackage them into securities and sell them to insurance companies, pension firms and other investors.

Similar to the lending practices that lead to the mortgage crisis, car dealers take advantage of borrowers by falsifying income to put individuals into loans they cannot afford. The loans often include high interest rates or hidden fees that allow for a quick profit. For example, reporters for The Times reviewed bankruptcy and civil filings and found interest rates that exceeded 23 percent.

What are the options for dealing with a financially ruinous car loan in bankruptcy?

Bankrate provides several options that may be available. The first option is to surrender the car. This option may result in a deficiency if the sale of the vehicle does not cover the balance owed. Bankruptcy would generally eliminate this deficiency balance.

A second option is to reaffirm the car loan or keep paying on it. Chapter 13 may also allow an extended repayment period and lower monthly payments.

A third avenue is to redeem the car loan and use a new lender. This is similar to a refinance, but bankruptcy laws may allow an owner to reduce the loan balance to the fair market value of a vehicle. This could help if the car is only worth $4,000, but the outstanding balance is $6,500. Some lenders, such as credit unions, may even be willing to renegotiate the balance of a loan to the fair market value without going through the redemption process.

Keep car loans payments current or some of these options may no longer be available. A bankruptcy attorney can explain options in more detail.

Source: New York Times, "When a Car Loan Means Bankruptcy," Editorial Board, August 8, 2014.

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