A vehicle can be a debtor’s most important asset. Without one, it is particularly troublesome for a debtor because a loss of his or her vehicle may preclude continued employment.[1] Because many debtors need a vehicle, entering into a reaffirmation agreement seems the ideal and obvious choice.[2] Yet depending on the vehicle, reaffirmation may not be the best choice.
With automotive debt over $1.1 trillion,[3] almost half of Americans have a car loan. The average loan is $31,099 for a new car and $19,589 for a used car, with average monthly payments at $515 and $371, respectively.[4] These payments can be much higher for individuals with poor credit scores deemed high risk by lenders.
How to Analyze a Reaffirmation Agreement
Attorneys can help their client decide whether reaffirmation is the best choice. There are two major factors in this decision: value and interest rate. Attorneys likely understand that a higher interest rate equals increased monthly payments and overall costs. However, the analysis of value is more complex.
Principal Balance vs. Actual Cash Value
The first inquiry is whether the loan’s principal balance (excluding interest) is substantially greater than the vehicle’s actual cash value (ACV). Determining the vehicle’s ACV is twofold: It comprises the vehicle’s book and market values, both of which take into consideration the mileage, condition and features.
Two leading resources for book value are Kelley Blue Book (KBB) and National Automobile Dealers Association (NADA).[5] When employing these resources, it is important to use the correct trim level[6] of the vehicle, with the understanding that base trim levels are more plentiful in the market and will always have the lowest resale value. If a debtor does not know the trim level of his or her vehicle, he or she can simply provide their vehicle identification number (VIN) to a franchise dealer, who can decode the vehicle’s trim level and options. KBB allows users to input their vehicle’s VIN to accurately price their vehicle based on the correct trim level.
The attorney should also cross-check the KBB and NADA values against the market, because while reliable, neither KBB nor NADA sells cars. The two leading resources to find vehicles on the market are “Cars.com” and “Autotrader.”[7] It is imperative to search for the same trim level with similar options and mileage in a 100- to 250-mile radius, depending on the market saturation for that particular vehicle.
The NADA and KBB values in conjunction with the market value should give an accurate appraisal of the car’s ACV. If this value is roughly equal to or greater than the debtor’s outstanding principal value, the attorney should encourage reaffirmation. If, however, the value is roughly $2,000 or less than the debtor’s outstanding principal, the debtor should simply surrender the vehicle. Negative equity of $2,000 or more should be the tipping point because the ACV does not consider added costs when buying a vehicle such as dealer processing fees and applicable state taxes,[8] which can total about $2,000 on an average-priced new vehicle.
Cost of Long-Term Ownership
The second consideration is the cost of long-term ownership. This cost is comprised of reliability and depreciation. A trusted resource on vehicle reliability and depreciation is J.D. Power and Associates.[9] Overall rankings can receive a maximum of 100 points, with individual categories ranked on a scale of 1 to 10. An individual score of above eight points should be the benchmark.
Conclusion
If a debtor owns a vehicle that is worth much less than its payoff or owns one that is unreliable, he or she should surrender the car and replace it with a new one. On the other hand, if a debtor owns a reliable vehicle and owes less than or the same as the vehicle’s value, then the debtor should consider reaffirmation.
The above considerations should be helpful when deciding whether to reaffirm the loan on a debtor’s vehicle. If, after proper analysis, a debtor chooses to reject his or her car, the attorney should remind the client that it is crucial to shop around and negotiate not only the sales price but also the interest rate.[10] Interest rates are typically lower on brand-new cars, and manufacturers may have promotional rebates that can help a debtor save money.
Disclaimer: The views expressed in this article are those of the author and not of the U.S. Bankruptcy Court for the Western District of Virginia.
[1] See generally In re Henderson, No. BK-S-12-23691-BAM, 2013 WL 3356128 (Bankr. D. Nev. May 22, 2013).
[2] Reaffirmation agreements are between a creditor and a debtor with consideration based on a debt dischargeable in bankruptcy. 11 U.S.C. § 524(c).
[3] Niall McCarthy, “The Rise in U.S. Auto Loan Debt Shows No Signs of Slowing Down,” Forbes (Jan. 3, 2019, 7:06 AM), available at www.forbes.com/sites/niallmccarthy/2019/01/03/the-number-of-americans-h….
[4] Phil LeBeau, “Americans Borrow Record Amounts for Auto Loans Even as Interest Rates Rise,” CNBC (Mar. 2, 2018, 12:01 AM), available at www.cnbc.com/2018/03/01/americans-borrow-record-amounts-for-autos-even-….
[5] Both KBB and NADA are free guides, available at www.kbb.com and www.nadaguides.com, respectively.
[6] Trim level refers to the model’s equipment level. For example, a base model Toyota has a trim level of “CE,” while upgraded trim levels are labeled “XLE” or “Limited.”
[7] Both Cars.com and Autotrader are free guides, available at www.cars.com and https://www.autotrader.com.
[8] Most dealers charge processing fees that can range from $99 to over $1,000. Sales tax varies from 2% to 9%, unless there is no state tax.
[9] A free online guide, J.D. Power ratings are available at www.jdpower.com.
[10] Interest rates are usually lower when financed through credit unions because they are nonprofit organizations.