A consumer client comes in for a bankruptcy consultation. You can’t just look at their financial situation, you must also examine their life: who do they live with, where do they work, where does their spouse work? Perhaps one of the more difficult questions consumers face is whether they want to keep their car. Consumers need to know what their options are if they surrender their cars. Will they be able to get another one? If they can’t get approved for another car, they will have no choice but to keep their current car.
Clients need their cars to be able to get to work, so this is a sensitive topic. Many bankruptcy attorneys don’t know what factors go into a client getting approved or denied a car loan. Can they get a car while they have an open bankruptcy on their credit report? Should they wait to finance a new vehicle until they receive a discharge? When is the best time to buy to get the best deal? This article will answer those questions.
Background
Most consumer clients fall into the subprime lending category, meaning they have a 600 or lower credit score. These consumers pay much higher interest rates on their car loans, often between 17.74% and 20.45% or more for a used car loan.[1] The value of an average subprime loan is around $30,633, and the average monthly payment is $574.[2] It’s no wonder that many subprime consumer auto loans fail and consumers end up saddled with cars they cannot afford. In the Detroit Metropolitan area where I practice, the public transportation infrastructure simply does not exist to allow a person to get to work in any type of efficient manner — if it exists at all.
About a year and a half ago, I spoke with a finance manager at a local car dealership. I asked him how often he put clients in loans with the dreaded 22.99% creditor well known in our area for putting consumers in old high-mileage cars that break down long before the car is paid off. He said that he only did that when all other options had been exhausted, and the client needed a car right away. I knew I had found my “car dealer soulmate,” someone I could trust to take care of my clients. I want to share some nuggets of wisdom I have learned from him along the way. These adages won’t apply to all situations and consumer clients, but they will give you a much stronger knowledge base than most bankruptcy attorneys and allow you to set yourself apart.
Chapter 7 Considerations & Timing
What do you do when you have that chapter 7 client come in who needs to file and wants a new car but still has decent credit? When should they buy a new car? Well, it depends on their situation income-wise and what other debts they have outstanding. But, before filing their case, you might want to send them to a trusted dealer to see what kind of interest rate they can get. A good finance manager will be able to look at the client’s credit report and make a prediction based on their experience as to the best time to buy. Have a client with atrocious credit? Once they have filed for chapter 7 bankruptcy, most lenders will give those clients an extra boost to their credit score to even out the open bankruptcy on their credit report. Find lenders that recognize that chapter 7 clients aren’t going to have large amounts of money for a down payment. Those lenders may be willing to finance with zero down. Yes, they are out there.
Think your chapter 7 client will be in the same position if they wait until they receive a discharge? Think again: That lovely little boost to their credit score that they got while in open bankruptcy disappears. I had a client who waited until after discharge and had their interest rate go from 14.99% with an open chapter 7 to 19.99%. That is a massive deal for the financial success of the client. As a bankruptcy attorney, you don’t want to see a client back in your office a couple of years after discharge because they couldn’t afford the vehicle they bought during their bankruptcy or after their discharge.
Chapter 13 Considerations
Chapter 13 clients must get permission from the trustee to finance a vehicle. In the Eastern District of Michigan, this includes getting an estimate from the dealer about the type of car, amount financed, down payment and, of course, interest rate.[3] Can chapter 13 clients get a vehicle before confirmation? In my district, the trustees will generally agree to it, but you will be hard-pressed to find a lender willing to approve a client before the case is confirmed. This is because if the case fails, little is standing in the way from that client filing again and adding the vehicle they just purchased to the plan or surrendering the car altogether. The ramifications of this are if the client surrenders a car in chapter 13, they will need a transportation plan after they surrender the car, but before the case is confirmed. Knowing this ahead of time helps you advise your client of their options.
Let’s turn to the types of vehicles that your client is likely to be offered. Those high-interest financing companies hurt the client by only financing old and high-mileage vehicles. The last thing you want for a client is for them to be stuck with a car needing massively expensive repairs. This is especially true in a chapter 13 case, where all of the client’s disposable income goes toward the plan. The condition of the vehicle and interest rate the client gets can make or break what happens after leaving your office.
Finding a Reputable Dealer
I was lucky enough to stumble upon a finance manager extraordinaire, but I know that some of you might not be as lucky. Here are some tips to help you find your “car dealer soulmate”: Call around to your dealerships. Talk to the finance manager and ask them what options they have for clients in chapter 7 and chapter 13 bankruptcy. If their only option is a high-interest creditor, keep looking. You want someone who knows how to work the system in favor of your client. There are many options for bankruptcy clients for those dealers who are willing to work as hard for your client as you do. Find a dealer who will keep you updated throughout the process; this is especially helpful if you are trying to make sure the client gets the vehicle before discharge or if the client is buying the vehicle before filing.
A Learning Experience
As a new attorney, much to the firm’s senior attorneys’ frustration, I got a reputation for talking chapter 7 clients out of reaffirming on their 22.99% interest rate vehicles. I would advise them to at least check out their options; their interest rate couldn’t possibly get worse. They were looking to reaffirm on a vehicle usually worth thousands less than what they owed and already had close to, if not over, a hundred thousand miles. When I asked the senior attorneys about when the client should purchase the vehicle — before or after discharge — they told me it didn’t matter. I didn’t have a trusted dealer to send clients to; the dealer that the firm worked with had a reputation for putting clients back into the same terrible loans I was trying to prevent.
When the firm decided to go with a new dealer, I was ecstatic! This dealer will surely be the one to save our clients’ money and put them in a car that won’t break down on them well before the client pays it off! I was wrong. I’ll never forget that 341 hearing when the client told the trustee that she had a new vehicle; the client was so happy. I was too until I found out the creditor was exactly the creditor that I routinely advised clients to run away from as far and as fast as possible. My heart sank. There had to be a better way.
A year later, I was at a new firm and working on a post-confirmation chapter 13 case. I don’t remember offhand what the interest rate was on that particular case. Still, I remember making that phone call to the finance manager that changed my perspective on advising bankruptcy clients seeking to purchase a new vehicle.
Conclusion
This topic is one of my passions as a bankruptcy attorney. My goal in sharing this information is to avoid having that heart-sinking moment when you realize your client will be back in your office in a matter of years because the car dealer they went to didn’t look at all the available options for financing. Armed with this information, you can help clients achieve their financial goals and receive more referrals because you took care of them beyond just filing the bankruptcy case.