Vehicle Redemption and Bankruptcy – September 2016 Interview

Katherine:

Hello everyone, thank you so much for joining us today on This Needs to be Said. We’re talking with our friend attorney Pete Moak, and he’s going to talk with us today about vehicle redemption and bankruptcy. Welcome back Pete, how are you?

Pete Moak:

Doing wonderful, thank you very much.

Katherine:

All right. Vehicle redemption and bankruptcy, I know I’m about to learn something I didn’t know before, so go ahead and lay it on us.

Pete Moak:

Well, one of the things that bankruptcy offers for people in a chapter 7 type bankruptcy is some options with regards to how they can treat the debt that they owe on their car. Any vehicle debt, in fact any debt that’s on any personal property, not on real property can be treated with what is called a redemption. Now, that term probably doesn’t mean anything to people except when they go to church, right? Redemption in the bankruptcy context means that you can treat the creditor in a way that allows you to save some money, if the amount that you owe on your personal property is more than what it’s worth. The fair market value of what the vehicle, I’ll use the example of a vehicle here is worth, is what the creditor is entitled to receive.

When you file bankruptcy the creditor has … You could give the car back, we talked about that as one of the options, that’s surrendering the vehicle. Of course when that happens we tell them, “Go ahead, eat steel.” In other words, you’re going to have to sell it, you’re going to sell it at an auction, you’re going to sell it for less than what it’s worth, and because I file bankruptcy you can’t count it back against me for what we call the deficiency, the difference between what the car, the loan on the car and what it sold for at the auction. The other option that we talked about, and are going to talk about today, is redemption.

You consider that there’s the piece of steel, the car, but it has a fair market value at the time that you file bankruptcy. That value, it has a little bit of wiggle room because we really don’t have a ready willing buyer that’s offering a sum of money for the car right at the moment that you file bankruptcy. You can get a pretty close estimate of what the vehicle could sell for in its condition. We have a program that allows the debtor to say to the creditor, and I will do this for the client of course is, “This is what the vehicle is worth, my client is willing to pay you the fair market value of the vehicle in a lump sum and keep the vehicle.” This works very well for many of our clients who owe considerably more than what the vehicle is worth.

In today’s world, cars are being financed for a much longer period of time, simply because the price on the car has gone so high that people can’t afford the monthly payments. When I first bought my car, my first car, I won’t tell you how many years ago that was, but …

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Katherine:

Okay.

Pete Moak:

The typical refinance, or the typical payment program was 3 years. That was the maximum, you couldn’t get a car loan for more than 3 years back in the old days. Well, we all know that that’s gone to 4 years, and 5 years, and 6 years now. Cars are being financed 6 and 7 years of time. Well, typically cars don’t last that long and hold their value. It takes a lot longer for somebody to get to the point where the amount of money that they owe on their car is equal to what the car is worth. Because when you drive it off the showroom floor, it depreciates quite a bit, and it continues to depreciate and the amount of money that you’re paying on the loan, because of the amount of … The term is so long, that much of the money that you pay is going to pay interest.

It takes a longer time for the amount that’s being applied to the principal to chip away at the total value, or the total amount of the loan so that it might be 3 years, 4 years plus before you get to the point where you’re at a break even. Meaning, that the amount that you still owe on the car is equal to what you can sell the car for on the fair market. When a person owes considerably more than what the car is worth, than one of the best options that we have is this redemption program, because the debtor can get financing to pay the lender the fair market value for the car. Of course, this is a loan that’s taking place after the bankruptcy case is filed, so it’s not covered by the bankruptcy. Meaning, that when you enter into this loan agreement it has to be after the bankruptcy case was filed so that the lender is not going to have that debt discharged in the bankruptcy. They couldn’t do that of course, because that would be a bad business decision on their part.

They can loan you the sum of money post-filing, meaning after the bankruptcy case is filed. Then your attorney, me, would be able to negotiate with the creditors to … Or with the lender that they’re able to accept the fair market value of the vehicle as the lump sum payment. Now the creditor is taken care of with the car. Now you have a new lender, and the new lender is being paid only for the fair market value. That is, the amount that they loaned you to pay off the original lender that loaned you the money to buy the car. This is called redemption.

Now, this is a program that is limited, meaning that it doesn’t necessarily work for everybody. For example, the car has to have … Still not in so bad shape. In other words, if it’s older than 10 years you’re going to have a very difficult time getting somebody to loan you the money. If it has more than a 150,000 miles, that’s another problem because they’re not willing to loan out on cars that are so old and have very high miles. If the debt after the bankruptcy of course, the debtor usually has paid or eliminated the debts that they owed, so the amount of surviving debt payments divided by the gross income should be less than 45%, but if it’s more than that, then the lender’s not going to be able to do this, okay.

The program does call for the court, that is the judge, has to approve this. There’s a motion, the motion is called a motion to redeem personal property. I prepare that motion and file it with the court, there is a fee involved, I charge $600.00 to do that. The lender that we use at 722redemption.com is willing to include in the amount that’s loaned to the debtor the cost of me preparing and filing the motion to redeem. It doesn’t result in the debtor having to come up with any money out of their pocket. The court approves this only if it’s going to save the debtor money. This is not something where the debtor has any risk of actually making a big mistake because they’re going to get themselves deeper into debt, or that they’re going to end up paying more money than they would have paid if they kept paying the installments on the original loan. It has to be approved by the judge, the judge won’t approve it unless it saves the debtor money.

The people at 722 Redemption do some help also. That is, they evaluate what is the car worth? What evidence can we use to convince that lender that the amount that we are going to borrow from 722 Redemption is enough to pay the fair market value? You see, they can’t just say, “We don’t want to do it.” The judge can force them to do it if a judge is convinced that the amount that’s being offered represents the fair market value. That’s the program, and it saves clients many, many thousands of dollars over the life of the loan. They might have a situation where they have a car that has a value of say, 11 or $12,000.00. Let’s say 11,500, and right now they’re paying $500.00 a month. Well, with the redemption they may be able to reduce that loan payment by over $100.00. Maybe even reduce 5 or 10 months off of the repayment period. It results in a bottom line savings of close to $8000.00 over the life of the loan.

These are the kinds of programs that work best for clients, is when the amount that is owed on the loan is considerably more than the amount that the car is worth. We help the client evaluate whether that works for them, and it doesn’t cost them anything to try, and it’s usually a very good option for treating the loan that is owed on the car. A lot of times people when they buy a car, they still owe money on the car that they’re driving that is more than what the car is worth. Often times what they do, is they go to the car dealership, and the amount of the debt on the previous car is rolled into the new loan. The new loan might be way more than what the car that they just purchased is worth, but so often people will buy the car based upon the monthly payment. They just add another year or 2 to the life of the loan and say, “Oh, your payment is affordable, because it fits your budget,” but instead of paying it off in 3 years, or 4 years, or 5 years, now it’s going to take you 7 years.

Well, that amounts to a little bit of insanity, but the redemption can redeem you, it can get you out from beneath that mess because we can look at what is the car actually worth at the time that you filed bankruptcy, and make it so you don’t have to pay for that old car that was rolled into the new loan. This is a good program. Did that help you understand better what you can do, or what the options are?

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Katherine:

It definitely does. You just don’t want to feel like your hands are tied, and you keep unfolding layer by layer every conversation that we have, and it brings hope to someone’s situation each and every time. The answer is yes, emphatically yes that was clear.

Pete Moak:

Well this is a wonderful program and I certainly want my clients to have the option to do this, this is of course available in a chapter 7 type bankruptcy program. There’s something that is in a chapter 13 that’s also available if the person has owned the car long enough it can be crammed down to the fair market value. We’ll talk about that on another day, because I would say about 85% of the people that come to see me do a chapter 7. We try to keep most of the conversations about chapter 7, but we have talked a lot about chapter 13 as well. This will be something that I hope that everybody will click on and listen to this interview and understand better the options that they have with regard to their car loans.

Katherine:

Absolutely. Pete, how do they get in touch with you outside of This Needs to be Said?

Pete Moak:

All right. The law firm can be reached at the phone number, 480-755-8000, extension 1. That would get you in touch with my appointment setter, and schedule a time for us to have a consultation, which would of course be at no charge for the initial consultation, there’s a 30 minute free consultation. Usually at the end of that 30 minutes, my clients are ready to make a decision, and we move forward with additional instructions, and guidance, and advice, and get them started with what they need to do to get their bankruptcy case filed and get the discharge so they can be free from the oppressive debts. The number again 480-755-8000, extension 1.

Katherine:

Awesome. Thank you, and until next time Pete have a wonderful day.

Pete Moak:

Okay, you too.

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