Attorney at Law
Using Bankruptcy to Lower Your Car Payment
One of the little-known benefits of bankruptcy, and one that most bankruptcy attorneys do not actively offer, is the potential ability to lower your car payments using bankruptcy. The bankruptcy code permits something called "redemption," which is refinancing your automobile as part of the bankruptcy process. But unlike ordinary refinancing, where one company simply steps into the shoes of another one-- albeit at a lower interest rate-- redemption can actually lower the principal amount owed on your vehicle. Specifically, it can lower the principal amount owed on the vehicle to the true market value of the vehicle. So if you owe $10,000 on a vehicle with a Blue Book value of only $3,000, we might be able to knock $7,000 off of the amount owed. Instead of having to pay $10,000 you would only have to pay $3,000 over the life of the loan (plus interest), and your monthly car payment would be almost nothing.
Unfortunately, there are some limitations on the ability to redeem your vehicle. The biggest one is that you have to be approved for the refinancing. Redemption is not possible if the refinancing company will not approve you for a new loan, which might happen if, for instance, you have a very low income or no income at all. Redemption is also typically not possible with very old, damaged or high-mileage vehicles, because they have almost no value as collateral. The refinancing company needs valuable collateral to protect itself in the event you do not continue making payments, and it will not approve a loan where the vehicle is not valuable enough to provide this kind of protection.