Delinquent car loans are becoming a big problem in Arizona. There are several reasons why, however a big problem I see in my bankruptcy practice are subprime car loans that charge very high interest rates on used cars.

The subprime car loan problems were recently highlighted by John Oliver with particular attention paid to the “buy-here pay-dealerships”.

These are the car dealerships that offer car loans regardless of credit score, bankruptcy, foreclosure, or lack of credit. The average interest rate at such dealerships is 19% up to 29%. Further, 1 in 3 of the subprime loans will end in repossession with the average month of default occurring just seven months after the car is purchased.


Arizona’s Subprime Auto Lending Problem


If you live in Arizona you are likely familiar with Cactus Jack’s, a car dealership that offers “no-credit financing”. And while it is true that they will sell you a car regardless of credit score, they do require you to bring in proof of employment, proof of address, and “a list of 10 relatives and friends”.

Why would they want a list of 10 relatives or friends?

They say they are going to “check your references”.

This claim is somewhat suspect in that why would a dealership who doesn’t care what your credit score is, doesn’t care if you have filed for bankruptcy or even a foreclosure, instead base their lending decisions on what your friends and family have to say about you?

My guess is that this list of family and friends will be used for either (1) marketing purposes, and/or (2) for collection purposes if you don’t pay your car loan – with a heavy emphasis on collections if you can’t pay your loan.


I Thought They Couldn’t Contact My Friends and Family?


If you can’t pay for your car loan it will repossessed and the car lender will then start collections on the amount still due.  

Lenders like the one mentioned above will take the list of 10 friends and start calling them to put pressure on you to make your car payment. The reason why they can do this is because the laws that govern debt collection do not apply to original creditors.

The Fair Debt Collection Practices Act (FDCPA) tells debt collectors what they can and can’t do when it comes to collecting a debt. However, with the “buy-here, pay-here” they generally don’t have to follow the FDCPA because the FDCPA does not apply to original creditors – only debt collectors.

This means that they can do shady things like contact family and friends to “encourage” you to pay them money without any legal repercussions.


Santander and GM Financial Get into the Subprime Lending


Similar to the mortgage crisis of 2008, we are seeing more traditional auto lenders get into subprime lending. One I see on a regular basis at my law practice here in Arizona is Santander.

Is was recently reported that the delinquency rates (more than 60 days past due) on subprime auto loans rose 22% from the year prior and delinquency rates on regular auto loans rose 17% from the prior year.


Options to Avoid Repossession in Arizona


With its sprawling cities and expansive deserts having a car is vital to day-to-day living in Arizona. You might be surprised to learn that there are several options when it comes to avoiding repossession and getting your car loan back on track.


Option #1 – Call Your Auto Lender


If you run into financial problems and can’t pay your car payment the first thing you should is reach out to the bank or lender that loaned you the money on the car. If your financial problem is temporary you might be surprised at the options they give you to keep your car from being repossessed.

Repossession is expensive and believe me the last thing the auto lender wants is another car they have to sell. And because of this they will likely give you options to help you get caught up on your payments – if you reach out to them before you get too far behind.


Option #2 – Redeem Your Car with a Chapter 7 Bankruptcy


Once you fall behind 2-3 months on your car payment there is a good chance the vehicle will be repossessed (**if you bought your car at one of those buy-here, pay-here dealerships they will repossess much faster – even if you are just a few days behind**).

In order to avoid repossession you can file a chapter 7 bankruptcy. As soon as a bankruptcy case is filed the bankruptcy judge enters an order that stops all collections against you. This includes repossession. The auto lender will not be able to call you or repossess your car unless they obtain permission from the bankruptcy judge.

However, if you don’t start making your monthly car payment the bankruptcy will only protect you for a few months and then the lender will be able to repossess the car.

However, within a chapter 7 bankruptcy you may be able to significantly reduce the amount you have to pay for your car. It is done through a process known in bankruptcy as redemption.

Here’s how it works. Chapter 7 bankruptcy allows you to pay what your car is worth, rather than what you owe on it.

Let’s say you have a car that worth $4,000 but you still owe $12,000 on it. That is not a car you would normally want to stay in because you are so far upside down. However, in a chapter 7 you if you can pay the $4,000 you get to keep the car and the remaining balance is eliminated.

Here’s the catch, you have to be able to pay the value in full. So in the example above you would be required to pay the full $4,000 in order to be able to redeem the vehicle and get the $8,000 savings.

I know what you are thinking – “Where am I going to get $4,000? I’m in bankruptcy!”

Luckily there are lenders that specialize in these types of loans.  A lender we often refer clients to is 722 Redemption. They offer loans that allow you to obtain a lump sum to be able to redeem your car in your bankruptcy and by doing so save thousands of dollars.

These loans have to be approved by the bankruptcy court (to make sure that they aren’t a worse deal) and your car must be less than 10 years old and have less than 150,000 miles on it.

Bankruptcy redemption is a powerful tool that will stop repossession and allow you to significantly reduce the amount you have to pay for your car.


Option #3 – Surrender Your Car With Chapter 7 Bankruptcy


A couple of years ago I attended a conference in Nashville, Tennessee at the Dave Ramsey headquarters. I was amazed at how Dave Ramsey would speak to us at the conference and then literally run across the parking lot and into his studio and do a three (3) hour radio show with almost no preparation.

I had a chance to ask Dave how it is that he was able to do a three (3) hour radio show with no preparation. He said “the answer to almost every question I get is simply – SELL THE CAR!”

While Dave Ramsey was just joking there is wisdom in what he said. Sometimes the best choice is to surrender the car back to the bank.  

It is important to understand that if you voluntarily surrender your car back to the bank they will then sell the car and come after you for the balance.

That is, unless you file for bankruptcy. If you file a chapter 7 bankruptcy you can elect to surrender the car through the bankruptcy and you won’t owe anything on the balance going forward.  

Sometimes you just need to cut it loose and and start over.  Chapter 7 bankruptcy can help that.


Get Caught Up on Your Car Payments with Chapter 13 Bankruptcy


Another option is to look at a chapter 13 bankruptcy. Chapter 13 bankruptcy is a much longer process than chapter 7. The typical chapter 7 bankruptcy lasts about five (5) months while most chapter 13 cases take five (5) years to discharge.

The benefit to a chapter 13 is that if you are behind on your car payment you can propose a plan to your car lender that will get the loan caught up over the life of your chapter 13 case.

Not only that, but if you purchased your case at least 2 ½ years prior to your bankruptcy filing (910 days to be exact) then the bankruptcy court will only require you to pay the value of your car, not what is owed. This is known as a “cram-down” in chapter 13 cases.


Chapter 13 Bankruptcy Can Get a Repossessed Car Back (Sometimes)


If you find yourself in a situation where your car has been repossessed you may be able to get the car back if you act quickly.

After repossession of a vehicle most lenders will hold the car for 10-14 days before sending it to be auctioned off.

If you file a chapter 13 bankruptcy before they auction the car then the lender is required to return the car you. You can then draft a plan on how you will get the car paid off over the duration of your bankruptcy case.


You Have Options


The point of this article is that you have choices. Often when you are faced with financial problems it can feel like the world is against you and that often leads to people sticking their head in the sand and failing to take any type of action.

But it is important to understand that the law provides you with options that will allow you to keep your car and get caught up on the payments over time and sometimes even significantly reduce the balance you owe.

If you would like to set up a free consultation to determine what your best options are, don’t hesitate to contact us at (480) 420-4028 or by completing the form below.

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