What is a repossession?
When you buy and finance a car, you make an agreement to pay a lender (usually a bank) on a monthly basis. If you break the agreement by not making payments, the lender can start the process of repossession to get the car back. This is possible because the creditor has a lien on the car, and the debt is considered secured debt.
Why file a bankruptcy after a repossession?
Once the car is repossessed, the lender usually puts the car up for auction, and whatever they get from the sale is deducted from the balance you owe, and you are responsible for the remainder. If the car is worth $15,000, and you owe $23,000, the lender can still sue you for the $7,000. This is called a deficiency.
A deficiency is very common, as cars do not usually maintain their value well. Once a car is sold in auction, you are responsible for the deficiency, and it is now considered unsecured debt. This is a fairly difficult position to be in, because not only do you no longer have a car, but you also owe money on a property you no longer have possession of.
Fortunately, unsecured debt such as a deficiency can be discharged in a chapter 7 bankruptcy.
William Ha is an attorney serving Los Angeles and Orange Counties in California, and Cibola (Grants) and Bernalillo Counties in New Mexico.
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