Borrowers Trapped – Defaults on vehicle loans increasing
Published On: November 11, 2019
Vehicle defaults is the next financial crisis (after the mortgage crisis)
According to the Wall Street Journal 33% of vehicle loans are upside down (meaning the vehicle is worth less than the debt). Borrowers trade-in vehicles with existing loans, finance a new vehicle and carry over the debt from the old vehicle. This results in a vehicle worth significantly less than the secured debt – sometimes as much as 100% less. This trend is continuing to rise, from 19% 10 years ago, to 33% today.
If this continues at the current rate, within just a few years 50% or more of all vehicles on the road will be worth less than the debt.
Dealerships encourage irrational financing
The dealerships encourage this insane financing scheme because they make more money. Vehicles are being designed to die within a few years, many less than the length of the loan. The borrowers are trapped. The only way out is to pay the entire loan and not finance another vehicle until it is paid in full. That is extremely difficult because many loans are for 7 years or longer (long past the life of many vehicles).
Most lenders offering underwater loans have extremely high interest rates
Once a borrower falls in default and tries to refinance they may find the only lenders willing to finance a new loan is a ‘sub-prime’ lender. These lenders are aware the borrower has financial difficulties and they don’t care (in fact, they make more money because of the default). Borrowers ask the lender for help, but they are turned away every time. Some lenders will offer to refinance (again), but this time at even higher interest rates.
Many lenders want the borrowers to default because they can raise the interest rates, charge penalties, or offer another loan at higher terms. Or they repossess the vehicle and sell it to another naive’ borrower who cannot afford the loan.
Defaults can lead directly to unemployment, eviction and homelessness
Sub-prime loans are outrageously expensive, which leads to more and more defaults. This takes a borrower, who could barely afford to pay their bills, into a guaranteed downward spiral. Default on a vehicle loan results in the repossession the vehicle and a guaranteed lawsuit. A lawsuit results in garnished wages. Garnished wages result in more defaults. More defaults result in eviction. Evictions result in homelessness. Homelessness results in unemployment.
Repossessed vehicles and deficiencies
When a lender is not paid they will repossess the vehicle, sell it at an auction (for far under the true value of the vehicle – many times to their own dealership) and then sue the borrower for the difference (referred to as a deficiency). The lender then garnishes the borrower’s wages and bank accounts, which pushes the borrower even deeper into financial crisis.
Bankruptcy may be the only way out of this insanity
I would be out of a job if lenders used common sense in making loans and working with their borrowers facing financial problems. There are times that bankruptcy is the only option for someone to start their life over. Yes, you can finance a vehicle after filing for bankruptcy (sometimes for better rates than before bankruptcy). Talk to an experienced bankruptcy attorney in order to determine your rights and obligations.
Does a false financial statement make it impossible for a borrower to discharge debt under Section 523(a)(2)(B)(iii)?
Not according to In re Brown, 17-21719, E.D. CA, Bankr Court). “A bank’s blind reliance on financial ratios does not qualify as “reasonable reliance” on a false financial statement for purposes of excepting a debt from discharge under 11 U.S.C. § 523(a) (2) (B) (iii) when it has information inconsistent with the credit application presented through an automobile dealer.”
MUSINGS FROM DIANE:
Who is at fault? Everyone – the manufacturer, the dealership, the lender and the borrower.
Many vehicles are designed with short life spans, many less than the length of standard financing. A manufacturer’s goal is to sell as many vehicles as possible, so quality rarely a consideration. The average worker does not have the ability to pay cash for a vehicle and is left with options of financing at high interest rates or riding the bus. In many areas a vehicle is an absolute necessity in order to keep a job.
I am not advocating giving a free vehicle to anyone (unless you want to). But, how about using some restraint when either buying or selling a vehicle? If you are buying a vehicle that has a life span of 3-5 years then you are an idiot to finance it for 7 years. If you are a lender then why is it necessary (other than pure greed) to charge outrageous interest or terms? When the vehicle is repossessed and sold at auction, why isn’t it the obligation of the lender to get the best price possible?
By Diane Drain|Published On: November 11th, 2019|Last Updated: July 14th, 2022|
Diane is a well respected Arizona bankruptcy and foreclosure attorney. As a retired law professor, she believes in offering everyone, not just her clients, advice about bankruptcy and Arizona foreclosure laws. Diane is also a mentor to hundreds of Arizona attorneys.
*Important Note from Diane: Everything on this web site is offered for educational purposes only and not intended to provide legal advice, nor create an attorney client relationship between you, me, or the author of any article. Information in this web site should not be used as a substitute for competent legal advice from an attorney familiar with your personal circumstances and licensed to practice law in your state. Make sure to check out their reviews.*
5 / 5
“You folks are the BEST OF THE BEST in Arizona.” M.H.
You and Jay are the best attorneys I have ever had or needed and thank God for the Honorable Robert Gottsfield in recommending you folks – I would have never made it through the entire process without you and Jay and God Bless you both always and stay in touch as well. You folks are the BEST OF THE BEST in Arizona.
5 / 5
“My only regret is that I didn’t find Diane sooner.” K.H.
I can’t say enough good things about Diane. The way she handled my not typical circumstances was amazing. I was very nervous to start the bankruptcy process but Diane just has a very comforting way of explaining the whole process. My only regret is that I didn’t find Diane sooner. If you find yourself in a financial situation that you can’t correct on your own, please Call Diane Drain as soon as possible.
5 / 5
“Filing for bankruptcy can be a stressful life event” R.A.
Filing for bankruptcy can be a stressful life event, and selecting the right attorney can add to this stress. Diane and Jay were a pleasure to work with, and it is obvious that they are passionate about helping people get their life back on track. I would highly recommend them if you need a bankruptcy attorney.
Want to avoid dishonest debt collectors? Watch this video from FTC’s Consumer Advice By Joseph Ferrari,July 22, 2022 (reprint from FTC, Consumer Alerts) During Military Consumer Month 2022, the FTC [...]
RELIGION AND BANKRUPTCY Bankruptcy has its roots in religion. No one should avoid dealing with debt because of misunderstandings about religious or ethical considerations. It is NOT shameful to seek relief from crushing debt! [...]
Diane Drain received the 2022 Preeminent Award and Gold Client Champion Award from Martindale-Hubbell. The 2022 AV Preeminent award is given to an "elite group of attorneys who have been rated highly by their peers [...]
My intention is to put you back in control of your life
Start with $0 down*. We provide affordable payment plans.
We are a debt relief agency; we help individuals and small businesses through the bankruptcy process. Attorney Advertising. This website is designed for general information only. Any information you obtain from this website should not be construed as legal advice, nor as grounds for forming an attorney-client relationship. You should consult an attorney for information on obtaining formal legal advice.