Many people, when filing for bankruptcy, want to give back (surrender) their vehicles to the lender who holds their car loans. The theory is that the lender will take possession and then re-sell the car, and the debtor will get a discharge of that entire debt in the bankruptcy. If a Chapter 7 debtor states on his Statement of Intention that he is surrendering the vehicle, then the debt will be wiped out when the bankruptcy is discharged.
The problem arises when the car is worth significantly less than what’s owed to the lender, and therefore the lender refuses to accept the car back. You now have the car, but the lender is holding the title. You can’t sell or trash the car without the title, and — guess what– the lender doesn’t want to give up the title unless you pay what you owe! Neat little game they’ve got going there, isn’t it? What can you now do with the car? Unfortunately, it’s a scenario that’s been playing out frequently over the past few years.
Let’s go back for a minute to review how a car loan works. If you take out a loan to buy your car, the bank or other lender will have a lien on that car and will hold on to the original title until you pay off the loan. The lien is a kind of legal protection for the lender, giving it the right to repossess your car if you are unable to keep making your payments. The white “memorandum of title” that they give you clearly shows the lender’s name and address as having a lien and is generally for your use in renewing your license with the BMV. When you pay off the loan, the lender will provide you with the original title, which is then stamped to show that the lien has been satisfied (released). You cannot sell or junk your car without the original title.
When paying off the car loan makes no financial sense for you because the car simply isn’t worth the balance you owe, it may make no financial sense to the lender either. Sometimes the cost of repossessing, repairing, storing, and reselling is more than the fair market value of the car for the lender as well. This is particularly true if the car isn’t running or needs major repairs. And reasonably, you can understand their position. However, many times, the lender is essentially holding the title for ransom. The lender can’t continue to hound you for payments, and you have the right to continue using it if it’s drivable, but you’re going to have a big problem when the time comes to get rid of it. Keep in mind that the bankruptcy filing in itself does not require the lender to release the lien on the vehicle, it just releases you personally from the duty to pay it. (The lien is attached to the vehicle.)
So what can you do, especially with a junker that you just want gone? There are a couple of things you can try to shake the title loose:
- You (through your attorney, if you have one) can inform the lender that you will consider it a violation of your discharge order if the lender does not either release the title to you or tow the vehicle. It may be necessary to “remind” the lender more than once, but sometimes they decide it’s better to just provide the clear title rather than taking the chance that your attorney will file an action asking the Bankruptcy Court judge to rule that the lender violated the discharge and making the lender responsible to pay your attorney fees. Keep in mind that there is no guaranteed outcome if you actually have to file the motion, and you will probably have to file to reopen your bankruptcy as well.
However, in the northeastern U.S., there is a court decision that could be used to persuade courts in other parts of the country to rule in your favor. The facts of that case are an example of what happens when the lender won’t accept the car back. The debtors surrendered their car in their bankruptcy to the lender. The car was worthless, but the lender refused to release its lien unless its claim was paid in full. Under state law, the debtors could not “junk” the car without a release of the lien. In order to ” junk” the car, someone would have had to tow it to the junkyard. The bankruptcy judge found that:
- the debtors had timely filed their notice of intention to surrender the vehicle,
- the debtors did nothing to prevent the lender from repossessing the car, and
- the lender had determined that it was not cost-effective to repossess the car.
Based on these facts, the judge ruled that the lender’s refusal to release its lien to allow the debtors to junk the car was coercive, and “had the practical effect of eliminating their ‘surrender’ option in their bankruptcy. In situations where the collateral (the car) was entirely without value, the lender’s assertion of its right to its lien on the car left the debtors with no option but to pay the balance in full or continue to own, store, and insure the car themselves. The judge in that case ruled in favor of the debtors, finding the lender in contempt for violating the discharge order. While bankruptcy courts in other parts of the U.S. do not have to follow what this court did, it may be useful as a means of convincing an uncooperative lender that it would be in its best interest to pick up the car.
- Another possible solution would be for your attorney to file a motion to “redeem” the vehicle for $1.00. The bankruptcy laws allow you to keep a vehicle if you pay the lender the actual value of the vehicle in one lump sum payment. In bankruptcy lingo, that’s a “redemption”. Since the lender has not repossessed the vehicle, you may argue that they consider it worthless, and therefore they should accept $1.00 in return for the release of the lien on the car. If the lender fights the $1.00 redemption value, it is in fact admitting that the car does have value, which defeats its reasoning for not picking it up. So either way, the lender loses.
- Several states, including Ohio, have laws that allow a repair garage or a towing company to assert a lien on a vehicle for work done. It appears that this lien is actually superior to that of the lender! Assuming that the garage would work with you, you could take the car in for a repair, and not pay. The repair shop can then assert a mechanics lien and sell the vehicle after first notifying your lender, who has the option of paying for those charges. If the lender doesn’t pay for the repair, then the garage can have it towed to a junkyard. The junkyard will pay for the selvage, the garage/towing company can recap their charges, and you will be done with the vehicle without the need to get the title.
- One more suggestion occurs to me: when my client surrenders a car, I generally advise them (if it’s running) to take it to the lender’s place of business, remove the license plates and all personal possessions, and have someone working for the lender give my client a receipt verifying that on a particular date, the lender did receive the car and keys back. I generally do that so that my client can return the car at their convenience, rather than some repo man picking it up unannounced before the client has removed his personal property. Now, in my experience, the lender has previously indicated to me exactly where they want the car returned. However, the possibility that the debtor, who has previously stated he will be surrendering the vehicle in his bankruptcy, could do a little “self-help” of his own by dropping the unwanted car on the lender’s doorstep sounds like it could work, so long as he can get a receipt proving that he did indeed drop it off. Without a receipt, it’s too risky to just abandon the car, and I definitely would not advise trying this. To make this work, then, the debtor would have to call the bank branch or other lender location beforehand, simply stating that he’s surrendering his car and expects to get a receipt acknowledging that he is leaving it in the lender’s possession when he drops it off there and will surrender the keys at that time.
Obviously, this isn’t going to work if the car isn’t running. And, again, it needs to be pre-arranged. But if you can get the car physically there and acknowledged, the lender certainly isn’t going to return it to you.
Car and other types of vehicle lenders have created this problem in recent years as a way to get around bankruptcy laws that permit debtors to surrender their vehicles and thereby be able to get the loans discharged along with the rest of their debts. The best way to approach these lenders to get them to remove their liens and provide a clear title depends upon the specific facts of your situation. Certainly, the fair market value of the vehicle and the amount of the lender’s loan balance are essential; however, other facts may have a bearing as well. I have laid out various suggestions to make this happen. I would suggest, however, that you also consult with a bankruptcy attorney so that you can make the best decision as to how these options would work in your case to truly give you a fresh start at the close of your bankruptcy.