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Impact of a Customer’s Bankruptcy after a Vehicle is Repossessed with an Unpaid Balance Due and Negative Equity

Vehicle Repossessed Bankruptcy

Many of our clients have inquired as to how a licensed vehicle dealer or finance company in California should act with respect to a customer who has a financed vehicle purchase and no equity in the vehicle after the customer defaults on the purchase contract and then files for bankruptcy. For specific transactions that involve a bankruptcy by a customer with a balance due to a lender, legal advice should be sought immediately so that the lender does not violate the automatic stay of the customer’s bankruptcy case. This article is not applicable to a repossessed vehicle with positive equity and does not provide a complete analysis of a lender’s duties under Cal. Civ. Code § 2982.3 to a borrower.
Assume that a customer financed a significant amount of the purchase price (over 80%) to buy a vehicle from a dealer in January of the present year. Per the purchase contract, the vehicle secures the customer’s purchase. After the sale, the customer drives the vehicle for six months and makes monthly payments. The customer then defaults on the purchase contract and decides not to cure the default (i.e. pay off the arrearages to make the amount financed current or pay the balance due) per options given in the NOI. At the time of default or thereafter, the value of the vehicle is less than the remaining balance due per the purchase contract (i.e. customer has negative equity in the vehicle). The dealer/finance company repossesses the vehicle in August of that year and provides the customer in default with the 15 day NOI, which includes an itemized statement of the amounts owed under the purchase contract as required by Cal. Civ. Code § 2983.2 (a) and (b). This section requires (1) the customer pay either the past due balance or the entire balance during that 15 day period to recover the vehicle from the dealer/finance company; if customer fails to make these payments, the dealer/finance company has the right to sell the vehicle after the 15 day period expires.
If the customer files bankruptcy during the 15-day notice period of Cal. Civ. Code § 2983.2, the dealer/finance company is required to surrender the vehicle to the customer upon notice of the bankruptcy case and not sell the vehicle. (In re Fitch (Bankr. S.D. Cal. 1998) 217 B.R. 286, 290.) The dealer/finance company should then seek legal counsel immediately to respond to the circumstances of the customer’s bankruptcy case and avoid violating the automatic stay.
Potential bankruptcy case outcomes are (1) customer will keep the vehicle, cure arrearages, and pay the remaining balance; or (2) the vehicle will be surrendered the vehicle to the dealer/finance company.
If the 15 day notice period of Cal. Civ. Code § 2983.2 (and any voluntarily agreement between customer and dealer/finance company to extend this period) expires without the customer paying the arrearages or the balance due in full, the dealer/finance company is entitled to sell the vehicle and apply the sale proceeds to the remaining balance. This is true even if the customer in default files a petition for bankruptcy relief with the United States Bankruptcy Court after this 15-day notice period expires. (In re Fitch (Bankr. S.D. Cal. 1998) 217 B.R. 286, 290.) Any deficiency on the balance due after applying the vehicle sale proceeds to the balance requires the dealer/finance company to file a proof of claim as a general unsecured claim in the customer’s bankruptcy case to recover any money paid on this claim in that bankruptcy case.

Dixon Gardner, Esq.