Who wouldn't want to sell a new car or truck to actor Randy Quaid or ice skater Dorothy Hamill or nightclub entertainer Wayne Newton? Surely they are all excellent credit risks.
In fact, all have bankruptcies in their backgrounds, notes North Carolina bankruptcy lawyer John Orcutt.
His point: While celebrities may have more opportunities than others to rebuild their credit, bad things happen to all kinds of good people, and everyone deserves a fresh start.
For auto dealers and lenders, the pool of potential customers who have experienced bankruptcy exceeds 10 million U.S. households - at least one out of every 10. Bankruptcy filings last year reached a high of about 2 million. That's more than a 30 percent increase from 2004. As a result, many vehicle lenders say they try to keep open minds toward would-be new- and used-vehicle buyers who have been through bankruptcy.
A new federal bankruptcy law took effect last October. Many people with financial troubles were concerned about how the law might affect them and headed to bankruptcy court early.
Some already knew the law would make it harder for them to file Chapter 7 bankruptcy, in which unsecured debts are wiped out. Instead, they would be forced into Chapter 13, in which debts are reorganized.
After last year's surge of about 2 million, bankruptcy filings dropped sharply to 102,949 in the first quarter of 2006, according to Lundquist Consulting Inc. They are expected to balance out over time.
One provision of the law was designed specifically to protect auto lenders. It was intended to keep a bankruptcy judge from lowering the amount owed on a vehicle to its market value, which often is far less than the outstanding loan. Lenders call the practice cram-down.
But a bankruptcy judge in Tennessee issued a ruling last month that could undermine the effectiveness of that provision, creditor lawyers say.
No longer shunned
Bankruptcy does not exclude a consumer from the vehicle market, says Steve Bowman, chief credit and risk officer of AmeriCredit Corp. in Fort Worth, Texas. "But obviously it puts them into a different risk category," he told Automotive News.
Interest rates vary according to individual circumstances, Bowman adds. But in general a person with a past bankruptcy must pay a double-digit interest rate on a vehicle loan. For someone with a top credit report, that rate is typically 5 or 6 percent.
"When we look at a person who has filed bankruptcy in the past, that's not the sole factor that drives our assessment of the risk," Bowman says. "It's in many cases what they have done since they filed that bankruptcy to re-establish credit."
AmeriCredit specializes in working with customers with flawed credit. It does 97 percent of its business with franchised dealers, Bowman says.
People with past bankruptcies are no longer shunned by lenders, he adds.
Even a prime lender like Ford Motor Credit Co. doesn't rule out a customer who has been in bankruptcy, says spokeswoman Meredith Libbey.
A consumer who has not emerged from reorganizing debts would not get a Ford Credit loan, she says. But the company would consider someone with a past bankruptcy, she adds.
"We love people with (top-notch) credit histories," Libbey says. "We are also realistic."
Rates up to 24%
At the other end of the spectrum are so-called buy-here, pay-here dealers. They provide car loans to people who can't get credit elsewhere.
People who are newly out of bankruptcy will pay higher interest rates on car loans to help them re-establish credit, says George Wright, a manager at Hepperly Auto Sales, a used-vehicle dealer in Maryville, Tenn.
The dealership tries to place customers with lenders, but it also offers in-house financing. Rates can be as high as 24 percent, Wright says. "It's worth doing," he adds. "You take the good with the bad."
Some consumer groups argue that lenders, especially credit card companies, have been too eager to extend credit to people who may not be able to make the payments. Those lenders brought about the need for so-called bankruptcy reform, critics charge.
Congress fought over the legislation for years. A compromise measure was finally approved by lawmakers early last year and signed by President Bush.
Auto lenders said they needed a provision in the law to prevent cram-downs. They said they were losing hundreds of millions of dollars a year in bankruptcy reorganizations. In the final bankruptcy bill, the industry got a provision that prevents cram-down during the first 30 months of a loan. They had sought a five-year provision.
But U.S. Bankruptcy Court Judge Richard Stair threw a wrench into the works, lenders say. He approved a reorganization plan for Larry and Regina Ezell, of Knoxville, Tenn., that allows them to surrender a 2003 Nissan Xterra and wipe out all of the nearly $25,000 they owed on it.
The debt is believed to be far more than the vehicle would bring when it is resold. But if the judge's opinion stands, the lender could collect no more from the Ezells.
"It's a huge backfire," says Thomas Dickenson, a lawyer who represents a group of lenders that intervened in the case. "There is no way that this is what Congress intended."
You may e-mail Harry Stoffer at [email protected]
