Obama “Cash for Clunkers” Bill May Hurt Creditors

Several versions of a “cash for clunkers” bill were introduced in Congress for inclusion in the $787 billion stimulus package.  The concept is to give buyers a cash incentive to buy new cars.  Backers of the bill point to increased new car sales (and revenues) for the struggling US automotive industry and reduced gas consumption and emissions if more of us drive newer cars.

Sounds good on first glance, right?  But as jobless claims continue to rise, legislation that makes times harder on small business owners deserves a second look.

If our government is successful with a bill like this, we will get a “voucher” that is good toward the purchase of certain cars if we trade in an older car that gets low gas mileage.  The amount of the vouchers is yet to be determined, but $2,500 up to as much as $7,500 has been mentioned.  Congress will designate which new cars qualify for a voucher.  It is probably safe to assume the list will be comprised of US companies.

In my neighborhood, small car lots fill a much needed niche.  They help people buy cars that have no credit or bad credit and they let them make the payments out of each paycheck.  The cars they sell are those that would be targeted by a “cash for clunkers” law.  If you have $10,000 to spend and you can buy a 6 year old car with that money, or a new car for just a little more if you have a voucher, which car would you choose?  If small used car dealers sell fewer cars, many of them will be forced out of business.

In addition, if there is less demand for used cars, the value on the cars we all drive now will decline.

This may actually help you if you are considering filing bankruptcy.

When Congress changed the bankruptcy laws in 2005, they made it tougher for debtors who have car payments.  If you have owned your car for more than 2 ½ years, you might qualify to “cram down” what you owe on your car to be the same as what it is worth.  That means you could get the title to your car after paying just the value, not what you owe.  But the value that is used is the “retail” value of either the NADA index or the Kelly Blue Book, depending on where you live.  That value is often high enough that a “cram down” does not save any money.  But if values decline, as they certainly will if a bill like this passes, it could mean thousands of dollars of savings for debtors who take advantage of the protection a Chapter 13 bankruptcy can provide.

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