Five Key Considerations for Automobile Appraisals in Bankruptcy

Automobile appraisals in bankruptcy situations can present unique concerns, and as such, it is important to give them particular care and attention. Below are five areas of special concern to watch out for and some tips for completing a successful appraisal.

1. Value

Value is often the biggest concern.

The Bankruptcy Code specifically provides that automobiles should be valued according to retail standards, as stated in Section 506(a)(2)of the Bankruptcy Code: ". . . such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing."

The Bankruptcy Code further defines replacement value as the price a retail merchant would charge for property of that kind considering the vehicle’s age and condition of the property at the time value is determined. Thus, retail value is the price paid in a purchase from a dealer or private seller. The Bankruptcy Code is very clear that trade-in value isn’t acceptable or appropriate. As a result, it’s essential to ensure that the appraiser knows to appraise the vehicle using retail rather than trade-in value.

2. Timing

Appraisal timing is another area of concern that must be addressed with the appraiser when ordering the appraisal. The appraisal should always be completed as of the bankruptcy filing date since "as of the date of the filing of the petition" is stated in the Bankruptcy Code referenced above.

In situations where an appraisal is needed months after filing, instruct the appraiser to complete an "historical" appraisal. This type of appraisal allows the appraiser to use the base value for the filing month and to discount any mileage that has accrued post-petition.

3. Valuation Source

It’s also important to address the valuation source of the appraisal when ordering. The National Auto Dealers Association (NADA) is the recommended baseline value for a creditor's appraisal. NADA is preferred because it uses regional data and traditionally has higher values. Avoid using Kelley Blue Book for valuation because it tends to provide lower values.

4. Vehicle Condition

When it comes to the vehicle’s condition, appraisers naturally want to itemize damage to the vehicle when completing the appraisal.  While that might be relevant for an insurance appraisal, it isn’t for bankruptcy purposes.

Once again, Section 506(a)(2) of the Bankruptcy Code addresses this issue and specifically excludes " . . . the costs of sale or marketing." This is because retail value presumes that the vehicle is in good condition and has been repaired for marketing. The creditor shouldn’t bear the burden of those repairs. However, mileage and overall condition should be factored into the value.

5. Communication

Lastly, clear communication with the appraiser is essential to getting the most value from an appraisal. It’s important to communicate expectations clearly from the outset.

In addition, look for an appraiser who is willing to testify at a hearing. Many won’t, so confirm the appraiser's willingness to do so when you order the appraisal.