 Car loan alone isn't causing debt problems
|  Dear
Debt Adviser,
Which is worse: Calling the bank and telling them you want them
to repossess
the car? Or filing for bankruptcy? If we turn in our cars,
we can make our other bills.
-- Valerie
Dear Valerie,
You have fallen into a trap I used to see a lot back in the days
when I counseled individuals. It is the tendency to focus on one
debt and say "If only I didn't have ..." -- and then list
one or more of the following: a car payment, a house payment, a
child support payment -- " ... then everything would be fine."
Unless you address the underlying cause of these problems, anything
you do will only be choosing between a black eye and a broken nose!
It's a losing proposition.
Let me illustrate
what I mean by looking at the consequences for each action based on the limited
amount of information I have from you: A voluntary repossession
will generally not end your car bill. It will transform it into another bill.
It will also be a black mark on your credit report for seven years and now you
will have to find another way to get to work, live and succeed in a largely car-dependent
society -- unless you live in New York City, in which case I'd want to know why
you have a car at all. When a lender repossesses a vehicle
it is usually sold wholesale at auction. Most often the vehicle sells for less,
sometimes much less, than what is owed on the loan. In addition, there are costs
associated with picking up, storing and selling your car that are added on to
your bill. The residual balance due after adding the fees to your existing loan
and subtracting the wholesale price received is your responsibility, in full,
as soon as a bill can be sent to you, along with an unsecured (unfavorable) interest
rate for every day you don't pay it. Yes, you will owe money
for a vehicle you no longer have in your possession. Though it may seem unfair
and perhaps not right, that is most likely what you agreed to in your contract
with the lender.
As for filing for bankruptcy, this is not as simple
as it once was since the Bankruptcy
Abuse Prevention and Consumer Protection Act was enacted a little
more than a year ago. Your income may exceed the limit for your
state to file Chapter
7 bankruptcy and get rid of some of your debts. Even in a Chapter
7, some bills are not discharged, such as taxes, student loans and
back child support.
You may instead have to file Chapter
13
and would then be responsible for paying back some portion of the loans and living
on a strict budget, set by the court, for the next three to five years. Only a
lawyer can properly advise you on this course of action. I can, however, advise
you that a bankruptcy may be on your credit report for up to 10 years, complicating
your life for job-hunting, promotions at work, insurance and reasonably priced
loans. It may also have an affect on your self-esteem and how those people who
are important to you in your life look at you. A life failure can affect a marriage
and more.
My recommendation is to sit down with your significant
other and thoroughly go through your finances to determine if there
is any way to avoid either a black eye or a broken nose! Perhaps
you can reduce expenses or increase income for a period of time
to get out from under. See a lawyer for some sound advice, and if
you need help sorting out an action plan to pay what you owe, try
an AICCCA or
NFCC member
credit counseling agency.
Good luck!
The Debt Adviser, Steve Bucci, is the president
of Money Management International Financial Education Foundation
and the author of "Credit
Repair Kit for Dummies." Visit MMI
for additional debt advice or to ask a question of the Debt Adviser,
go to the "Ask the
Experts" page and select "debt" as the topic.
| 
