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Repossession choice: one car or two?

Dear Dr. Don,
I am faced with a dilemma. I've come out the other side of a technology layoff with a decent job, but I'm not making the money that I used to. I am in two car loans but cannot afford both vehicles. I am too upside down in the notes to sell or ask someone to take over payments.

My choices are: 1) Voluntary repo of one vehicle, while I stay in the other at a moderately high payment. Along with the car payment I would have a deficiency payment to the lender of the repo'd car, or 2) Voluntary repo of both vehicles and (with help of family) get into a cheaper car at a reasonable payment given my present salary. Even though I would have deficiency payments on two vehicles, I know I could make the lower car payment no matter my employment circumstances.

So which is worse, one repo or two, or does it even matter?
Many thanks!
Kent Carr

Dear Kent,
Voluntary repossession sounds more civilized, and it is a better approach than a repo man taking your cars away in the middle of the night or at work. A voluntary repossession saves you the embarrassment of having your co-workers or neighbors seeing your car(s) taken away, and keeps you from having to reimburse the lender for the repo expense.

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State laws vary concerning your rights in a repossession, but the lender is typically obligated to notify you of his plans to sell your car and the lender has to try to get a commercially reasonable price for the car. The car's wholesale price at auction should be sufficient to satisfy that obligation. You would also have to pay the lender's costs in arranging the sale.

With enough money at risk the lender is likely to sue for a deficiency judgment against you for any shortfall on the loan plus expenses. (Some states don't allow the lender to sue for a deficiency judgment on an auto loan.) A judgment will show on your credit report along with the repossession(s). After that it won't much matter whether you have one or two repossessions on your credit report.

Here's the part of your plan that I don't understand. If you plan on making the deficiency payments on the car(s), how is repossession any better than selling the cars on your own? The only benefit is that it allows title on the car(s) to pass to the new owner without you having to come up with the shortfall to sell the car. You're paying a steep price for that benefit, especially if the lender can force payment on a judgment through either garnishment of your wages or with a levy against your personal property.

Bankruptcy, using either Chapter 7 liquidation or a Chapter 13 repayment plan, could be a better approach than voluntary repossession. Review your state's bankruptcy laws, or consult with a bankruptcy attorney, to see how you might fare in a bankruptcy filing. Any repossessions or judgments will stay on your credit report for seven years, just like a Chapter 13 bankruptcy.

-- Posted: June 13, 2002

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See Also
When to file for bankruptcy
10 ways to bounce back from bankruptcy
Credit repair after bankruptcy
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