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!