File for bankruptcy to get rid of car and car payment

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Dear Bankruptcy Adviser,
I have a car that I financed in 2007. The monthly payments are extremely high and it’s becoming more difficult to pay them. I currently owe about $21,000 and the blue book value for it is about $10,000. I tried to refinance, but with the negative equity, I do not qualify. My credit is fairly decent, and I am thinking about doing a voluntary repossession or filing for bankruptcy to get rid of this car. However, this is the only vehicle I have and would need a replacement. Should I just save money to buy a cheaper car and file for bankruptcy or do a repo and apply for a smaller, affordable loan?
— Jennifer

Dear Jennifer,
You have a few options available and you seem to understand those options. It is amazing how quickly car values can drop. I think a new car loses 25 percent of its value the minute you drive it off the lot. While I assume it is impossible to create statistics to show this dramatic decrease, I notice this phenomenon when clients file for bankruptcy protection shortly after purchasing a new vehicle. The value is typically 25 percent less than the purchase price and many times the client has owned the vehicle for a short period of time.

Here are all the available options:

  1. Keep and pay. If you feel that the payment is too high, then you will not be able to handle this option.
  2. Sell the vehicle. You can try to get as much as you can at this time, but this option will leave you with a deficiency balance. A deficiency balance is the difference between the sale price and the amount owed. The lender, or a subsequent collection agency, will try to collect the difference. But by trying to sell the vehicle on your own, you might be able to keep the deficiency balance lower than if you voluntarily surrender the vehicle. Should you choose this path, keep in mind that the lender will not turn the title over until the car balance is paid in full. This can be a difficult option, since the title transfer can be time-consuming and complicated. The benefit simply is that the remaining balance will be less than had the lender repossessed the vehicle and sold it at auction.
  3. Voluntary surrender. You can just drive the car to the dealership where you purchased it or contact the lender to pick up the vehicle. Sometimes this option is not as easy as some may think. On occasion, clients tell me that the lender will not pick up the vehicle or tell them where to turn it in. They even tell the client to sell the vehicle themselves! Strange, but true.

    If the lender does pick up the vehicle, you will be responsible for the deficiency balance. The lender will sell the vehicle, pay off a portion of the loan and send you a bill for the difference.

  4. File bankruptcy. If you qualify for Chapter 7 bankruptcy, then you can eliminate the entire balance and surrender the vehicle. People have hired me to file for bankruptcy simply to eliminate the remaining balance on a vehicle. Sometimes, this is your only option, depending on the size of your deficiency balance.

    Bankruptcy might be a reasonable option if you have other debt like credit cards or personal loans. But think long and hard about filing for bankruptcy only to eliminate the deficiency balance.

  5. Redeem the vehicle inside bankruptcy. You can file for bankruptcy, keep the car and eliminate the difference between the fair market value of the car and the current balance. Search the Internet under “vehicle redemption” prior to filing for bankruptcy. You can find out the current value and determine whether this would be a viable option to explore while you are under bankruptcy protection.

    Some companies can get you into a new vehicle during a bankruptcy. Many clients have purchased a more affordable vehicle while surrendering their current vehicle in bankruptcy.

Sometimes people learn the hard way that car payments can devastate one’s budget. I hope that it is possible to reduce your pending financial exposure, and I hope you can avoid bankruptcy in the process.