Sell or keep the truck?

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Dear Bankruptcy Adviser,
We are in the process of filing for bankruptcy. However, we’re undecided whether or not to surrender our truck, as this is a big expense on our monthly gas cost and monthly vehicle payment. We have obtained this vehicle only last year. After we file for bankruptcy, what are our chances in obtaining another car loan within the next year? We have one other vehicle that we use. However, we need another one for work and driving the kids around. Should we keep the truck or get another car with better gas mileage?
— Tely

Dear Tely,
It is refreshing to hear someone actually thinking realistically about a car loan. Typically, most clients tell me, “I must keep my car, no matter what! Or I will not file bankruptcy.”

You need to review your financial picture thoroughly before making the decision. And you need to make a few inquiries into whether you can buy a car and what the cost will be to buy a used vehicle that gets better mileage.

Here are four questions you need to ask before you drive the car back to the dealer, turn in the keys and include the remaining balance in your bankruptcy.

1. What will be the new car payment? With a voluntary repossession and bankruptcy on your credit report, you will have difficulty qualifying for a new loan. You may have to put 10 percent to 20 percent down on the new vehicle and the loan will likely have high interest and payments.

You need to get a general idea as to the potential new loan terms. Will the new vehicle be as reliable as your current one? Toyota’s and Honda’s seem to have excellent reliability. You could get many years of use after the balance is paid in full. While you are paying more for gas because you have a truck, you might pay less in the long run for annual maintenance and repairs.

2. How much better mileage will you get? The current mileage versus long-term repair costs could be a major factor. Magazines like “Consumer Reports” will give you accurate information on actual gas mileage versus the automaker’s advertised mileage.

3. What is the current value of the truck? You might be able to lower the outstanding balance from the current one to the fair market value. This is done through the bankruptcy and is known as “redeeming” the vehicle at the fair market value. If the value of the vehicle has depreciated considerably since you bought it, then you might be able to redeem the vehicle with a new car loan. The new loan will be completed before your case is closed. Use the bankruptcy code section, 722 Redemption, to look for companies that handle this type of scenario.

4. What do you need the vehicle to do? If your business requires a truck, then having something reliable is essential. If you have the vehicle because you like to go off-roading once a year, then it might be an unnecessary and lavish expense. Only you can determine the reasons why you need a particular vehicle.

Tely, you are very wise to consider surrendering the vehicle. Consider the issue carefully and determine how easily you can get a reliable, better gas mileage vehicle. Once you have answers to the above questions, you can make an informed decision.