What Should I do With My Car if I Owe More Than it’s Worth?

underwater car loan

How Do I Deal With An Auto Loan That is Underwater?

One common issue that I see time and time again at an increasing pace is that consumers owe significantly more to a bank for a car than the car is actually worth.  As it turns out, www.edmunds.com has actual statistics to back this up which show that 1/3 of all auto trade-ins involve cars in which the consumer owes more than the car is worth, otherwise known as being underwater.  Making matters worse, car dealers are agreeing to take the car on trade-in and add the difference between what the car is worth and what is owed to the new car loan, which ultimately results in the consumer getting a new car that loses value the moment it is driven off the lot in addition to the underwater debt the consumers owed on their former vehicle.  So now the consumer is left with a depreciating asset that they are not likely to pay off or gain the value to correlate to what they are spending.  Don’t let yourself to fall into this trap.

I had the chance to talk with James Gore on his radio show on 1150 AM KKNW with regards how you can deal with an auto loan that is underwater and you can listen to the show here:

When shopping for a car loan you should not be spending more than you can afford and you should think about how much you will be required to spend on the loan on a monthly basis.  You will want to secure the lowest interest rate that you can, which can be done by improving your credit score.  If you are somebody who needs the latest and greatest technology, you should consider leasing a vehicle rather than taking out new loans on a depreciating asset which may drive you further into debt with nothing to show for it when it comes time to sell the car.

So How Can You Deal with An Auto Loan That is Underwater?

(1) One option is if you are considering filing for chapter 7 bankruptcy, you can simply walk away from your vehicle and the debt will be discharged with your other unsecured debts like credit cards and medical bills.  And yes you would need to surrender your vehicle back to the bank.  The good news is that you will qualify for a new auto loan that hopefully will not put you underwater, but it would most likely be at a higher interest rate than the average car loan.

(2) If you have decided to file for chapter 7 bankruptcy, another option for you is to consider having your attorney file for a redemption under section 722 of the bankruptcy code.  Filing a motion to redeem an asset while in chapter 7 bankruptcy allows a consumer to cram down the amount you have to pay on the vehicle to the vehicle’s actual value.  The catch is that you would have to pay the amount you owe in one lump sum to pay off the debt, but again that would only have to be for the actual value of the vehicle.  There are companies out there that will give you a new loan for the actual value of the vehicle if you are not able to cover the balance.  This is a good idea for consumers who have a vehicle that is worth significantly more than they owe and who are in need of a loan to cover the actual value of the car.

(3) If you don’t qualify for chapter 7 bankruptcy or are considering reorganizing your debt payments, you may want to consider chapter 13 bankruptcy.  In a chapter 13 bankruptcy, consumers can cram down their car payments to the value of their vehicle through their chapter 13 plan.  A chapter 13 plan typically lasts for 3-5 years, and if the consumers vehicle was purchased more than 910 days ago, they may be eligible to cram down the auto loan to the actual value. Of course in order to file for chapter 13 bankruptcy, you need to be able to afford your chapter 13 plan which will include your auto loan.

These are some of the most common tools at your disposal to get out from under an underwater car loan.  If for whatever reason you fall behind on your car payments, you bank will most likely seek to repossess the vehicle.  Timing on this can vary by lender, but in my experience, credit unions are the quickest on the draw.  Once a vehicle is repossessed the lender will seek to auction the vehicle to recoup some of the funds that are owed to them.  The consumer will then be on the hook for owing whatever is left on the balance of the loan minus the auction value.  At this point your lender may file a lawsuit to collect these funds which can lead to a garnishment of your wages or bank accounts, not to mention negative reporting on your credit report the minute you go delinquent or get a judgment on your record.  This of course would make it more difficult for you to obtain a favorable car loan in the future.

Now that you know what may happen if you don’t pay for your underwater auto loan, you can use the tools above to avoid anything negative from happening.  For Example once you file for chapter 7 or chapter 13 bankruptcy, nobody can collection on a debt and you can redeem or cram down your loan to the actual value, or surrender your vehicle altogether and get out from under your underwater car loan.

If you live in Washington State and are considering filing for bankruptcy and have a vehicle in which you owe more than it is worth, give Symmes Law Group a call at 206-682-7975 to speak to an experienced bankruptcy attorney and learn about your options to become debt free.

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