Voluntary Repossession – Is it a bad idea?
Your Credit Minute Show Notes:
- 00:01 What’s going on, guys? This is Nik Tsoukales with Key Credit Repair. So, today we’re going to talk about car repossessions or voluntary car repossessions. So, the question I get a lot is, I owe too much on my car, I can’t afford the payment, I want to give it back. What should I do, Nik? Well, let’s talk about that. So, let’s say you do give the car back, okay? Um, and I’m going to give you a short little, uh, uh, example of w- what the worst thing that could happen is, okay?
- 00:23 So, let’s say you owe $25,000 on your car, okay? You give it back, uh, you call the car company, you call Chase or Bank of America, whoever it’s going to be, and you say, “Come and pick it up.” They’ll gladly do it, okay? But let’s realize they’re not in the car business, so the second you do that, they’re going to turn around and they’re going to get it over to a wholesaler. They’re going to give it off to an auction, okay? That auction, for a fee, is going to sell it back to the marketplace to probably a used car dealership, okay? That used car dealership, obviously, needs to make a profit, so they’re going to buy that car pretty cheap.
- 00:55 So, let’s say in this scenario you owed $25,000, okay? And you turn around, you voluntary or had it voluntary repossessed, okay? Car goes to auction and they sell it off for $15,000. Now keep in mind, now that you have or the bank has collected that $15,000, they can come after you for the difference, okay? Uh, not in every state, but probably half the states in the U.S. So, you got a $10,000 deficiency balance here, and this is scary, okay? That deficiency balance in half of the states in the U.S. can be collected, okay? And they will collect on it, and what they’ll do is they’ll, typically they’ll hire a collection agency that’ll start to solicit you and they’ll try to get that deficiency balance from you.
- 01:37 Now, if they can’t collect on it, a few things could happen. It could turn into a judgment. They could try to take you to court, okay? In some cases, they will forgive the debt, in which case they’ll send you something called a 1099-C document, okay, where that $10,000 will be considered taxable income. I obviously prepare … I- I- I prefer to pay the taxes on $10,000, um, versus, uh, the entire $10,000, okay. Also, there are some laws in place regarding taxation where you can claim insolvency. Obviously, speak to a tax professional if this does happen to you, and it could be the case where you wouldn’t pay much of anything, okay?
- 02:12 Um, but obviously they can come after you for the difference, so it’s not just, hey, let me hand the keys back and- and it’s all over, okay? If you do find yourself in a situation like this, there are other alternatives, guys. Let’s say you only have a year left in the car loan, okay, or it’s a car lease, in fact. You could turn around and swap it out to somebody. Find someone that only needs a car loan for a year that’s willing to pay the premium. Maybe sublease it to them. Find a friend. Try to sell it yourself, okay? Maybe in a case like this, if wholesale was $15,000, it’s possible that this car in the open market would go for $20,000, and then you’d only be making up a $5,000 deficiency versus $10,000, okay?
- 02:50 Also, another thing to keep in mind is if it does get to the point where it does go to a debt collector, okay? If the debt collector has bought the debt for, as you hear, 10, 20, five cents on the dollar, you are in the position in a lot of cases to negotiate, uh, some debt relief on that and get a settlement on that debt. So, that always is an option, but that’s always something that we want to keep kind of as a back up plan. It’s not something we want to strategically approach because while we take that strategic approach, our credit really is going to take a bath, okay? So, there is no, uh, clean getaway from these, uh, uh, companies, unfortunately.
- 03:23 Also, in regards to the deficiency balance in your state, that’s definitely something you want to speak to a professional about, okay? Because if it is a predatory loan you’re in, if it’s a 20 per- 20% interest rate, you got sold a lemon, there are some laws that protect you. Some states are a little bit more consumer-friendly in regards to deficiency balances, so you might not, this might not even going to be applicable for you, okay? Something to keep in mind and something you can actually ask us here at Key Credit Repair and we can help break down for you.
- 03:50 So guys, this is Nik Tsoukales with Key Credit Repair. Thanks again for checking out our Credit Minute, and if you need anything else, feel free to email me at Nik, N-I-K, at keycreditrepair.com. Have a great day.