Car loans are a common reason for bankruptcy
Borrowing money to buy a car is a serious decision. Last year, the average new car cost $37,577, and that doesn’t include the finance charges you have to pay over the course of the loan. Lenders are often very eager to help close the deal, and sometimes the whole thing happens so fast that you don’t ask as many questions as you should have before signing on the dotted line.
Once the new-car buzz wears off and that payment is due month after month, it might be harder to justify taking out that loan in the first place. Car loans push people into needing bankruptcy protection more often than you might guess.
Car loans are secured by the car, meaning that the lender has the right to get the vehicle back if the loan isn’t going to be paid. In chapter 7 bankruptcy there are two main ways to deal with a car that has a loan on it: you can surrender the vehicle (give it back) or reaffirm the debt (agree to continue paying the loan back).
When there’s more than one car in the family, or the loan balance is very high, surrendering the one with the loan can make a lot of sense. You hand over the keys and get to walk away from $30-40,000 in debt.
On the other hand, if the vehicle is paid off, or you have sentimental reasons to hold onto it, a reaffirmation agreement lets you keep paying that loan as normal during and after the bankruptcy process.
Your best choice might be to ride the bus, buy a junker, or hold on to the car you have. We deal with each situation individually. If you have a car loan and want to discuss your options in bankruptcy, contact us for a free consultation.
Image credit: Nick Youngson, CC BY-SA 3.0.