Driven to Bankruptcy in Upside-Down Car
Dear Bankruptcy Adviser,
My husband and I are preparing paperwork to file for a Chapter 7 bankruptcy. One of our major issues is we have two cars, and the loans for both of them are upside down. That is, they are for more than the cars are worth. At present, we plan to reaffirm the car loans on our vehicles even though I would prefer to let them go because they're upside down. Our problem is that we live outside of the metro area where we both work. We need two vehicles. But we have no cash to purchase cars. If we chose to surrender the cars we have now, how could we obtain replacement vehicles?
-- Jennifer
Dear Jennifer, You ask a great question and definitely are thinking about the most important parts of life after bankruptcy. Most families need two cars. And unless the cars are paid in full and reliable, you have to find ways to finance them and make the payments.
You mention that you have considered turning them in prior to filing bankruptcy. This is an option. And since you owe more on the cars than they are worth, it might be a sound one. But you must make sure you are prepared for life without a car (or cars) or have another car available. Here are some of my thoughts.
One, how many car payments do you have left? You say the vehicles are worth less than what you owe. If you have less than two years of payments left, maybe keeping them is the best idea. That's because any new car loan after you have filed bankruptcy will likely be for four to six years and have a high balance and interest rate.
Two, how reliable are the current cars? A reliable car with little value is much better than a valuable car with high maintenance and repair costs. Paying on a reliable car for three or four more years is better than surrendering the car and buying something with a lower payment but reliability issues.
Third, do you have to reaffirm the car loans while inside bankruptcy? This is very important. If you reaffirm the car while inside bankruptcy, you must pay it off. A reaffirmation agreement is a legally enforceable contract, filed with the bankruptcy court. It states your promise to repay all or a portion of a debt that may otherwise have been subject to discharge in your bankruptcy case.
Some lenders demand you sign this agreement and will not send you statements or report payments to the credit bureau without the court-approved reaffirmation agreement. In many instances, lenders consider it a breach of the terms of your loan if you fail to sign the agreement, and will repossess the vehicle.
Upside Down Car Loan - News
One of our major issues is we have two cars, and the loans for both of them are upside down. That is, they are for more than the cars are worth. At present, we plan to reaffirm the car loans on our vehicles even though I would prefer to let them go
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How long have you been with your current employer? It looks okay at around 6 months but the longer the better….and its okay if its been less if you changed jobs but stayed in the same job field. Another thing is your ability to repay.Most lenders like the debt to income to be low. To find out the debt to income just divide your monthly net pay from your total monthly debt. If its say 30 or less your okay….31 or more and its not looking so good. Lastly that I would look for is loan to value of the auto your trying to refi. Go to either Kelly Blue Book or NADA and see what they value your auto for. Then see how much your going to refi for. Take the amount of the refi and divide it by the value of the auto, that would be your loan to value……the lower the better. If your loan to value is over 100% you are upside down in the loan and the lender might ask if you can put some money towards the auto……..The biggest thing is your credit history, but since you said you have none they may factor that in as well. Those are the road blocks that I see the most when people come in….I hope this helps.
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