Are you struggling to pay your car payments? Do you need a new car? If so, you might consider trading your current car to purchase a new car. However, your car has negative equity. What are your options for trading in a car with negative equity?
What Is Negative Equity?
Equity is the amount of money you would receive if you sold your car. Negative equity means that you owe more on your car loan than your car is worth.
For example, let’s assume the market value of your vehicle is $10,000. However, you owe the bank $12,000. So if you sold your car for $10,000, you would have to pay the bank $2,000 out of your pocket to pay off the loan.
Several factors can lead to negative equity. Some factors include:
- Your down payment was very small. Most new cars lose up to 20% of their value during the first year. Therefore, if you try to sell your car soon after purchasing it, you might owe more than the car is worth.
- You financed the car for an extended period. For example, a 72 or 84-month car loan may lower your monthly car payments. However, long-term car loans generally result in negative equity.
- You put a lot of wear and tear on your car. For example, the vehicle has high mileage, or you did not take care of the car with regular maintenance.
- The car was involved in a traffic accident or was damaged in another way. Even though you made the repairs and the car looks brand new, any accidents or damage lowers the car’s value.
Trading in a car with negative equity is possible. However, it is costly. You may need to pay off the negative equity to qualify for a new car loan. If you roll the negative equity into a new car loan, your new vehicle has negative equity when you drive it off the car lot. Furthermore, your car payments will be larger to repay the negative equity on the trade-in.
What Happens if You Allow the Lender to Repossess a Car with Negative Equity?
If the lender repossesses your car because you stop paying the loan payments, the lender sells the car. The lender applies the money received from the sale to the loan balance. Unfortunately, most cars sold through repossession sales are sold for below market value. That means you owe even more money to the lender.
The lender may file a lawsuit seeking a deficiency judgment. A deficiency judgment is a court order stating that you owe the lender the additional money due on the account after the car was sold.
In other words, if you owed $15,000 on your car loan and the lender received $10,000 for the car, you owe the lender $5,000. The judgment would total $5,000 plus the costs of filing the judgment and interest. Therefore, you now owe the lender more than $5,000 on a car you no longer own.
Depending on the laws in your state, the lender could ask the court to grant a wage garnishment order. It could also take legal action to collect the judgment by seizing other property and assets you own.
Filing Chapter 7 When Your Car Has Negative Equity
Do you owe other debts that you cannot afford to pay? If so, filing Chapter 7 might be a way to get rid of a car with negative equity.
You can surrender the car to the lender through your Chapter 7 bankruptcy. The lender cannot seek a deficiency judgment if you surrender the car. Therefore, it does not matter how much negative equity the vehicle has when filing Chapter 7. The entire car loan is discharged through your Chapter 7 bankruptcy case.
A Few Things to Consider Before Filing Chapter 7 to Surrender a Car
Car loans after bankruptcy can be complicated. It can be difficult to get a car loan immediately after filing a Chapter 7 bankruptcy case. You must wait until the Chapter 7 case is closed (about four to six months after filing) to apply for a new loan. In addition, many lenders will not extend credit to someone who has a recent bankruptcy filing on their credit report.
You may be able to finance a loan through a “Buy Here, Pay Here” car lot, but the interest rate will be high, and your selection of vehicles is limited. Filing Chapter 7 will give you a fresh start. You can rebuild your credit. However, it might take you a few years.
Therefore, consider your options for obtaining another vehicle before filing bankruptcy. For example, can you borrow a car from a family member or friend for a year or two after you file for bankruptcy relief? Before filing bankruptcy, could you purchase a car with your tax refund or other savings?
If you are unsure what to do, talking with a Chapter 7 bankruptcy lawyer is the best option. Most bankruptcy attorneys offer free consultations. Therefore, you can talk to a bankruptcy lawyer free of charge to get legal advice about what is best for you.
Contact Ascend for More Information
At Ascend, our goal is to help you find the best debt-relief option for your situation. We want to help you get out of debt quickly and affordably. Most of our services are free of charge. Call us or contact us online for more information.