Know your financial obligations: Though you let your car get voluntarily repossessed, you're still responsible for the unpaid balance on the loan, plus any storage and transportation fees, plus interest charges. [Bankrate]
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Comments:
@31y/oToday_GitEmSteveDave: Yeah, I agree, it's ridiculous. If you default on a mortgage, they'll just foreclose on you and you don't pay anything else. Why is it different for an auto loan?
@Cocoa Vanilla:
Foreclosure doesn't just erase the debt. The bank forecloses and sells the house. if they get less for the house than you owe, you're still on the hook for the balance. If the house is worth less than you owe, I guarantee they'll come after you for the costs of foreclosure. Even if it's worth more, they'll take out all of their costs (legal and otherwise) before remitting the balance to you.
@Esquire99: Depends on the state. In some states, residential first mortgages are "non-recourse" loans, meaning if you give up the house, further recovery is not possible.
Most home loans are non-recourse loans. Car loans are not. Regardless of repossession, your obligation is to pay the balance of the loan. Repossession is their recourse to protect themselves if you stop paying, but even after selling the car and putting the proceeds toward the balance, there is often a small remaining balance (or if you're a bad consumer, a LARGE remaining balance). No one other than the person who purchased the car is legally or morally responsible for that balance.
This is also true about your home: If you let it go to foreclosure and it's worth less than the total amount of your mortgage (often true in these times), you can be held responsible for the "shortfall". Sometimes this runs into the tens of thousands of dollars!
There are two ways to get out of it. One is to make a deal, usually by sacrificing your redemption period (or other rights, depending on the state) in exchange for the mortgage company letting you off the hook for the shortfall -- an arrangement typically called a "deed in lieu of foreclosure", though that's misleading since it usually still lands a foreclosure on your credit report. *Make sure a lawyer reads that deal before you sign it*, though. It doesn't cost that much to have an attorney read a document & tell you what it really says!
The other way is bankruptcy: Once the property that secured the loan (house or car) is gone, the shortfall is an unsecured debt and can be discharged (ch7) or reduced (ch13) in bankruptcy. (ALWAYS OPT FOR CHAPTER 7 IF YOU CAN -- ch13 is more expensive and unscrupulous lawyers will push for it, but unless you're wealthy, a Ch7 is almost always better for you.)
If you're stuck in a lease or mortgage that isn't worth it, where the property is valued way under what you're paying for it, you can also often get a bankruptcy judge to let you give back the car (or house) and get out of the shortfall. This by itself usually isn't a good enough reason to declare bankruptcy (which is your big "get out of debt free" card and you should never use it unless you really need it) -- but if you have credit cards, medical bills or other unsecured debt anyway, it can sometimes be the most graceful exit from a bad lease or mortgage.
...Gods, some days I hate my job...this stuff just comes spewing out automatically now...the other day I ended up giving an impromptu lecture on redemption periods to my martial-arts class! NO NO NO!! ;)
Happy Birthday Steve!!
Mine is coming up on the fourth.
Virtual cake anyone?
@31y/oToday_GitEmSteveDave:
Happy birthday SteveDave!
I send you a virtual cake, too as I enjoy your comments. To avoid you gaining virtual weight, I will make it out of virual kitteh food. Then it can be a par-tay.
@Mary Marsala with Fries: In some states, first mortgages are "non-recourse" loans, meaning once the foreclosure happens, any shortfall must be eaten by the bank. It still hurts your credit, but it won't drive you into bankruptcy.
Storage charges on a radioactive Chevy Malibu???
@31y/oToday_GitEmSteveDave: He can also sell it to his brother for $500. You now owe $10k minus $500, and his brother has a new car.
If they ever "forgive" the debt, then you owe income taxes on the $9,500 they "gave" you.
@sirwired: even on non-recourse loans, a lender has the right to report the cancelled debt to the IRS (1099-C), leaving you to pay taxes on the deficiency as income & that amount generally includes "recovery costs", such as repossession of property, legal counsel, court filing fees, etc.
so, if your $150,000 house goes into foreclosure & they sell it at auction for $125,000, be prepared to pay taxes on $25,000+.
this really varies by state - if you are in a position where you are starting to default on debts, it's in your best interest to know the laws where you live to make the best default decisions possible.
in CT, deficiency balances (including recovery costs) on collateralized loans can be recovered even if the property has been repossessed. however, the lender can only attempt to recover any deficient balance ABOVE fair market value.
what does this mean? let's say your car is worth $10,000, but you owe $15,000 on the loan. the lender repossesses the car (towing + storage fees = $1,000). now, they sell the car for $2,000. that's a $14,000 deficiency, but is only PARTIALLY recoverable.
balance due: $15,000
+ recovery cost: $1,000
(total: $16,000)
- GREATER of FMV or sale price of collateral: $10,000
= recoverable deficiency (total: $6,000)
the lender will have to eat the $8000 deficiency between sale price ($2,000) & FMV ($10,000).
it gets a lot more complicated than that, but that's the gist of it. some other important things to note about CT repo laws:
-a lender must sell the vehicle within 6 mos. or surrender the vehicle back to the borrower.
-any proceeds ABOVE balance due + recovery costs must be returned to the borrower.
-the lender must either give 10 days notice of a repo action or give the borrower 15 days to redeem the property.
@31y/oToday_GitEmSteveDave: Happy Birthday. Sorry about all the cat hair on your cake. You get to serve six months.
@mac-phisto: Due to the Emergency Economic Stabilization act of 2008, debt discharged on a principal residence is excluded from tax if the loan was used to purchase or improve the house. (See form 982.) If you engaged in a cash-out refi, the discharge of the cash-out amount is indeed taxable unless you are insolvent. (You are considered insolvent if your debts still exceed your assets after the discharge.) I am guessing this is likely to be the case for most people who have been foreclosed on.
The life of a repo man is always intense.
The repo man has a code: I will not harm any car that comes into my possession, nor through inaction will I allow any car that comes into my possession to come to harm, nor will I harm the contents of any car that comes into my possession, nor through inaction allow the contents of any car that comes into my possession to come to harm.
So wait, they reposes my car, and I'm still going to be paying for it, plus pay the guy who snuck in at 2:30AM to swipe it from my driveway, and also pay for him to keep it in his lot(where he has no liability if it gets broken into). Dang, I'm in the wrong business.