Have Car Repossessed or File for Bankruptcy?

Dear Debt Adviser, My biggest problem is my two car loans. Is it better to have the second car repossessed or claim bankruptcy? How bad is it to just repossess that car because I can still very much handle other bills? Will my credit look very bad for a long time just repossessing one thing? -- Phyllis

Dear Phyllis, That's a no-win question! Either alternative will be bad news for your credit. But there will be some differences. A repossession will show on your credit report for seven years, while a bankruptcy will be on your record for either seven or 10 years depending on the chapter you qualify for and file. A repo will also be more likely to get in your way should you want to purchase and finance another car before the seven years is up rather than a general bankruptcy might. Defaulting on a car debt will make a car lender more nervous than a general default because you might do it again ... to him!

If you are managing all your other obligations and the second car loan is the only payment you are unable to make, bankruptcy is most likely an overkill solution -- much like nuking the ants in your kitchen to get rid of them. Yes, it works, but the collateral kitchen/home/neighborhood damage is considerable.

Be aware that allowing the lender to repossess your car will not end your obligation to pay. Here's what will happen: The lender will sell your repossessed car at auction. You will still be responsible for paying the difference between what your vehicle sells for at auction and the balance left on your original car loan. Plus, you'll owe repossession and other fees that the lender is allowed to by the terms of the loan to add to the debt balance. So, you will still owe on a car you no longer have. A real bummer!

Before you drive down this road, I have a question for you. Would eliminating your second car loan payment really solve your financial problem? Life is not usually that simple. I encourage you to find out how and why you ended up in this position in the first place. Unless you know what behaviors or circumstances led to your current situation, chances are you'll end up there again.

Here are some alternatives: Rather than allow a repossession, I suggest that you sell the car yourself. It is likely that you will end up selling the car at a loss, but it will almost certainly be less of a loss than what you would owe after a repossession. In addition, you will have some control over the transaction. You would need to come up with the difference between what is owed on your car loan and the purchase price you agree to, so the lender will release the title to the new vehicle owner. But that may not be a big stretch.

Another possibility would be to trade in both cars on a new (but inexpensive) car and roll the outstanding debts into the new car loan for a longer period of time at a lower rate. This may lower your payment enough to make things work.

If you go ahead and damage your credit, it isn't the end of the world. As with any major negative on your credit history, time and paying your other credit obligations on time and as agreed will eventually bring your credit history back to what it should be. For a repossession or bankruptcy you can expect your credit score to drop anywhere from 60 to 240 points depending on what your score is now. The higher the score, the greater your point drop will be. No, that's not unfair! It just recognizes the larger gap between what your score said about you in the past and what reality has shown your true risk profile to be.

Good luck!

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