Friday, August 15, 2014

Bad Car Loans and Bankruptcy


An editorial recently published by the New York Times examined the potentially devastating impact of high-interest car loans. 

Far too often, people allow themselves to get roped into high-interest car loans that ultimately can lead to major financial problems.  As a general rule, vehicles are not a good investment; they lose value quickly, even if they are well cared for. Vehicles also have a lot of ongoing expenses.  Think about what you actually have to pay out for a vehicle:
  1. Vehicle payment;
  2. Gasoline;
  3. Insurance;
  4. Registration/Taxes;
  5. Repairs.

According to articles by the Chicago Tribune and CNN Money, "a good rule of thumb is to plan on spending 10% to 15% of your total monthly budget on a vehicle."  So, for example, if you bring home $2,000.00 a month (approx. $1,000.00 every two weeks), you should be budgeting out somewhere in the range of $200.00 to $300.00 a month for your vehicle expenses.  Let's face it, that is a pretty low number, and with the price of gasoline and insurance, it would be nearly impossible to do that.

The articles linked above have some good, general suggestions about how to handle an automobile budget.  However, if you've already taken the plunge and are stuck with a car (or cars) that you can't afford, it may be worth looking into whether bankruptcy is a viable option.

Through either a Chapter 7 or Chapter 13 bankruptcy, it is possible to surrender a vehicle and discharge the remainder on the loan.  Chapter 13 also contains a special provision called a "cramdown" that allows you to pay what the vehicle is worth, rather than what is owed (for example, if value of vehicle is only $5,000.00, but you still owe $10,000.00 on the vehicle, you can pay $5,000.00 to pay off the loan).  There are situations where the cramdown power does not apply, most often when the vehicle has been purchased recently.

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