Questions like these are difficult to answer — but not because they’re complex. The solution to this specific problem is actually quite simple: Don’t do it, Cynthia.
What’s complicated are the circumstances that led up to this awful situation. In my experience, Cynthia’s problems started long before she owed more on her car than it was worth. She likely has other debts that prevent her from making her monthly payments.
I was discussing this with Steve Rhode, better known as the Get Out of Debt Guy. Steve is a debt celebrity because he was once broke himself and educated his way back to financial independence. I asked him about Cynthia, since he was once in the same situation. Here’s what he said…
Steve Rhode’s take on Cynthia
The worst thing you can do at this time is to make any decisions based on your credit score. We need to think more long term and understand what a credit score really is. Your credit score is an indication of your risk to future lenders and not how smartly or wisely you are managing your money. Let’s start thinking smart.
I would suspect that if you are $14,000 upside down on the car you now want to trade-in or give back that there are other financial concerns as well. Maybe you previously traded a car in and rolled in some negative equity in the past.
One option here if the car is in good shape and treating you well is to just stick with it, pay the loan off eventually, and get the use out of the car. Modern cars are much more reliable and getting many trusty years out of a vehicle that is regularly maintained is quite possible.
I would absolutely avoid getting yourself in a situation to just default on the car and lose it to a voluntary or forced repossession. You’ll get hit with a huge bill after the repoed car is sold at auction.
But if this is the sign of a greater financial struggle then one logical consideration is to think about cleaning the slate and pursue a Chapter 7 bankruptcy. You can give the car back and shed the $14,000 of negative equity. This will give you the legal fresh start that citizens are entitled to when in bad situations.
Your debt will be eliminated in about 90 days and then you just need to get to work rebuilding your credit, which is actually easy to do.
Immediately after bankruptcy you could do what a lot of people have done, even me, and buy a cheap beater car. During the next six months you can focus on rebuilding your credit and then you should be ready to go talk to one of the major car manufacturer dealers and discuss their internal financing offers. Before you talk to a sales person, talk to their financing office.
The fact you dealt with your debt in bankruptcy will most likely free up money each month you can save towards the down payment on your new car. The bigger the down payment, the lower the lender risk is, and the better terms you will get.
When you buy the new car after six months of driving the beater, your interest rate is going to be higher but that can be offset by looking for a much more fuel efficient vehicle that allows you to lower your monthly fuel bills. Additionally, after another 12-18 months you could even look at refinancing the vehicle at a lower interest rate. Refinancing of used cars is possible.
Have a debt question?
Email your question to firstname.lastname@example.org and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.