Q I feel like I can no longer afford to make my car payments. How much will it hurt my credit to turn my car back in?
C.Y., Bolivar, Pa.
A If you turn your car in, you will not be free of the debt. Your lender will continue to hold you responsible and probably seek repayment. That could mean garnishing your wages, said Chicago bankruptcy attorney Donald Leibsker.
Garnishing means some of your pay would automatically be taken out of each check and sent to pay off the car loan. It's a legal process, and the lender could also garnish your bank account.
So if you turn in your car, "you will still be in limbo," said Ed Beckstrom, education coordinator for the McHenry County Consumer Credit Counseling Service in Illinois.
The lender will sell the car, and, considering cars lose substantial value as soon as you drive them off the lot, the sale price will probably be far less than what you paid — or even owe. With lenders having no motivation to seek the best price, the car will probably be sold in an auction to used-car dealers, and you will owe the remainder. So if you owe $10,000 and the lender sells the car for $3,000, you will owe $7,000.
"They will hound you," Leibsker said.
"I've never heard of a lender taking it back and forgiving the debt," Beckstrom said.
Meanwhile, your credit report will be scarred for seven years.
So think through your options.
•If you have a car that's too costly, but you are handling the rest of your financial life well, a family member may be able to help. Or you might be better off selling the car yourself. That way you can try to get the best price and reduce your debt.
•You can talk with your lender about working out more affordable payments, but options are limited. Refinancing a car loan is typically out of the question because cars lose value quickly. Lenders won't grant loans in excess of the car's value. A community bank might be more open to negotiating, Beckstrom said.
•If you have a short-term financial problem, you might be able to defer payments for a couple of months. But this will help only when an end of financial problems is assured — if you're out of work with a commitment for a new job in a couple of months.
•If you can't make payments and have made every cut possible in your lifestyle, don't wish for the best. Tell your lender you plan to turn in the keys. Arrange a voluntary repossession. This way you won't lose the car right before heading to work or be embarrassed having your car removed in front of your neighbors.
You also can take personal items such as child seats from the car and keep your costs down by avoiding fees for towing, storage, cleaning and filling the gas tank, said Cate Williams, vice president of financial literacy for Money Management International.
•If the car payments are close to manageable, look for other costs to cut. Usually people have options: Trim excess phone, cable and Internet service or live with a friend or relative for a while. A number of new books show ways to cut costs, including "Save Big," by Elisabeth Leamy. Set up a budget at a site such as mint.com or find a reliable credit counselor through an organization such as the United Way.
•If you have been out of work for a lengthy period, are struggling to get a job and have fallen behind with everything from your mortgage and credit cards to the car loan, you might have to consider filing for bankruptcy.
That's the way to reduce your debt and give yourself a chance to start over. Though it stays on your credit report for 10 years.
Leibsker said some credit cards are designed for people who have come out of bankruptcy. People who diligently pay off the cards each month can rebuild credit scores better than those who let financial matters fester and continue to miss payments.
•Avoid firms that advertise debt restructuring. They typically charge fees upfront, don't relieve your debt and leave you and your credit score in worse shape. And do not tap your 401(k) retirement account to pay the debts.
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