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Cars aren’t cheap, but for many people, they’re essential for getting around. People need their cars to get to work, go grocery shopping, pick up kids, you name it. But the cost of transportation can be crippling for households that are struggling financially.
The average cost of owning a vehicle is between $8,000 and $13,000 annually between depreciation, gas, maintenance, insurance, taxes, and interest rates on auto loans.
Despite the enormous expense, when people come to us looking to file insolvency proceedings, they often don’t want to give up their car. However, the Licensed Insolvency Trustees at David Sklar & Associates have seen plenty of situations where it made more sense to give it up.
What Is Voluntary Surrender?
Voluntary surrender of a car is when you voluntarily give your vehicle back to the lender when you file for insolvency proceedings. Car loans are secured debts, so the lender can repossess your vehicle if you stop making payments. Secured loans can’t be included in a consumer proposal or bankruptcy in Ontario. Voluntary surrender turns the remainder of your secured debt into unsecured debt.
When you return the vehicle to the lender or dealership, they sell the vehicle and send you a “statement of realization.” Whatever funds they recoup through that sale are deducted from your car loan, minus penalties, fees, and the cost of repossessing the vehicle.
The remainder becomes unsecured debt. You still have to pay it, and the lender can send your debt to a collection agency or pursue a judgement to garnish your wages. But you now have more options available to you.
Why Use Voluntary Surrender of a Vehicle in Canada?
Why would you give up your vehicle? There are plenty of reasons it makes sense. The first is that you simply can’t afford car payments. The threat of repossession and the importance of your vehicle can blind you to the financial realities. You may be neglecting other bills or debt repayments to keep up with your car loan, but your finances are unsustainable.
High Price Tags
Sometimes people buy cars that they can’t afford. Their income may have changed, or they may have bought the vehicle impulsively, without doing all the numbers. Voluntary surrender is a way of getting out of a bad deal, although there are still financial consequences you will have to deal with.
Breakdowns or Wear & Tear
Your car might also be on its last legs and not worth keeping. A car breakdown can be a financial nightmare. You still owe thousands on your car loan, but due to an accident or mechanical breakdown, your car is barely worth anything, meaning you’re paying for an asset that’s worthless. Meanwhile, you still need something to drive. If you want to avoid bankruptcy via car breakdown, talk to a Licensed Insolvency Trustee about what you can do with your vehicle.
Beyond the financial aspect, voluntary surrender of a car can make a huge emotional difference compared to having your vehicle repossessed. When the lender repossesses the vehicle, they send someone to collect it on their terms. They might come in the middle of the night to take your car away. It can be a distressing experience for you and your family.
When you make a voluntary surrender of your car, you return it to the dealership during normal business hours. It also feels like you’re taking responsibility for your debt and that this is your choice. It may not be a pleasant experience, but you’ll feel like you’re doing the responsible thing and taking tangible steps toward getting out of debt.
If living without a car is an option, you can save thousands of dollars a year that are simply lost to interest charges and depreciation.
You’re Underwater on Your Vehicle
Car loans are a very risky type of debt for consumers because of how quickly vehicles depreciate. When you’re underwater on your vehicle, you owe more on your loan than your car is worth. This is a tricky place to be. If you can’t afford your car payments, there’s no way out. You can sell your vehicle, but usually, the money you raise won’t pay off the loan.
The problem can become even worse if you use a car loan rollover when the value of the vehicle is still less than the loan. You can wind up paying off interest charges on a previous car loan in addition to the new one.
Owing more on your car loan than your car is worth is remarkably common because of the way depreciation works. It happens as soon as you drive off the lot. Depending on the length of your loan, you could owe more than the vehicle is worth for years. In a standard 5-year loan, it can take you, on average, 3 years to catch up. If you extend the terms of the loan to 6 or 7 years, it can take you 4 to 5 years to break even because of how slowly you’re paying off the principal.
Secured loans can’t be included in consumer proposals or bankruptcy, so even if you’re willing to lose your vehicle, you’re still on the hook for that debt. With voluntary repossession in Canada, you get a way to get out of your car loan.
How Do You Voluntarily Surrender Your Car?
To make a voluntary surrender, start by notifying your lender that you can’t afford car payments and you will no longer be making them. Let them know that you want to use voluntary surrender and return the vehicle. The lender will ask you to drop the vehicle off on an agreed-upon date, or they may send someone to pick it up.
Once the lender sells the vehicle, you will receive your statement of realization, which shows how much of the debt has been paid off and what your loan shortfall is. The loan shortfall is the difference and becomes an unsecured loan that you are now responsible for.
If you plan on using voluntary surrender, you must do so before or while you file for insolvency proceedings. When you file a consumer proposal in Ontario (or a bankruptcy), only unsecured debts acquired before filing are included and discharged. You cannot change your mind after the fact. If you use voluntary repossession in Canada after filing insolvency proceedings, you may be left with a new unsecured debt to deal with.
What Happens When You Surrender Your Vehicle?
The most important thing to know about voluntary surrender is that it turns secured debt into unsecured debt, which you can then be included in a bankruptcy or a consumer proposal. When you can’t afford car payments, you’re underwater on your loan, and there is no other way to get out of the debt, voluntary surrender is an effective option.
One of the lasting impacts of voluntary surrender is on your credit report. Voluntary surrender is a loan default, just like a repossession, and this information will remain on your credit report for some time, impacting your ability to qualify for credit in the future. You will likely face higher interest rates on your next vehicle.
This is why it makes sense to use voluntary surrender at the same time that you file a consumer proposal or bankruptcy. The impact to your credit report happens all at once, and you discharge the loan shortfall along with other debts like credit cards. It can be a smarter way to deal with a car loan you can’t afford, as well as other financial difficulties.
How to Surrender a Leased Car?
When you surrender a financed car, you’re giving up ownership and turning secured debt into unsecured debt. But what can you do if you’re leasing your vehicle? When you lease a car, you still have to make a down payment and pay a monthly lease fee that covers the car’s depreciation, rental fees, and interest charges. The only difference is that at the end of the loan, you don’t walk away with the vehicle.
There are several other ways out of a lease. You might be able to transfer the lease to someone else, buy out the lease, roll over the lease into a new one, or get a car lease termination. Many of these options can wind up costing you more money, and if you’re struggling with debt already, it won’t help your financial situation.
You can use voluntary surrender on a leased car. The lender can still pursue you for any remaining payment that you’re owed, but if you are taking other insolvency actions, you can have this debt discharged.
How to Keep Your Car in a Bankruptcy
Most people who file insolvency don’t end up giving up their cars. They need to keep it for transportation, and unless they’ve spent beyond their means on a car they couldn’t afford, the cost difference between one vehicle and another may not be great enough to go through with voluntary surrender.
You can usually keep a financed or leased car during bankruptcy because the equity in a vehicle (up to a certain limit) is exempt from bankruptcy proceedings. Much of the time, people who file for bankruptcy don’t exceed the equity exemption, and they can keep their vehicle.
If your equity is over the exemption limit, or you own more than one vehicle that you’re not willing to part with, you can pay the difference into your bankruptcy estate, or you can protect your assets by filing a consumer proposal instead of bankruptcy.
In addition to that protection, discharging your other debts like credit cards should free up your monthly budget. Once you’ve been discharged, more of your income will be free from debt repayments, so you can more comfortably manage your auto loan.
Voluntary surrender could be a good option for your financial situation, but you don’t necessarily have to give up your car. Talk to your Licensed Insolvency Trustee about your finances to find a solution that fits.