Vehicle Debt & Insolvency
A shiny new car is an exciting prospect, whether you need to replace an old vehicle or you just feel like something new.
Most people choose to buy a new vehicle by financing it, paying a monthly payment to repay their debt.
The average vehicle debt in Canada is $20,000, and many people could be paying too much each month.
One of the problems with vehicle debt is negative equity.
This means that the amount that you have left to repay is more than the value of your vehicle.
As soon as you have bought a new car, it starts to depreciate and is worth less than it was brand new.
As the years go by, the value of your vehicle depreciates even more.
After a couple of years, you might not have paid off a lot of your debt, but your car could be worth less than what you owe.
You’re still making the same monthly payments, but your vehicle has lost a lot of its value.
Most of the depreciation of a new vehicle happens in the first year, with a vehicle losing about one-third of its value in this time.
Depreciation starts to slow down after this, which means that the longer you own your vehicle, the less likely you are to have negative equity.
Making a larger down payment on a vehicle or buying a less expensive vehicle also make a difference.
Once you’re in negative equity, you might fall into the trap of making your vehicle debt even worse.
This can happen when the dealership offers you a new vehicle, perhaps giving you an offer that seems attractive.
You get a new vehicle, perhaps discounted and with the financing extended so that you still pay the same amount each month.
You feel like you’re getting more for your money, but your overall debt has actually increased.
And because your monthly payments haven’t, you can get into more negative equity faster than before.
This might not seem to matter, as long as you are able to keep making your payments.
Eventually, you might get to a point where the negative equity evens out, or you might even pay off your loan.
However, problems begin when you start to have problems making your payments.
You could be paying a significant chunk of your income toward the loan for your vehicle.
If you suddenly lose some of your income or expenses in another area of your life start to rise, you can find that you’re having problems meeting your payments.
It’s also a problem if you decide that you want to trade in your vehicle.
If you do this while in negative equity, it means that you won’t have paid off your loan.
There will still be an outstanding debt, which you will need to pay off.
What Can You Do About Vehicle Debt?
If your vehicle debt is overwhelming you, you might find that you can no longer pay your monthly payments.
When you can’t pay off your debt, you could choose to stop paying.
This means that the lender will either seize the vehicle, as the loan is secured against it, or they could choose to sue you.
Most of the time, they will seize the vehicle because it’s the quickest way to recoup at least some of their money.
The debt will then no longer exist, allowing the debtor to be free from it, although they will no longer have their vehicle.
If the creditor chooses to sue, the debtor could keep their vehicle but will still owe the debt, and there may soon be legal action to repay it.
However, if the creditor decides to sue, and the debtor decides to go bankrupt, they might not be able to get anything back.
If you are having problems with your vehicle debt, the risk of being sued probably doesn’t appeal to you.
Struggling to pay your debts is stressful enough without having legal action taken against you.
That’s why you might want to explore other options for dealing with your debt.
You can consider bankruptcy or a consumer proposal as one way to deal with vehicle debt and other debts.
These legal processes are both options that you might consider if you are unable to meet the monthly payments for your debts.
Both of these options could be available if you’re having problems with debt.
A vehicle loan counts as a secured debt, which isn’t included in a discharge during a bankruptcy or proposal.
However, the lender will be informed of the bankruptcy or proposal, and will then take action to seize the vehicle, because it will be the best way to get their money back.
A consumer proposal might be a better option for people who want to avoid bankruptcy.
It allows you to deal with your debt without having to surrender all of your assets.
Although it might result in the seizure of your vehicle, it can allow you to keep other assets that you would be expected to give up in a bankruptcy.
You will make payments toward your debts, but might be able to get the amount that you owe reduced.
Another possibility is that dealing with your other debts could make it easier to make payments toward your vehicle, enabling you to keep it.
If vehicle debt is causing problems for you, you might think that you can’t address it using a bankruptcy or consumer proposal because it’s a secured debt.
Fortunately, these options can still help you if you are in a position where vehicle debt is weighing you down.
A Licensed Insolvency Trustee can help you to explore these options to determine if they might be right for you.
They can also help you to take a look at other debt solutions so that you can find something that works for you.
Bankruptcy Canada can help you out with finding a trustee, as well as provide resources for you to learn more.
