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I’m Behind on Car Payments: What Happens If You Stop Making Them?



Question: I have a car that I’m upside down on, to the tune of about $14,000. I was told to let it go back to the dealer and buy another – and that it wouldn’t hurt my credit if I kept my car payments up for a year. Is that true?

— Cynthia in North Carolina

Get Out of Debt Guy Steve Rhode explains what to do when you get this far behind on car payments…

First and foremost, don’t do it.

Whoever gave you this advice doesn’t have a clue what they’re talking about.

Just handing a car back will generally result in the dealer filing for a deficiency judgment in civil court. That’s where you get sued for the difference between the remaining balance on your loan and the small price the lender is likely to get for the vehicle when they auction it off.

The dealer will not put themselves out to try and get the best price on your car when they resell. You can expect they’ll sell it for wholesale or less. Then they can come after you for the remaining balance that you owe them.

What’s more, that deficiency judgment that the dealer receives from the court will likely end up on your credit report. So will the repossession and the defaulted car note. That’s three negative marks on your credit that will haunt you for the next seven years.

So now that we’ve confirmed what you shouldn’t do, let’s talk about what will happen now and what you should do to recover.

The real facts on what happens if you stop making car payments

As soon as you fall behind on car payments, the lender who financed the vehicle has the legal right to take it back through repossession. Given how far behind you are, repossession could happen at any time.

Even if your financial situation improved and you start making payments, the lender has the right to repossess your vehicle as long as you’re behind. That means you don’t have time to wait and hope your financial situation can improve.

Bankruptcy may be your best option

In such an upside-down situation like yours, often the best strategy is to hand the car back in conjunction with filing bankruptcy.

The dealer will get the car back when you voluntarily return it. This will help you avoid the stress and potential embarrassment of wondering when the repo man will show up to take bac the vehicle.

Then the bankruptcy will terminate the liability from the bad car loan. In other words, that deficiency balance owed will likely be discharged by the courts. You’ll lose the car, but you won’t be on the hook for $14,000 or the rest of the remaining balance owed on the vehicle.

Some tips for recovery

For the next year or so, you will need to find some means of getting around.

Public transit may be an option, depending on where you live. If you borrow a car from a friend or family member, make sure to keep it well-maintained and that you cover any gas that you use.

If you can’t live without a vehicle, you can do what lots of people, including me, have done in this situation and buy a cheap beater car. You buy a vehicle in cash from either the owner or one of those buy-here-pay-here lots.

If you go with a lot, stick to cash, even though they may try to offer you financing for people with bad credit. You want to avoid a potentially predatory loan that will just put you back upside down.

Once you receive final discharge through bankruptcy, you can jump on rebuilding your credit. If you file Chapter 7, then you could receive a discharge in as little as 90 days. You can use tricks like secured credit cards and credit-building loans to start improving your score.

With a concerted effort to fix your credit, you’ll be eligible for better vehicle financing again in about a year. By taking the right steps to achieve a better score before you apply for new financing, you’ll avoid predatory loans that can easily go upside-down. You’d be surprised what you can qualify for with just a little bit of effort to fix your credit first.

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