Expert: David - 1/12/2009

Question
I am writing you on behalf of my father.  He is 60 years old, and recently became unemployed, and currently has no income.  Prior to losing his job, he was having financial difficulties due to what he will admit were poor decisions, but they were made when his income was higher, and he felt he could afford them.  Among these are $15,000 in credit card debt, and a car lease that is now beyond his means to pay.

He was employed in home construction, and has a work truck which is now basically worthless due to high mileage and condition, but he still makes payments of about $250/month for the loan and insurance.  His other vehicle is a car, which he leases for $389/month, and the lease is not up until late in 2009.  He also still has over $15,000 in CC debt, which he has been unable to make payments on, and collectors are calling him often.  

He has been searching for jobs, and has some prospects, but nothing that will pay him enough to be able to paydown CC debts, and both of his cars.  He is considering bankruptcy, which I think is probably a good idea.  However, he wants to continue making both car payments, because he is afraid that having both a bankruptcy and a car repossession on his credit report will be worse than a bankruptcy only. He thinks if he tries to take out a car loan in the future, having only a bankruptcy will look better on his credit than a repo and a bankruptcy.  I've told him that a bankruptcy will ruin his credit, so why both paying on a car you can't really afford if it won't make your credit any better.  I've told him to let them repossess the car (or turn it in early), then declare bankruptcy, and to keep paying on the truck (which I'm pretty sure he can do under certain kinds of bankruptcies).

So, my question is:  Which is worse, to declare bankruptcy and keep paying on both vehicles, or to let them repo the car plus declare bankruptcy?  Would it make much difference either way? Or is there something else you would recommend he do?

Answer
Hi Shane,

Good question, I don't here this one very often.  Your father is correct to an extent.  Car lenders dislike seeing a Repo and it can be very difficult to obtain lending from a mainstream branch like GMAC with a repo less than 4 years old.  Car dealers use a specialized FICO credit report that is more aggressive concerning repos as well.

All that being said, do what makes sense for cash flow.  Cash flow is what put him in this mess and cash flow is what he needs to fix.
I have helped hundreds of people rebuild their credit quickly after BK and foreclosure and repo.  He'll be able to get another vehicle pretty quickly if he has positive income and takes a few simple credit rebuilding steps.  But first things first...fix the cash flow.

Have him talk to an attorney to see which type of BK he can qualify for.  That will shed a lot of light on what he should keep and let go.

Feel free to call me if you have more questions.  Also, contact me as soon as the BK is discharged and I'll help remove some of the negative credit history from his report.

David McArthur
219-718-8566

Financial Scoring Solutions
www.financialscoringsolutions.com