Negative equity can cause a financial crisis; bankrupcy can help

On Behalf of | Nov 11, 2019 | Bankruptcy

Buying a vehicle is a significant investment, but most people do not have any other options. Having a car is necessary for things like driving to work, going to the grocery store and even picking kids up from school. Cars do not last forever, though, and some Connecticut consumers might have to buy a new vehicle before they are ready. This can put people into precarious financial situations that may need to be addressed through bankruptcy.

High mileage, increased upkeep costs and changing needs are all common reasons for trading in old vehicles for newer ones. Unfortunately, car owners cannot control when these issues will arise. Since car prices are rising, it is getting harder and harder to pay off an auto loan before trading purchasing a new vehicle.

This means that many car owners in Connecticut are currently underwater on their cars. Being underwater — also called having negative equity — means that a person owes more for his or her vehicle than it is even worth. Over the course of most of 2019 to date, the average person who traded in an old vehicle that he or she had not paid off still owed around $5,000. Combined with the auto loan for the new vehicle, a person in this situation will already be underwater before he or she has a chance to even drive off the lot.

Most car dealerships make less money selling vehicles than they do arranging financing for customers. Because of this, these dealerships often encourage customers to take out new auto loans even when they are still paying off their old ones. This can create a financial crisis much more quickly than some people might imagine, and a person might be faced with both his or her bills as well as the prospect of losing the vehicle. There is still hope in this type of situation, because filing for bankruptcy can address debt and temporarily halt any repossession proceedings.