Disaster strikes - options for Car Loan deficiency

[Axecleaver]

Hi Mustachians,

My parents are in a pickle, and I'm trying to advise them. I could use some help working through the options.

My Stepdad recently suffered a very serious stroke, which landed him in the hospital. He has been there for a month in rehab and is making progress. He is partially paralyzed, has lost some brain function, and is fighting hard to regain his independence. Our hope is that he can return to the home, but that remains to be seen. Needless to say, his recovery is his primary focus. My mother is working to reconfigure their finances to their new reality.

They are both retired and get by on about $50k a year, $20k of which is a part time job he worked. They have no savings and live paycheck to paycheck. He is unable to return to work, so they will need to learn how to survive on $30k a year. Mom has done a good job reconfiguring their expenses to fit into the new $30k reality, and they could continue to pay the loan, with some sacrifice, at least until the next emergency strikes. Doing so seems foolish to me given all the challenges they have in front of them. There is no margin for error.

They have two cars. He will not be able to drive, and my mother wants to get rid of one car, which is a good choice.  Her car is owned free and clear and driven about 3000 miles a year, for groceries, doctors, and visits to friends and family. His car is worth about $14k, and they owe $18k. They can't sell the car, because they don't have $4k to pay the loan off. I'm considering advising her to call the lender and negotiate a repossession. My understanding is that this would result in a deficiency after being sold at auction. What I don't know, is what kind of cost this would add - repossession fees, and who knows what else. She could then work out a repayment plan with the lender.

Some other info, my Mom is retired and partially disabled, she has been looking for part time work for four years without any success. Stepdad is a retired veteran. They are both over 65.  I could bail them out, but there are a whole separate raft of problems and consequences that come with that, and it would mean a lot to my mother's pride to work through her problem on her own. She has not asked me for money and I have not offered, although I feel tremendous and crushing guilt about it.

What would you do in their situation?

[Numbers Man]

If it was me, I would insist on absorbing the $4k and get rid of the car. Tell mom she can pay you back whenever.

[slugline]

If this was my parents, my inclination would be to offer to help pay off that loan so they could unburden themselves of the unneeded car. But these are your parents, and I don't know that the "separate raft of problems and consequences that come with that" means, so. . . .

[Louis the Cat]

I absolutely agree about helping with the $4000 to be repaid whenever she can. When/If she balks at accepting help from you, remind her that she raised you and it certainly cost her far more than $4000 over the years to help you be the person you are today and you're proud that she did such a good job that you are in a position to help her out.

[MayDay]

Ethics aside, what are the implications for them if they just let the car get repossessed and don't pay the 4k back?

At age 65 plus I can't see them needing to go out and buy a new house or car or boat.  Will they need credit going forward?  If not, maybe the time to worry about their credit scores has passed. 

That said, I would first try just insisting on giving her the money.  Next try buying the car from them for the loan value.  Then you turn around and sell the car.  Or keep it if it makes sense for your vehicle needs, and sell whatever you own.  Preserving their dignity, etc. 

[bevathome]

You do not mention what you mom's car is worth.  Could they sell both cars and have enough money after paying off the loan to buy a used car suitable for your mom's driving needs?  Do they have anything else worth selling to be able to pay off the loan?

[Forcus]

Repossession might be the obvious answer but if they are on the hook for the difference between the loan and what the car sells for at auction, this could be even worse than putting the difference on a high interest credit card. If the car is worth 14k on the open market and 18k is owed, the difference is $4k. But at auction it may only bring $10k or twice the difference. I'd see if there is a personal loan that can make up the difference. Even at a high interest rate (15% around here), it would likely make more sense to do a personal loan than get it repo'd and pay even more (and have the ding to credit, if that matters).

[frugaliknowit]

Echo Mayday.

The most loving thing you can do going forward, is make sure your parents understand the concept of emergency stash and not borrowing money for cars and crap.

[Valhalla]

Help them sell the car via Craigslist, so they get the most for their car.

Write them a personal loan for the difference in the pay-off and the cash.  That way you're not giving them money, but some financial assistance in the form of this loan.

[Axecleaver]

Thanks for the discussion and advice, this helps, a lot.

Ethics aside, what are the implications for them if they just let the car get repossessed and don't pay the 4k back?

and

if they are on the hook for the difference between the loan and what the car sells for at auction, this could be even worse than putting the difference on a high interest credit card

That's one path I'm trying to understand, they really have no further need for credit, so this may not be the worst choice. I think if they get it repossessed, they owe a "deficiency" which is the delta between what it sells for at wholesale auction and what they owe on the loan, plus repo and auction fees. The bank would need to get a judgment against them. I might try calling the bank and talking through a potential voluntary repossession, telling them the current situation and seeing if they would be willing to reduce the deficiency to something manageable. It would be an option, anyway.

Alternately, selling the car and loaning her the difference is not a bad choice. Would require some finesse but I can probably handle it.

You do not mention what you mom's car is worth.  Could they sell both cars and have enough money after paying off the loan to buy a used car suitable for your mom's driving needs?  Do they have anything else worth selling to be able to pay off the loan?

She drives a 2008 Yaris which is lovingly maintained - a classic "church lady" car if ever there was one. Has under 40,000 miles on it. Probably could not get a more efficient car than what she has already. It's worth about 6-7k. Might be an option, though, worth considering.

As far as other assets, no, various emergencies over the years have wiped out any assets other than their home. They have a HELOC but it is very near the maximum, and does not have enough room on it to cover the 4k deficiency. They do have about 50% equity left in the home and we might look to expand the HELOC.

Thanks, everyone.