I have a current client who is getting ready to file. He has 2 financed vehicles: a 20 year old BMW and an 8 year old Toyota Tacoma. One of them is a lemon and has required transmission repair 3 times in the past year. The lemon is currently taking up one of his 2 assigned spots at his apartment, and he wants it gone now. However, we won’t be filing bankruptcy for another week or so.
What surprised me about the scenario is that his Toyota is the lemon. Who would’ve thought that the boring, dependable Toyota truck would be the problem here? That BMW probably looks fantastic, but when they start to break down, they really start to break down.
He wants to surrender the truck now, file bankruptcy in a week, and then list that loan in his bankruptcy. Bankruptcy will wipe out his liability on the repo and eventual sale of the truck. Unfortunately, his timing is off.
If he surrenders first and then goes bk, his credit report will show a repossession and a bankruptcy. That repo will stain his credit for 7 years, in addition to the bankruptcy sitting on there for up to 10 years. This gives him 2 black marks on his credit.
If he files bankruptcy first, and surrenders the truck the next day, the creditor CANNOT list the vehicle as a repossession. By filing bk and then surrendering the truck, he only gets the one negative hit on his credit (instead of 2).
It’s a little obnoxious having that truck sitting there for another week, but it’s definitely worth it. Your credit is a lot like a reputation; it takes years to build it up and only a few minutes to ruin it. You can recover from bankruptcy and repossession eventually, but you’ll recover more quickly if you try not to make your credit that much worse.