Popular or not, I've drunk deeply from the Dave Ramsey kool-aid, and am ready to get serious about eliminating debt, and never owing a car payment again. (I hate car payments!)

Unfortunately, I'm about 1.5 years too late to be able to avoid some costly mistakes. I'm 38 years old, married with 3 kids. A few years ago, I declared bankruptcy because of some very large uninsured medical expenses. Apparently, I didn't let that stop me, as I know have 2 car payments (at high interest rates) and a mortgage (also at a fairly high interest rate.) I also have about $8,000 in credit card debt.

I would LOVE to get rid of the cars, and replace them with something much cheaper, to free up more cash for debt elimination (as well as some general breathing room.) However, we financed the full cost of both cars and are now completely upside-down on them. We're about $7500 short on each note. So, basically I owe enough for three cars, but only get two!

Anyone faced a situation like this in the past, and come up with a creative way to get around it?

All is not completely lost. I did use a debt snowball calculator, and even with all of that debt, we could eliminate it in about 4 years with minimal pain. At the end of that 4 years, one car will only be 5 years old, and have about 75,000 miles on it. The other will be 9 years old and have about 150,000 miles on it. That's the one I worry about in terms of it needing to be replaced soon after I have the debt gone...

Any suggestions?

Here's a thought: If you're "upside down" on the cars, and you owe more than the car is worth, look for other things you may be able to liquidate in order to pay down some of your other debts. Free up cash from other sources, after all, free cash is free cash, no matter where it comes from.

When I got divorced, I got stuck with a lot of debt on a little salary. I absolutely had to pay off one credit card in a hurry. I also had a house absolutely crammed to the rafters with shit I didn't want, need, or care about. The amounts here I quote are approximate estimates of about how much I got from "simplifying" my household. I went through my house and collected boxes full of things I no longer needed or wanted. Housewares, garage & garden stuff went into a garage sale ($200) Boxes of books went to the local used book store for cash ($50) Old CDs and DVDs went to respective used media stores where they were sold for cash ($50).I found lots of old precious and semi-precious jewelry that I had either forgotten about, hated (think guilt jewelry from philandering ex), or was broken & in need of repair. I took the scrap gold and silver it to the local gold & diamond exchange store and got about $125 for it all. The good stuff I no longer wanted went on Ebay. ($300)

Small furniture, appliances and yard and garden tools went on Craigslist and sold cheaply but quickly ($150). Large furniture went to a local furniture resale, where I got a 50% comission on it. (another $300 total). In less than 60 days, I had a $1200 credit card debt completely paid off, and had a much nicer, cleaner, less cluttered house and garage to show for it.

Longer term, I went through my closet and collected all of my good used clothing --purses, some still with tags on them, great barely used shoes, costume jewelry and fashion accessories -- and took it to an "upscale" consignment store. Most of it was accepted, and over the next six months I received several hundred dollars in consignment checks. All the stuff that wasn't consignment or sales-worthy was donated to charity (tax write-off) or hauled to the dump.

Could you pick up a side/second job or make money from a home business or hobby? This would allow you to generate some income to pay down debt.

Also, sell off whatever else you can.

How about enduring a little pain? If you don't correct the mistakes you've made in the past, you're likely to repeat them again. What better way to ensure you correct them than with a little negative reinforcement? Don't let yourself off the hook so easily.

Poor choice of words. I intend to endure a LOT of pain during this process. My wife and I have made the decision that we need her to be a stay-at-home mom to be able to work with our special needs children. What I meant to say was that even with all of that debt, using the snowball method, I can have it all gone in just over 4 years, without having much else to apply besides what I can afford to do right now. That assumes no raises, extra jobs, etc. I expect all of those things will come into play during the course of this process.

My frustration is in the slow start to the snowball. It looks like I'll spend the better part of 2 years paying off the first few debts, then the rest falls quickly. I was just thinking that if I could find a way to get out of the cars reasonably, I'd be able to knock this all off in about 2 years, instead of 4.

The house is off limits. Again, a 100% finance just bought in October. When you consider the costs of selling, I'd be upside down on that as well. If I had a time machine...

So I have to get creative. To stave off bankruptcy as long as possible, we sold a ton of stuff already. Time to dig deeper, and get more creative. Selling more stuff, making what we own last as long as possible so we don't have to replace, etc. all comes into play.

I already also thought of refinancing the cars at a lower rate to lower the payment, but keeping our monthly outlay the same, so that I have more each month to pay down principal. That would help me kill off the early debts quicker, and move on to the cars sooner. That shortens the process by about 4-5 months according to the calculators.

I just keep hearing over an over, "Sell the cars and buy beaters until you're paid off." If only I could! Thought I'd ask if anyone had any creative ideas to get out from under these things!

Thanks.

You can't get out of the car situation. You might as well just keep paying for the cars and drive them till they fall apart. You'll get full value that way.

That's the realization I've come to as well. Just wondered if anyone had come up with any creative solutions in their experience.

Thanks.

Ok, and I didn't mean to convey any insensitivity to your situation. I don't think you've got any option at the moment, but stick around and keep your eyes & ears open. Hopefully a new avenue will open up soon and you'll have the flexibility to exploit it. Hang in there & don't get discouraged.

I don't necessarily agree with this. While you may not be able to get right-side-up, you can avoid getting further upside-down. It depends on how quickly the cars are depreciating, the duration of the loans, and where you are right now on the amortization schedule.

While you may be upside down now, you may be getting *more* upside down with each passing month. If your cars have reasonable value and you are sufficiently liquid to cover the remainder of the loans, you might be better off selling one or both cars to limit your loss, and buying a late-model used but reliable economy car (Honda Civic or some such) to slow your depreciation.

Also, of course this depends on your situation, but could you consider moving to one car? This decision brings with it additional savings; less insurance, less gas and less maintenance.


Sam

He said that, if he sold the cars, he'd be short $7500 on each. That's $15,000 of debt with no assets and he'd still need to buy one or two cars to replace his transportation.

Debt is debt and assets are assets. Separate your debt from your assets in your mind, and look only at the asset side for a moment. If you can sell one or both of the cars (don’t think about the loans) for X, and buy replacement vehicles for something less than X, than you will have taken a step forward.

On paper, it should not matter to you that the car loans are upside-down; you have a certain amount of total debt and a certain amount of total assets. Unfortunately, it does matter to the lien holders of your vehicles, so you would need to first refinance that debt to free the lien. Have you shopped for unsecured loans to refinance the vehicles unencumbered? If you realistically expect to be debt free in 2-4 years, you may want to look at www.prosper.com along with other personal loan options.

If you refinance the loans, sell the cars, and buy replacements for less money, your total debt and total asset values will be the same as they were before the transactions, only now you are holding more cash because of the sale of the vehicles. That cash can be used to accelerate paying off your debt, and you still have transportation. If you can get a lower rate than your current car loans, that is a bonus. You could do it with a higher rate as long as the total cost of the loan will be less after paying down the loan balance with the cash netted; however, if your plans to replace the vehicles don’t work out, the higher rate could leave you in a deeper hole.

Dylan,
I appreciate your attempt at a creative solution, but any way I run the numbers, I come up with the idea that we have to keep the cars we have, and focus on paying them off.

The whole sordid history of these cars will make a semi-interesting post for my journal when that part of the site is running. But it was a lesson in trying to do the right thing, but relying on the wrong people to help us.

Here are some details. I know they're ugly, but post bankruptcy car purchasing is often ugly.

Car 1, 2002 Honda Accord. Purchased 1.5 years ago, on a six year note at 17.99% interest. Payments are $400/month.
Car 2, 2006 Honda Pilot. Purchased 1 year ago, on a six year note at 12.99% interest. Payments are $700/month.

Each car was 100% financed, including taxes, title, etc. (Again, long story, as is the story behind the purchase of the second car.)

Let's just say, I'm learning the errors of my ways. They're expensive life lessons, but I'll have learned them real good.

So, even if we just pay the current amortization schedule, both cars will be paid off in about 5 years. At that point, the Pilot will be 6 years old, with about 70,000 miles on it. That will be a car we can get many additional years of service on, and it will be worth about $16K

The Accord will be about 10 years old, with 150,000 miles on it. I'll have put 100,000 miles on it, so I know most of those miles have been under very good maintenance. Based on the current value of a 10 year old Accord with those miles and the equipment I have, that car will be worth about $4K, but nearing the end of its useful life, most likely. That car will be a good candidate for replacing based on the method of putting the $400 a month away for a year or so, and then selling the car and buying a decent used one for cash.

Our plan is to pay them down much quicker, so the numbers should work out OK for us.

If we were to sell the cars outright, and convert that secured note unsecured, we'd still have to have money to buy cheaper cars, and we don't have that cash. So we'd be financing an older car than what we have, and moving the average 14% to something much higher. That doesn't make sense to me.

Going to 1 car doesn't work since I work 30 miles from home, and I'd either leave my wife stranded all day, or she'd spend half her day driving me back and forth to work. Plus, we'd still have the unsecured upside down balance to pay on.

I'm going to definitely re-finance the Accord to lower the rate from the current 18%. Although that will increase the principal by any loan fees and new GAP insurance. (I know it's a waste, but I don't have the funds to cover a $7,000 loss in case of total loss) At the 10.99% I have been approved at, the savings will more than cover the additional costs. I'll keep the term the same, and devote the savings to the debt snowball.

I have also considered refinancing both cars, and extending the terms 1 year (yes, they'll actually let me borrow for 5 more years on a 5 year old car.) The idea there would be to free up even more cash for the debt snowball, and to provide some cushion as we transition to a single income family. But that feels an awful lot like 'borrowing your way to prosperity,' which never works, at least not in my case.

If I can pay these things off sooner than expected, and get any decent life out of the 2002 afterward, then I'll be a happy man, and living debt free!

My opinion:

Refinance to a lower rate, but don't "borrow" from paying off the cars. As soon as the loan is paid off, you have the opportunity to drop your insurance coverage to a lower level (i.e. collision instead of comprehensive). Most of us don't use comprehensive insurance unless our vehicle is stolen. For instance, if we run our own car into something, we just fix it rather than make a claim on our insurance, which could raise the premium for a period of up to three years.

You are thinking quite short term for a Honda. We have an almost 10 year old civic. Hondas are just getting started with 150k miles. DO NOT sell it at that time. Someone will be very happy with you if you do, because I'd bet they'll be happy with a $4000 car that may will last them five years with little maintenance. If you maintain your Honda properly, it can be a HUGE help to your debt situation by becoming an inexpensive commuter vehicle for your 30 mile commute with low maintenance costs and NO car payment. This is exactly what we have done, and it's made a world of difference. I've often joked that my 4 year-old might get the Civic when she turns 16. My husband says, "only if she can pry it out of her father's fingers." New cars and new car loans are a big way people get into trouble, but used cars that you have not personally maintained can be an even bigger headache once you figure in time spent repairing it unexpectedly. Keep the miles off of the Pilot as much as is reasonably possible, just to make it last that much longer. But I as an admittedly Honda-loving consumer, would NEVER sell those vehicles. You might be upside down, but the length of time that those vehicles will be road-worthy will change that drastically after you pay them off.

Daisy, I agree with you wholeheartedly. I am counting on the Honda to last a long time past 150,000 miles. However, this is the first Honda that I've owned long term. A friend drives a 1994 Accord with 210,000 miles. I plan to do the same thing. But prior to these Honda's, I've only owned Fords, and they were pretty much toast at 110,000 miles. So while I'm hoping for a long, fruitful life for this Accord, I'll budget and plan like everything over 150,000 miles is just a bonus.

The Pilot gets very little use beyond my wife driving it to work. With her transition to being a stay-at-home mom, I expect that it will get less than 7,000 miles a year. (That's what we got on a previous car the last time she was a stay-at-home mom.) That Pilot is going to last a LOOOONG time.

My wife asked me if I'm going to be OK driving a 10 year old car to work, from a prestige point of view. Here in Tampa, a covered parking spot is a perk so your car doesn't reach 125 degrees in the sun. I park in a section with 1 Mercedes, 2 Infiniti's, 2 Lexii, 1 Lincoln and 3 BMWs. My Accord looks a little out of place! I told her that once we're debt free, I'm putting a big "Debt Free and Loving It!" sticker in the Window, and let them laugh!

Thanks for the support!

Croz.

I have to agree with Daisy.

My Honda Accord is just under 20 years old (manufactured Oct '87), and is in great shape. Granted it has low mileage because the first owner was actually the proverbial grandmother who drove once a week to the store....but still
My Accord previously was a '90 coupe, and I think I'd just got that thing in great condition when I had to sell it (damn thieves! why do they have to like that one so much?......)

Keep the Accord....maintain it when it needs it and it'll be around for years to come!

~Jamie