Voluntary Repo is Bad Practice

No way home

There’s a new rash of bad behavior streaking across the American landscape – Voluntary Repos… people are willingly allowing their cars to be repossessed and some are actually walking away from their homes, and mortgages, simply leaving the keys on the kitchen counter.

The irony should be lost on no one that this wave of bad behavior comes on the heels of previous bad behaviors – namely buying crap that could not be afforded in the first place, but that’s another story.

Instead, my intent here is to share my perspective on why a voluntary repossession is a bad idea on the basis of both personal accountability and simple mathematics.

Personal Accountability

This one should be easy, but I suppose if that were truly the case the larger topic would be moot.  Today folks are walking away from purchases because they are no longer convenient.  I think this should be a crime.  Folks are walking away from homes not because the payments are suddenly too high, but because the house is no longer worth what it once was.  Are you kidding me?  Is there a better example of gutless, irresponsibility in our society today?

Where has accountability gone?  I sign-up for the deal, I have an obligation to see it through.  I’ve never seen a mortgage with an “inconvenience clause”.

The decline in the housing market is exposing the inner selfish idiot in many folks.  Yes, housing values are down today, but they’ll be back.  There is simply too much history to think otherwise.  For generations these same folks have been comfortable with the idea that new cars drop at least 40% of their value in the first 2 years of ownership – with no hope of that value ever being recovered.  Why react so haphazardly when the housing market takes an odd, but correctable, turn down such a familiar and well worn path?

***Related Article:  Bankruptcy, If you’re going to do it, do it right! ***

Intersection of Accountability and Financial Mathematics

In the gap between personal accountability and the simple budgetary math of inflows and outflows there exists an odd formulaic model originally designed to assign a value to our fiscal intelligence.  Yes, I’m talking about the good ole Credit Score.

So there is no surprise that walking away from debt – defaults, foreclosures, repos, or the like are crater-making events to your score.  Simply put, you have behaved badly in your financial dealings and now your credit score will reflect those misdeeds at least 7 years into the future.  Or well into the next boom period during which the pockmarked face of your credit score will severely limit your ability to enjoy the ride.

Check the Math

Voluntary Repos are simply bad math.  If I owe $20,000 on a car but can only sell it for $15,000, I find myself $5,000 in the hole.  In reality, I have a $15,000 asset and a $5,000 unsecured debt.  But this arrangement, as self induced as it may be, isn’t working for me so I’ll just return the car.

All is good, now I have a clean slate and can start over.  Until the court summons arrives and I find the dealer or finance company has sold the car for only $10,000 and sued me for the $10,000 difference.   Hmm, now I have no car and a $10,000 judgment against me.  Exactly how was this supposed to be better?

Alternative Solutions

Are there alternatives?  Well of course there are.  The very premise of this article is on Voluntary Repos.  Why not grow a backbone and opt for an Involuntary Repo.  Sometimes you’ll fight and still lose, but never as badly or with the same certainly as rolling over and not fighting. 

Be an adult and make the payments if you are bailing simply due to an inconvenience factor.

If you want or need out bad enough try to sell the asset, then lower your price until you find an interested buyer.  If you’re dealing with a house, attempt to score a short sell with or without recourse.  Similarly with the car, try an offer in compromise or sign an unsecured loan for the outstanding balance.  Borrowing from my previous example: every time I’d rather owe $5,000 than $20,000.

Take on extra jobs and call your debt holders daily trying to negotiate better terms.  Basically you need to fight, fight , fight to improve your situation… and isn’t working hard to better your status something of a theme in this life?  What happened to grit and the American way?

Interesting News Item

As something of a bonus, I also want to share an interesting news piece that was recently reported on NPR’s Story of the Day.  It seems that a new trend is emerging in the world of bankruptcies.  Some banks are simply refusing to accept homes abandoned by the owner.  In this cases, the bankruptcy is incomplete leaving both the owner and mortgage in place.  In extreme cases, owners are being fined by local municipalities for upkeep violations due to the decay of the abandoned property.

I personally think this approach, in cases of abandonment, is genius.  Banks should not have an obligation to clean up someone’s mess when that individual is not also involved in the clean-up process.  If I’m working extra and trying to arrange short sells then I’m trying to do everything possible to mitigate the situation.  I am at least trying to partner with the bank to resolve my issue.  Alternatively, if I just walk away I’ve essentially asked the bank to clean my dirty diaper.

I don’ think the banks should be required to perform such duty in these cases and I would love to see stronger legislation in this area.  

Photo By: akashgoyal

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Category: Personal Finance

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