Upside down on a car? You can't just give it back

Last year, a record 1.67 million cars and trucks were repossessed representing a 12% increase over 2007. Unfortunately, this isn’t too surprising since in the first quarter of 2007, 29 percent of consumers owed more on their vehicles than they were worth. Being upside down on an auto loan leaves some struggling consumers with few choices. However, in most cases, it pays to do everything you can to avoid a repossession. Consider the following.

-A repossession is a repossession—voluntary or not. Being nice only matters so much. A voluntary repossession and an involuntary repossession affect your credit the same way. The main benefit of turning in the car yourself is that you might avoid being stranded when your car is taken from the grocery store parking lot. Other than that, the only difference is that if you voluntarily return your vehicle you could save on some fees associated with its collection. Either way, the notation will remain on your credit bureau file for seven years.

-Your obligations may not end after the vehicle is repossessed. After a vehicle is repossessed, the lender will most likely sell it to the highest bidder and apply the proceeds of the sale to the balance owed on the car. If the sale price is not sufficient to pay the balance due, there will be a "deficiency balance" remaining. Yes, contrary to popular belief, you will be legally obligated to pay this deficiency balance. If you do not pay this balance, the creditor can possibly sue you in an effort to try and collect.

-Cosigners are equally responsible. If you have a cosigner, and you value your relationship with them, do not let your vehicle go back as a repossession. Not only will the repossession appear on the cosigner’s report, but they are also legally responsible for any deficiency balance.

The most significant impact of repossession has nothing to do with money. In addition to losing something you most likely want and need, having it taken away can leave you feeling violated and vulnerable.

If you ever have trouble making your vehicle loan payments, communicate with your lender. Many creditors have hardship programs in place to help people experiencing temporary set-backs. For example, your lender may grant an extension, meaning that the past due amount can be paid at the end of your loan. Another option may be for the lender to rewrite your loan to reduce your monthly payments.

When making a request for a revised payment schedule, remember that your creditors are not required to agree. Therefore, you should approach them in a polite, business-like manner. If you are able to negotiate, get the details in writing.

If working with your existing loan is not possible or desirable, seek another. Refinancing the loan with longer terms will reduce your monthly payment. However, keep in mind that for reasons we discussed earlier in this chapter, lengthening your loan will not improve your overall financial situation.

Another potential solution to repossession is selling the car. Even if you are upside-down on your loan and are required to come up with some cash to pay it off and release the title, it is still preferable to repossession.

If you are having trouble making your lease payments, look very carefully at your contract to learn the consequences of default. Often, the fees associated with canceling your lease are very high. If you choose to proceed with canceling your agreement, write to the dealer stating that you want to terminate early. The dealer will contact you with the amount you owe. If you simply do not make on-time lease payments, the vehicle will most likely be repossessed.