I Can’t Afford My Car! What Are My Legal Options?

Canadians love their cars.

After lodging (rent or mortgage), cars are usually the average Canadian’s biggest monthly expense. Even in an era of expensive groceries.

And this seems to be a growing trend. Overall vehicle costs can add up to 1/3rd or more of a person’s monthly living expenses, adding in loan/lease payments, fuel, maintenance & insurance. Two late-model financed cars can cost as much as much as $2,000/mo.  when factoring in all real costs.

To make matters worse, cars are a terrible investment. In what other area would you spend lots of money per month for years, at the end of which you’ve got something that is almost worthless?

Furthermore, two thirds of all financed cars in Canada are on terms of 72 months or longer. So Canadians are taking longer and longer to pay those cars (which end up worthless) off, meaning their cash flow is minimized for longer than ever.

Low interest rates have been a huge contributing factor to all this. Easy & cheap access to money, not to mention an increasing predilection toward leasing, have meant bigger & more expensive cars in the driveway to better keep up with those dastardly Joneses.

In our practice, we see people whose cars are killing their finances. They rarely step back to calculate the total cost of owning their car and its impact on their monthly cash flow.

Many of them ask what they can do to get out from under an onerous finance contract or lease. They’ve decided their car is costing them too much. So what can you do to get out of your car deal?

One option is to file a personal bankruptcy. But for the car loan/lease to be included, you would then have to surrender the car to the financier, who would then sell it for what they could obtain and sue you for the shortfall. The shortfall amount is then included in the bankruptcy as an unsecured debt dischargeable (likewise a lease shortfall/deficiency). So you are deciding you no longer want the car – the tradeoff being you are no longer responsible for the payments.

Another far more popular option is to file a Consumer Proposal. A proposal is a legal alternative to bankruptcy.

In a proposal, an individual offers a settlement to their unsecured creditors generally for a percentage of the total. All interest is forgiven and a significant amount of principle is written off by the creditors. The payments can be mad e over time (60 months or less) and are open, so there are no penalties for paying the proposal off sooner. A legal release from all the unsecured debt is provided by the court at the end. In the case of a financed or leased vehicle, the shortfall amount from the returned car is included as an unsecured debt. The individual is released from their legal obligation to pay for the shortfall.

While a bankruptcy or a proposal are not appropriate for everybody, they can offer a solution in the case of a person needing to get out of a car debt that is far too expensive for them to maintain or pay off. Since all unsecured debts must be included in either action, these need to be taken into account. Income tax owing can be included, as well. A licensed trustee can advise you on your legal options in all cases and which may be the best route to go, including all possible ramifications. Knowledge is power!