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Voluntary surrender of car – is it a good option for getting out of debt?

Posted on 27 April 2023

Written by Chris Galea

Given the vast size of our country, for most Canadians a car is an essential asset. Whether it is needed for commuting, visiting family, going to the store, or taxiing the kids around, the vast majority of us require a car while living in Canada. While an incredibly useful tool for going about our daily lives, cars do come at a cost. If you are facing financial difficulty, particularly in a climate of rapidly rising living costs and increasing interest rates, a car may be the last thing you want to fund on top of everything else. Nowadays, the average cost of a new vehicle in Canada is over $45,000, and $25,000 for an average used vehicle. This is before you add on insurance, tax, gas, repairs, and all the other costs associated with owning a car. Although no one wants to forgo their vehicle, in some scenarios the voluntary surrender of your car may be the most sensible option. In this article, we share all you need to know about the voluntary surrender of a vehicle, and how in some cases there may be a workaround that enables you to keep your car.

What is voluntary surrender?

Voluntary surrender of a car is when you decide to give back your car to the lender when facing insolvency. As car loan debt is a secured debt, it cannot be written off in either forms of legal debt relief (consumer proposal and bankruptcy). While this means that you may keep your car even if you file bankruptcy, it does also mean that if you struggle to make your repayments, you car could be repossessed by the lender. Voluntary surrender means that any secured debt you had in your car can be turned into unsecured debt, which you can then file as part of a consumer proposal or bankruptcy. Upon returning your car to the lender or dealership, they will sell the vehicle and send you a statement of realization. However much they made from the sale of the vehicle will be deducted from your car loan, except for any penalties, fees, and the cost associated with repossession of the car. Any amount left over is unsecured debt. While it is still a debt you will need to pay, you now have more options when it comes to gaining debt relief.

Why opt for voluntary surrender of your car in Canada?

You may be wondering why on earth anyone would want to voluntarily give up their car. There are various reasons as to why voluntary surrender can be a very positive move. Here are the primary reasons:

  • You cannot afford your car payments. When being threatened with repossession while requiring your car, you may realize that keeping your car is unmanageable. You might be avoiding other debts in order to keep up with your car payments. You may have also purchased a car that is out of your price range – maybe you have had a chance in financial circumstances, or not quite run the numbers before committing. Voluntary surrender can free you from a car that you simply cannot afford.
  • You have a car that is high maintenance. Cars can cost a lot of money to run, even outside the initial car loan costs. Perhaps it is continually breaking down, or you have an accident. If your car is not worth a lot, you may be pouring money into a vehicle that is not even worth it. Voluntary surrender can help you to avoid bankruptcy, and may even free you up to find a more reliable vehicle that will not cost as much to maintain.
  • You want to avoid repossession of your car. Most Canadians would rather they got rid of their car on their terms if they can no longer afford it. Having your car taken away from you can have a tough emotional impact, as someone will turn up at your house to take away the car. You will not know which day or time this could be, and it is not nice for anyone to experience.
  • You want to take ownership of your car debt. Returning your vehicle to the lender or dealership can feel like you are taking control over your situation, and that it is on your terms. Although it is not the easiest action to take, you will know that you are taking accountability for the situation and taking the required steps to get rid of your car debt once and for all.
  • You want to save money. If you are able to survive without a car, you may be able to save thousands of dollars each year in interest on your car loan and depreciation of your vehicle alone. As secured loans cannot be cleared via debt relief, voluntary repossession can enable you to get out of your car loan.

How do you surrender your car?

There are a few typical steps to the voluntary surrender of your vehicle:

  • Let your lender or dealership know that you cannot afford your car payments and you will not be able to make them
  • Inform your lender that you want a voluntary surrender, and to return your car. Your lender will likely ask you to drop off the car on an arranged date, or they may be able to get somebody to collect the vehicle
  • Once your lender sells the car, you will receive a statement of realization. This shows how much debt you have repaid, and the remaining amount owed where applicable. Any remaining debt becomes an unsecured debt that you will need to repay
  • If you want voluntary surrender, you need to do so before you become insolvent. When filing either a consumer proposal or bankruptcy in Canada, secured debts cannot be included, only unsecured debts. This means you can include the debt to be reduced or eliminated entirely as part of your debt relief process

What are the benefits of voluntary surrender of your car?

Voluntary surrender has a number of key advantages:

  • You can avoid fees that your lender might charge if they had to repossess your vehicle, which could happen at any time
  • You can maintain a good relationship with your lender as you will be returning your vehicle voluntarily. They may be more inclined to keep you as a client, provided you make any repayments that are still owed
  • You can avoid collection agencies. While your credit score will be impacted whether you surrender your car voluntarily or involuntarily, the damage may not be as bad if you miss fewer payments and you do not need to be pursued by a collection agency

What happens when you surrender your car?

As well as turning your secured debts into unsecured debts that can be reduced or cleared via a legal form of debt relief, voluntary surrender can have an impact on your credit report. Voluntary surrender is technically defaulting on a loan, and is therefore similar to facing a repossession. This will reflect on your credit report for a period fo time, and can hinder your ability to be eligible to secure credit in the future. When you do go to apply for credit, you will probably face a much higher interest rate on any loans or vehicles you secure in the future. For this reason, it makes sense to utilize voluntary surrender when you are insolvent and about to file a consumer proposal or a bankruptcy. You will face the impact on your credit report at one time, and you can clear any outstanding debt owed on your vehicle along with any other debts you have, like credit card debt. It can allow you to tackle all your debts at the same time.

How does a voluntary surrender affect your credit?

Since a voluntary surrender is a type of repossession as you have defaulted on a loan, your credit will be negatively impacted. This is regardless of where your surrender is voluntary or involuntary. Your credit score will be affected depending on the number of payments you have missed, and the credit bureau you check with. Your credit score will suffer due to a poor payment history based on the loan payments you have missed, and this will remain on your credit report for a number of years. The account you have associated with your car loan will also receive a credit rating of R8 when your vehicle is repossessed. The longer you spend without making your payments, the more you will be penalized and the worse your rating will become. When lenders look into your report, they will see the negative records in your credit report, and will assess how worthy you are of borrowing credit. If your lenders do not think you are worthy of credit, it will be more difficult for you to borrow funds – and when you can, they will be more expensive due to higher interest rates. At Spergel, we can help you to rebuild your credit score after a voluntary surrender.

How do you surrender a leased car?

Surrendering a leased car works a little differently to the voluntary surrender of a car that you own. When you have a leased car, you still need to make a down payment in order to cover any charges related to the vehicle like rental fees, depreciation, and interest. The primary difference when leasing a car is that at the end of the loan, you do not get to keep the vehicle. There are a few ways to break a car lease. You may be able to transfer it to somebody else, buy it out, or roll it over into a new lease. You may even be able to terminate your car lease. Some of these options could end up costing you more, and if you already have financial difficulties, this could end up making your situation even worse. It is possible to have a voluntary surrender on a leased car still – your lender will want to collect any outstanding debt that you owe, but if you are filing a legal form of debt relief this debt can be reduced or eliminated altogether.

How to keep your car when filing bankruptcy

Although many Canadians think that filing bankruptcy means you are left with nothing, including having your car taken away, this is not the case. In fact, most people who find themselves insolvent do not need to give up their cars. Most Canadians need their cars for one reason or another, and often the minimal difference in cost between their car and another may not be big enough to proceed with voluntary surrender. Thanks to bankruptcy exemptions that are in play in each province, provided your car is under a certain value threshold, you can keep your car during bankruptcy. See, for example, Ontario bankruptcy exemptions. If your car’s equity is over the exemption limit, or you own more than one vehicle that you want to keep, you can pay the difference into your bankruptcy. You could also file a consumer proposal instead in order to keep your assets. Both a consumer proposal and a bankruptcy will free up your budget by clearing or reducing your other debts. This can make it much easier to make your car repayments. Speaking to a reputable Licensed Insolvency Trustee at Spergel will help you to understand all of your available debt relief options, and to decide which actions might be best for you.

If you are finding your financial situation overwhelming and are considering voluntary surrender, you should book a free consultation with one of the experienced Licensed Insolvency Trustees at Spergel. We will review your financial circumstances and run through all of your available options. We have been helping Canadians to gain debt relief while keeping their cars, and we are here to help you too.

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Chris Galea

Chris Galea is a Chartered Accountant and Insolvency and Restructuring Professional with over 20 years’ experience as an LIT (Licensed Insolvency Trustee). He is also our resident expert on tax debt, COVID debt, and the region of Saskatchewan, Canada. When he’s not at the office educating people about bankruptcies and consumer proposals, Chris is playing pick-up hockey with his friends, spending time with his family, and learning Spanish!

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