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RV Voluntary Repossession

Since an RV can be considered a second home for tax reasons, if we cannot afford its payments any more can we short-sell it?

My husband and I own a self-contained diesel motor home (considered tax-wise to be a 2nd home interest deduction). With the bottom falling out of the RV market we owe about $134,000 and am being told that the RV will only sell for around $85,000. We are paying on the loan $1100 per month and watching the motor home continue to depreciate each month. We have perfect credit and want to know if there is someway to prevent a deficiency judgment or claim. The loan is current with no late payments, however this is crazy, laying out the money each month as the coach depreciates. In a normal market the deficiency if any, would have been manageable, now it is out of range. What can we do? Any ideas? Is this considered a second home loan (since IRS sees it as a "second home") even though it is a vehicle loan and not a mortgage? What rules apply that can help us. Is Bankruptcy to be considered? Again, we have perfect credit. (Also going to get divorced soon, but that is secondary)

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Bill's Answer
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Bills.com | Find Learn Save

You do not mention how old the RV is, whether it was purchased new or used, or if you have other unsecured debt (such as credit cards or student loans) and indicate your credit score is good. I assume you are current on your home payment and all other debts. However, any late payments, repossession, or bankruptcy will affect your credit score adversely. On top of this, you indicate you plan to divorce.

I see the following issues:

  1. RV as tax deduction
  2. Depreciation of RV
  3. Repossession
  4. Deficiency Balance
  5. Divorce
  6. Bankruptcy and Foreclosure

Recreation Vehicle Second Home

According to IRS Publication 936 a motor home (RV) may be considered a second home, which means that the interest on the loan is deductible on your federal tax return. Because tax laws change every year, it is prudent to discuss tax questions with a tax professional to ensure your assumptions about the tax code are current.

Implied in your question is whether the fact that the RV qualifies as a second home also qualifies it for some type of forgiveness of a deficiency balance. In other words, does an RV qualify for short sale or deed in lieu of foreclosure? If you can present your lien-holder with a solid offer, you may be to negotiate a favorable deal, one that is better than letting the RV go to auction. At auction, if it sells for a low price, you are on the hook for the deficiency balance. You may be able to get a higher price and leave yourself owing less, if you try to sell the RV.

Depreciation

Unless a person has a vehicle loan with an unusually brief repayment period, vehicles depreciate at a rate that is faster than a consumer can pay off the loan. RVs depreciate approximately 30% the moment they are driven off of the dealer's lot. They depreciate another 18% in year one, and 10 percent in year two. They continue to depreciate 5%-6% each year thereafter. Therefore, a buyer who borrows money to buy a vehicle should expect to be upside down for the duration of their loan. The same can be said for vehicle leases.

Repossession

Repossession is where a creditor holding the title to property (vehicle, boat, RV, and so forth) takes possession of the property from the debtor. See the Bills.com resource advise on voluntary repossession to learn more about what voluntary repossession is and the affects repossession has on your credit score.

If a borrower allows a repossession of their vehicle, the creditor will sell the vehicle at auction and apply the sale price to the balance of the loan. If the sale price is less than the balance, this is known as a deficiency balance. The borrower must pay the creditor the deficiency balance plus the cost of the repossession. All of this is spelled out in a loan contract and each state's laws.

You mentioned you live in Florida. In Florida, deficiency balances are governed under Title XL, Chapter 713, Real and Personal Property.

Deficiency Balance

A deficiency balance is an unsecured debt, much like credit card debt, medical bill, or a payday loan. As such, it can be resolved in a debt settlement program. See the Bills.com debt savings center to get no-cost quotes from pre-screened service providers.

Divorce and Debt

You did not mention if the RV loan is in one or both of your names. If it is in both of your names the creditor has the right to pursue the deficiency judgment against one or both signatories. A divorce decree is an agreement between two former spouses, but it is not binding on third-parties or modify existing contracts the parties share.

Bankruptcy or Foreclosure

You mentioned divorce. Couples splitting often sell their home to free the equity and extinguish the mortgage payments. You did not mention if you have equity in your primary home. If you do not, consider the Home Affordable Foreclosure Alternatives Program, which is preferable to foreclosure. Depending on the rest of your financial situation, you may wish to consider bankruptcy. Bills.com has numerous articles on bankruptcy that can help you decide if this is a wise option.

Recommendation

You have many issues to reconcile. Consult with an attorney in your state experienced in debt and divorce. Regarding the RV, consider refinancing your home to pay off the loan on the RV. Or, you may consider keeping the RV and determine its disposition as part of the divorce settlement. If at all possible avoid repossession or bankruptcy, as both will adversely affect your credit score.

I hope this information helps you Find. Learn & Save.

Best,

Bill

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14 Comments

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  • DD
    Aug, 2011
    duane
    Custer, SD
    Have you considered having someone take over payments for you, and you hold the title? We are planning to sell our home and hit the road. We have good credit, but would like to work something out with someone in a pickle, and get a good deal at the same time.
    0 Votes

    • DS
      Aug, 2011
      Don
      Sacramento, CA
      There really is no such thing as "taking over payments". As an RV owner, why would I give you the keys to the property that is legally my responsibility and trust you to keep making payments and keep my property in good condition. Even if you offered a security deposit of say, $5,000, the RV is worth much more than that. Also, how does insurance get handled, how do you take out insurance if you're not the registered owner? I think the answer is you have to get a loan and then the only payments you take over are your own.
      0 Votes

    • BA
      Aug, 2011
      Bill
      Payment assumptions are risky on the part of the owner for the reasons you mentioned, but they occur nevertheless. Vehicle lease assumptions seem to be more common. However, in my experience, people do not lease RVs.
      0 Votes

    • DD
      Aug, 2011
      duane
      Custer, SD
      This is a very accurate reply. However, if one has never experienced something like this (Don S.), then I guess I can understand their email be written as it was.
      0 Votes

    • DS
      Aug, 2011
      Don
      Sacramento, CA
      I'm actually sitting on a 34' 5th wheel that's worth less than I owe so believe me, I would love it if someone could just take over the payments but that isn't reality. In fact it appears the Bank may accept a short sale with an offer in writing from an interested party. I will keep you all posted on how this works out so others in the same situation can find an option that doesn't drain their bank account or ruin their credit. Thanks.
      0 Votes

    • BA
      Aug, 2011
      Bill
      If your lender agrees to a short sale, make sure you understand if the deficiency balance will still be your responsibility or not. It certainly can be the case that the bank will agree to the short sale, as it saves the cost and time of repossessing the vehicle and auctioning it off, but still come after you for the difference between what you owe and price of the short sale.
      1 Votes

  • 35x35
    Jul, 2010
    BobM
    I am in the same boat, Wells Fargo is the lien holder and has agreed to a short sale, however there does not seem to be much of a market for RV's. I talked to the bank again and was told that if a short sale did not take place and the unit was repossessed then instead of writing off the balance they would sue for the deficiency balance, which was not the case if a short sale was done.
    1 Votes

  • BA
    May, 2010
    Bill
    1) Regarding the short sale, wow, that is great news. Thank you for sharing that information with me. I am very happy to be proven wrong.

    2) Regarding the clarification to your question, my answer is the same -- the creditor wants the money due. If you make your account current at the time of sale, the creditor will release its claim on the title.

    However, one thought to consider now is the importance of maintaining a positive relationship with a creditor that has expressed a willingness to short sale your RV. Before you decide to stop making the payments, consult with Bank of the West and ask as diplomatically as possible if defaulting on your payments will disqualify you from the bank's short sale program.
    2 Votes

    • DJ
      Jan, 2014
      Danielle
      T/o Colonie, NY
      There is nothing diplomatic about dealing with Bank of the Worst. They actually go out of their way to repossess vehicles.
      0 Votes

  • VK
    May, 2010
    Valerie
    If we STOP making payments and say have the RV in our possession for 6 months until the bank physically takes it away and during that 6 months are able to sell it, will the bank accept a payoff at that time or is to late since the repossession process paperwork is already started with the bank? Gets complicated, doesn't it! By the way, I did speak with the lender today, Bank of the West, and they will consider a short sale request if requested in writing AFTER we have a written offer by a potential buyer, yea! Thanks very much for all your input, greatly appreciated!
    0 Votes

    • RL
      Dec, 2010
      Ron
      Lockeford, CA
      What ended up happening with Bank of the West? I am in the process of writing a short sale letter and submitting it to their Loss Prevention Dept. I'm curious if they accepted your short sale offer.
      0 Votes

    • BS
      Jan, 2014
      Ben
      Orlando, Florida
      I would be curious to also find out what happened with Bank of the West. I have an RV that is under water and have checked several alternatives and none are really good financially.
      0 Votes

  • BA
    May, 2010
    Bill
    If I understand your question correctly, the answer is yes. Let us say for the sake of illustration that the balance on the loan is $100,000. Let us say that the market value of the vehicle is $75,000. You find a buyer for that price. When you sell the vehicle, you will collect $75,000 from the buyer, add $25,000 of your own, and give the creditor (i.e., bank or finance company) $100,000. In turn, the creditor will release its claim to the vehicle's title, which you will convey to the buyer.
    1 Votes

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