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)
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:
- RV as tax deduction
- Depreciation of RV
- Repossession
- Deficiency Balance
- Divorce
- 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