If you can't afford your car payments, you can give the car back to your car loan lender. But think carefully before you do this—you might still owe the lender money. Carefully weigh your options, and the pros and cons of each, before you take action.

The Lender Won't Write the Loan Balance Off

If you are giving the car back under the assumption that the creditor will write the loan off, think again. Just because you surrender the car doesn't mean that the creditor has forgiven the debt or that it has to. The creditor can still sell the vehicle and sue you for any deficiency.

What Is a Deficiency?

If you return the car to the lender, the lender will likely sell it. It will apply the proceeds of the sale to your car loan balance, after reimbursing itself for the costs of sale and certain fees. Often the sale proceeds are not enough to cover your loan balance; the remainder of the loan amount is called the deficiency. The car loan lender can demand payment of the deficiency. If you don't pay up, it can sue you, get a judgment, and then use various collection methods (such as wage garnishment or bank levies) to get paid. (Learn more about car loan deficiencies.)

Work Something Out With the Lender

If you still wish to surrender the car, then use this as an opportunity to work something out with the creditor. Negotiate a reduction or waiver of the loan balance as a condition of returning the car. After all, you are saving the creditor the time and costs of a repossession and auction (granted, most of those costs would still be passed on to you anyway).

If the lender forgives $600 or more, you'll get a Form 1099-C or 1099-A, and the IRS will expect you to report the forgiven balance as income on your tax return.

Sell the Car Yourself

You might also want to consider selling the car yourself. If you can find a buyer who would pay at least as much as what the car might sell for at auction, then the bank may agree to the sale and waive all or part of a deficiency balance.

Surrendering May Be Better Than Repossession

Even if the creditor won't cut you a break on the deficiency balance, surrendering the car might still be the best thing you could do under the circumstances. It could save you the extra costs and fees of a repossession, which the creditor can add to the deficiency balance you might owe later.

(Learn when creditors can take your property if you default on a secured debt in Repossession: When Can a Creditor Take Your Property?)

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