MY CAR WAS TOTALED AND I OWE MORE THAN ITS WORTH
Imagine this nightmare. You purchased a brand new car last year, and financed the purchase through a lending institution for three years. One day you are driving down the road and are t-boned by a negligent driver who ran a stop sign, causing excessive damage to your car.
The insurance company comes out to assess the damage to your car, and tells you that the cost to repair the vehicle exceeds the fair market value of the vehicle. Therefore, your car is deemed a total loss, and they offer you the fair market value of your car. But, the fair market value is thousands of dollars less than what you owe on the car, so the insurance company is going to send the payment to your lending institution in partial payment of your loan. Now, you have no car and still owe several thousand dollars to the bank
We have seen this scenario play out several times over the years. Cars depreciate in value, and that is just the way it is. According to some estimates, a car can lose nearly 10% in value the first minute that you drive it off the lot, and 20% in value over the first year. And with car dealers and finance companies spreading out payment plans over longer and longer periods, it can take years before the amount you owe on the vehicle to be less than what the car is worth.
Under Ohio law, you are entitled to the fair market value of your vehicle in the condition it was in immediately before the collision occurred, or the cost to repair it to that condition, whichever is less. With cars depreciating so rapidly, it is not uncommon for a car to be deemed a total loss. And if the fair market value of the vehicle is less than what you owe, you are on the hook for the difference, regardless of the fact that the accident was not your fault.
What can you do to protect yourself against this? First, make sure you know value of the car you are purchasing before you buy it. We have seen some shady car dealers sell cars to unaware customers for thousands of dollars more than what the car is worth. You can find the true value of the car you are looking to purchase at several websites on the internet, such as Edmunds.com, KBB.com or NADAGuides.com. Second, make sure you know the depreciation estimates for your vehicle, and compare that to the payments you will be making to know how long it will take before you owe less than the car is worth. Edmunds.com provides a convenient tool for doing so here. Third, check to see if your automobile insurance offers gap coverage, and if it does, purchase it. Gap coverage pays for the difference between the value of the vehicle and the amount you owe when the vehicle is deemed a total loss, with some limitations (make sure you read the policy to know these limitations). If your insurance company does not provide gap coverage, check with your finance company or look for an insurance company that does offer it. Generally, gap coverage is relatively inexpensive and can provide much needed assistance when you owe more than your car is worth.
The information contained in this blog post is general information, and should not be treated as legal advice. No attorney/client relationship exists between the reader and Lafferty, Gallagher & Scott, LLC without a signed Attorney Contract Agreement of Representation. Each case is unique and past results should not be treated as a guarantee of the results in your case.
Edmunds.com, KBB.com, and NADAguides.com are wholly owned by their respective companies. Lafferty Gallagher & Scott, LLC does not endorse nor guarantee the accuracy of these websites. Any reference to these companies is for informational purposes only, and should not be treated as an endorsement or recommendation of any products or services offered by these companies.