Navigating Car Loans' Challenges: Understanding GAP Insurance Limitations and Negative Equity Rollover

When it comes to car loans, unexpected twists can leave us "upside-down" and financially vulnerable. I'm sure you've already heard of GAP insurance but what exactly does it offer, and what are the coverage limitations in the event of an accident or theft?

Let's delve into it!

WHAT IS GAP INSURANCE AND WHY YOU MAY NEED ONE

Gap insurance helps you cover the "gap" between your vehicle's ACV ( actual cash value) and the outstanding balance of your loan.

Altough it isn't mandatory to purchase it, a gap insurance coverage might be beneficial if the following conditions arised:

• You made a low down payment and the financing term of your loan is long enough to make your outstanding balance higher than the actual cash value of your vehicle, leading you to face "negative equity" on your car pretty soon.
  

• Your car is subject to depreciation, which would increase the risk of incurring in negative equity even more.

• You already find yourself struggling with what it's called a "negative equity rollover", which means the debt resulting from the old loan is added to a new car loan, increasing the gap between what you still owe and what the car is worth.

GAP INSURANCE LIMITATIONS

Having said that, gap insurance can be a safety net to protect your bank account when your loan balance is higher than the value of your totaled car at the time of the accident but it’s not without limitations.

For instance, a gap insurance typically won’t cover an engine or transmission failure or any other mechanical repairs.

Furthermore, it won’t cover your car insurance deductible, overdue payments and late fees on your loan.

In fact, each policy is different but most of them may include an exclusion concerning carry-over balances from previous loans, which would leave you with a pile of debt and a totaled and useless car.

HOW TO GET RID OF A LARGE NEGATIVE EQUITY ROLLOVER

If you’re struggling with paying off your debt, you may want to consider filing for bankruptcy.

In Chapter 7, you may be able to totally eliminate the car loan debt along with other debts that you may have. In Chapter 13, you can readjust your debts by, among other things, surrendering the totaled vehicle and repaying a percentage of the loan balance at 0% interest over the term of your Chapter 13 plan.

There are several options to take into account and only an experienced bankruptcy attorney can help you figure out what’s the best solution for you.

Contact us at 304-780-3316, send us an email to johnson.legal.services.pllc@gmail.com or book your free consultation directly here on our website.