Planning for the financial wreckage left over after a writeoff collision

Lorraine Sommerfeld explains how to keep your car loan from ending up under water

Dilemma of the week: A reader got rear-ended and was deemed not at fault. The car, a 2013 Ford, was written off by the insurance company. The bigger problem? The payout was $12,000, yet she had $15,000 remaining on her car loan.

The payout was fair; she was a very high-miler, and the insurance adjuster went to the top of the pay scale for her. The issue now is that $3,000 gap on top of having to replace her car.

You might be surprised a car that looks relatively fine can be deemed a writeoff. The problem is often all the tech involved. If an entry-level car has several airbags go off, it’s usually a throwaway. Replacing those bags is expensive. If a $12,000 computer system has been damaged, it could be rendered too costly to fix. Even a modest parking-lot hit can damage costly sensors and cameras.

Before anything happens, this chasm between what you’re getting and what you need can be bridged on a new car in two ways. The first is on your insurance policy, where you can take a Limited Waiver of Depreciation. It’s available on new vehicles, usually for a 24- to 30-month period. It removes depreciation from the vehicle in the event of a total loss. If you paid $30,000 for a vehicle, you get $30,000 and your lease or lien is paid out.

However, be sure to check out details and restrictions on any insurance. Securing the waiver through your insurance could raise your annual premium by about $30, depending on your driving record; signing up for it at the point of sale could be around $20 per month, so shop carefully.

The second option is available through the dealer. When you buy a new car, you can purchase gap insurance to cover the shortfall. You can also purchase it from third-party companies. I strongly suggest starting with your own insurance broker, which is where you’re likely to get the best deal. I was once offered coverage by a dealer at a monthly rate for what it cost me annually through my insurance.

This information is useful if the written-off car is new, but my reader’s 2013 model would have been well outside the compensation boundaries. So, she didn’t qualify for gap coverage, was offered a more-than-fair settlement from her insurance company, and was still out three grand. What are her options?

She could sue the at-fault third party. The problem is I have a reader with a problem that needs answers in a few days. Watching it drag out in the courts for possibly years does little to solve it.

One dealer I spoke to offered up the following:

“If a new car had a rebate on it, say three or four thousand, you could create the loan on a new purchase without the rebate, and direct that money to pay off that shortfall. The rebate can be applied in several ways, and every customer is different,” he said.

Be careful inflating the value of a new-car loan in other ways when it comes to securing funding. If the value of your car is less than what you owe, you’re under water. This is most likely to be in the first few years of your loan, making a writeoff collision potentially costly in more ways than one.

Dealers have been known to get creative to get your business; be wary of anyone promising you what nobody else could deliver. Be prepared to be stuck with the difference between what your car is worth and what you owe, and talk to your insurance broker when you get a new car.