Car Repossessions and Auto Loan Charge Offs

Learn about auto repossessions, your rights and remedies, deficiencies, and charge offs.

Updated by Carron Nicks, Attorney (Tulane University School of Law)

If you miss payments on your car loan, you can bet your lender won't let it continue for long. If the lender can't talk you into making payments, it will resort to repossessing the car, selling it, and applying the proceeds to pay your loan down. The lender could even sue you for the balance or "deficiency" remaining after the sale.

In this article, you'll learn:

  • what happens when the lender repossesses your car
  • how to get your car back after repossession, and
  • why you might still be liable for any remaining debt.

Auto Repossessions

The process of taking a car back is called repossession. When you get a loan to purchase a vehicle, the lender almost always takes a security interest in the car. The security interest guarantees payment of the loan because if you default on the loan, the lender can take the vehicle back, sell it, and use the proceeds toward your loan balance without first suing you and winning a money judgment.

The Auto Repossession Process

In most states, if you default on an auto loan, the lender can repossess the financed vehicle. Usually, "default" means missing just one car payment or letting your insurance policy slip. In some states, the lender must send you a notice of default and give you the opportunity to make up the payments before repossessing your car, but others don't require a repossession notice.

State law varies regarding the steps a lender can take to grab your car. For the most part, the lender or the repossession company it hires can't breach the peace during the process. Breaching the peace can include ignoring the car owner's simple objection to engaging in menacing behavior or physical confrontation.

Many cars are repossessed at night and from office or shopping center parking lots to avoid breaching the peace. In many states, repo agents are allowed to hotwire the car, make a duplicate key, or even take it from an open garage or carport(but generally not from a closed garage or inside a locked fence.

Learn how repossession notices explain your rights and the notices your lender might be obligated to send you.

The Right to Redeem

All states allow you to get your car back by "redeeming the contract" within a certain period after the repossession. When you redeem a contract, you pay off the entire car loan, along with repossession and storage costs.

If you redeem the contract, you will own the car outright. The right to redeem generally lasts until the lender sells the vehicle, but check your state laws for specifics.

The Right to Reinstate the Contract

If you don't have enough cash to redeem the car, you might be able to "reinstate" the contract and get the car back. To reinstate, you must make up the past due payments, interest, and penalties, as well as cover the repossession and storage costs incurred by the lender.

Act quickly if you want to reinstate. In most states, you'll only have 10 to 15 days after the lender picks up your car. Learn more about getting your car back after repossession.

File a Chapter 13 Bankruptcy Case

If you have no money to reinstate or redeem your car loan, filing a Chapter 13 bankruptcy case can help you get your car back while taking care of other financial issues. Filing Chapter 13 will prevent the lender from selling the car while you formulate a plan to pay your car loan and other debts over three to five years.

Getting your car back after filing for Chapter 13 bankruptcy might take some time. Some lenders will release the vehicle once they learn that you're in a bankruptcy case, and others will wait until they know your case will go forward and they'll be paid.

Learn more about how Chapter 13 works and how a Chapter 13 payment plan can help you save your car and pay your car loan.

Deficiency Balances After the Lender Sells the Car

The lender will sell the car if you don't reinstate or redeem the car by the deadline. Lenders must sell cars in a "commercially reasonable" way. Auctions are a popular way for lenders to sell repossessed vehicles because they're considered commercially reasonable, even if the sale fetches far less than what you owe.

If the sale proceeds don't cover the amount you owe to the lender, plus costs of repossession, storage, and sale, you'll probably be liable for the balance, called the "deficiency." Because cars usually sell for less than what you owe at auction, most car repossessions result in a deficiency.

The lender will try to collect the deficiency balance from you, so, expect collection calls and letters at a minimum. Most states also let the lender sue you for a money judgment.

Which is Worse: Repossession or Charge-Off?

Charging off a loan doesn't mean that the lender is giving up on collecting it, as many people believe. A charge-off is not a collection action at all. It is an accounting entry. Lenders consider a loan, like your car loan, to be an asset. If you aren't making your payments, and the lender can't take possession of the car, the lender is required to take the loan off its books so that it won't show up as an asset and artificially inflate the lender's value. Charge-offs usually happen when your loan becomes delinquent for 120 days.

The charge-off doesn't affect the lender's right to collect the loan or your obligation to pay it. When the loan is charged off, you're still liable for it until it's paid in full, or the lender forgives it, or you discharge the debt in a bankruptcy, even if the lender reports it to the credit bureaus as a charge-off or sells the uncollected loan to a collection agency.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.

Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

More Bankruptcy Information

Bankruptcy Forms and Document Checklist

You'll find fillable, downloadable bankruptcy forms on the United States Courts Bankruptcy Form webpage.

Chapter 7 and 13 Bankruptcy Form List

Bankruptcy Document Checklist

More You Might Like

Will Chapter 7 Bankruptcy Prevent a Car Repossession?

Will Filing for Bankruptcy Get Back a Repossessed Vehicle?

What Happens to Your Car in Chapter 13?

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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