Car Repossessions and Auto Loan Charge Offs

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

If you default on your car loan, you can almost always expect the lender to repossess the vehicle. If, after the repossession, you still owe money pursuant to the loan, the lender may go after you for the money, or it may choose to charge off the remaining balance. Here's how it all works.

Auto Repossessions

Almost always, when you get a loan to purchase a car, the lender (whether it be the dealer or a bank), takes a security interest in the car. The security interest is meant to guarantee payment – if you default on the loan, the lender has the right to take the car back to cover the loan balance due and owing to it. The lender can take the car back without first suing you and winning a money judgment. The process of taking the car back is called repossession.

This differs from what happens when you default on a loan that is not secured by your property. In the case of unsecured loans, the lender cannot just take your property. It must first go to court, win a money judgment, and then employ its various options for collecting the judgment.

The Auto Repossession Process

In most states, the lender can repossess the vehicle if you default on the loan. Usually, "default" means missing just one car payment. In some states, the lender must send you a notice of default and give you the opportunity to make up the payments before it repossesses. In other states, no notice is necessary before repossession.

State law varies as to what is legal when it comes to grabbing your car. For the most part, the lender (or the repossession company it hires) cannot breach the peace during the process. But in many states it is allowed to hotwire the car, make a duplicate key, or even take it from an open garage or carport.

The Right to Reinstate the Contract

Most states give car owners a short period of time in which they may "reinstate" the contract and get their car back. To do this, you must make up the past due payments, interest, and penalties as well as cover the repossession and storage costs incurred by the lender. The right to reinstate may not be available in every situation, however.

The Right to Redemption

All states allow you to get your car back by redeeming the contract within a certain period of time after the repossession. To redeem the contract, you pay off the entire car loan, along with repossession and storage costs. Most people don't have the cash on hand to do this.

Deficiency Balances After the Car Is Sold

If you don't reinstate or redeem the car by the deadline, the lender will sell the car. If the sale proceeds don't cover the amount you owe to the lender, plus costs of repossession, storage, and sale, you may be liable for the balance, called the deficiency. With car repossessions, there is almost always a deficiency.

The lender can then try to collect the deficiency balance from you. So expect collection calls and letters.

Auto Loan Charge Offs

Sometimes the lender decides for accounting purposes that the loan is uncollectible. It might "charge off" the loan -- meaning it claims the uncollected loan as a business loss. The lender can still sell the uncollected loan to a collection agency, however.

To learn more, check out our section on Your Car in Bankruptcy.

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