If you’ve stopped making your car payments, and your mailbox is filling up with late notices from the lender, you probably don’t know what to expect and are worried about the consequences. Fortunately, you have options. In this article, you’ll find out about the steps your lender can take to pay off your debt, as well as about strategies that will help you keep your car.
When you miss a scheduled payment, you default on—or break—the contract. Some states allow you to fix the default through a process known as the “right of redemption.” This right allows you to redeem your loan by paying all that you owe in a single lump-sum payment. Most states require car lenders to send you your balance, along with instructions explaining how to make the redemption payment. Also, you can call the bank and ask for the payoff amount directly. Once you redeem your loan, you’ll resume making your monthly payments.
For many, however, it’s not as easy as it might seem because by the time you have missed several payments, it’s likely that you’ll have incurred late fees, interest and other charges. So bringing your loan current will mean paying more than just a few missed payments—you’ll have to pay the additional fees, too.
The lender doesn’t have to wait for you to get caught up on your payment. If you fall behind and can’t redeem the loan, it can repossess the car (take it back) after the first missed payment and sell it at auction (more about the repossession sale below). Here’s how it works.
The lender will send someone out to tow your car to a storage facility. Towing can take place, however, only if your vehicle is in an easily accessible location, such as a street or parking lot. A tow requiring a more intrusive procedure isn’t allowed if it will result in a “breach of the peace.” Actions falling within this category would likely include:
While you could keep your car in a locked garage or park it at an unlikely location, this isn’t a good long-term strategy. You’ll still have to deal with the defaulted loan, and worse yet, you don’t want to be accused of attempting to defraud a creditor. Plus, it’s uncomfortable living with the idea that your car might disappear at any moment.
You’ll likely be able to redeem the vehicle after repossession. However, the longer you wait, the more it will cost you because the repossession fees and storage costs will increase the balance you owe. Also, be aware that you’ll likely have a short time to do so. If you find yourself in this position, you should act quickly and consult an attorney, if necessary.
The lender will sell the vehicle at a public sale once it’s in its possession. In most states, the lender must tell you when and where the sale will take place. Additionally, the sale must be “commercially reasonable, ” which means that the bank must sell it for a price close to what the car is worth—not for pennies on the dollar.
The bank will apply the sales proceeds to your loan. If the vehicle sells for less than what you owe, the remaining balance is called a “deficiency.” You’ll still owe this deficiency amount even though you don’t have the car, and the bank can take steps to collect it from you. (Find out about the debt collection process in Delinquent Debt: What to Expect in Debt Collection.)
If repossession is inevitable, but you don’t want to be taken by surprise, you can give your car back to the lender in what’s known as a “voluntary repossession.” You ought to reach out to your bank beforehand, however, because the lender might agree to waive the deficiency. Why would the lender do this? Because the bank would save the money it would have spent repossessing your car. You could ask that the lender forgo putting a repossession on your credit report, as well.
If you want (or need) your vehicle, you might be able to hold on to it by filing for Chapter 13 bankruptcy. Understand, however, that you’ll need to have enough income to pay your living expenses, your monthly car payment, and make up any overdue amount over the course of a three- to five-year repayment plan. (For more information, read Secured Claims in Chapter 13 Bankruptcy: Can I Catch Up on My House or Car Payment?)
If you’ve already lost the car but are stuck with a deficiency balance, filing for Chapter 7 bankruptcy will discharge it (wipe it out). Other debts, such as credit card balances and medical bills, will be discharged, as well.
If you’re not sure what’s best for your situation, you should consult with a local bankruptcy attorney.
