Options to Avoid Car Repossession

If you default on your car loan, the car lender may repossess your vehicle and then go after you for the deficiency. If you want to avoid repossession or a deficiency, read on.

This article discusses some options for keeping the car, resolving the debt, or protecting yourself against a deficiency judgment. Not every option is right for you, even if it seems like the right choice, so explore each carefully.

Make Up the Late Payments

Just because you're late on a payment doesn't automatically mean you're in default. Some agreements state that you're in default if you're one day late with the payment. Other agreements might say you're not in default unless you're 30 days late or more. Even if you are late, the loan might not be in default until the creditor tells you it is, usually in writing.

If you're not yet in default according to your loan documents, you can head off a repossession by bringing the loan current. Read your loan agreement carefully. When you make up the late payments, include all applicable late fees and charges. If you don't, you might be in default because you didn't make the payments in the entire correct amount.

If you're habitually late with payments, you might be putting yourself at risk. On the one hand, if the creditor consistently accepts payments, it might have legally waived its rights to declare a default. On the other hand, relying upon the creditor's acceptance of future late payments is never a good idea because it might change its mind.

Reinstate the Loan

You might have the right to reinstate the loan even if you're in default. If you reinstate the loan, you can prevent a repossession or get the car back if the car was already repossessed.

With reinstatement, you bring the loan current by making up all past-due payments, including applicable fees and late charges, in one lump sum. This process is also called the "right to cure the default." Not everyone has the right to reinstate, though. Some state laws provide the right to reinstate your car loan. Even if your state doesn't provide for this right, your loan agreement might specifically state that it allows reinstatement.

You only get one bite at the apple in many instances where reinstatement is allowed. If you default again, you might no longer be able to reinstate the loan.

Redeem the Car

After repossession, you usually have a right of redemption. You can get the car back if you pay the outstanding balance due on the car loan. The redemption amount, or "payoff," often includes not just the outstanding principal and interest on the loan but also repo fees, storage costs, and perhaps even attorneys' fees. You don't have a lot of time to redeem the car. Your right of redemption ends when the car is sold.

Cons. Redemption isn't always realistic. If you couldn't afford the installment payments, you probably can't pay the loan off either. Also, redemption might not be in your best interest if the payoff exceeds the car is worth.

Pros. On the other hand, if the loan balance is relatively small, or if the payoff is less than what the car is worth so that you have significant equity in the car, you might be better off redeeming the car. This is especially true if the car would have been sold for less than what you could sell it for elsewhere.

Negotiate With the Creditor

Sometimes, you can approach the creditor and negotiate an alternative way to get the car back or reduce or eliminate the debt. Some options include:

Sell the Car Yourself

Typically, a creditor will sell the car at a public auction or a private dealer sale, which doesn't always realize the maximum value of the car. If you can sell the car to a buyer willing to offer more than what the creditor is likely to obtain at a dealer's sale or auction, this might be the best route. A creditor could be agreeable to this option because it saves on resale costs, such as advertising and storage fees.

This option can be challenging to exercise, as you only have a limited time to do so. The buyer must have the cash or financing readily available. More importantly, you need the creditor's cooperation. The creditor can refuse to consent to the sale for the wrong reason, an arbitrary reason, or no reason at all. However, you might be able to use its refusal to cooperate as a basis for defending against any deficiency claim, especially if the creditor sold the car for less than what your private buyer was prepared to pay.

Surrender the Vehicle

You might consider surrendering the vehicle to the creditor if you're in default, habitually late on payments, or want to get out from under the car loan. Ideally, in exchange for your surrendering the car, the creditor will agree to waive or reduce the deficiency. The incentive for the creditor is the savings in time and money by not having to repossess the car itself.

You should surrender the car only after you have reached an agreement (in writing) that settles the deficiency. If you surrender the car without some waiver agreement with the creditor, it may still pursue you for the entire deficiency balance.

On the other hand, if the circumstances are such that the costs of repossession would be passed on to you anyway, then it might be better for you to surrender the car, even without an agreement with the creditor, to reduce your overall debt. Your financial circumstances will ultimately determine whether surrendering the vehicle is your best option.

Bring Your Complaints to the Bargaining Table

You don't have to wait for the creditor to sue you before trying to settle. If the creditor violated your rights concerning the repossession and sale of the property, you may informally use your defenses (and potential counterclaims) to persuade the creditor to give the car back, reinstate the loan, redeem the vehicle, or forgive or reduce the amount of the deficiency balance.

Refinance the Car Loan

The creditor (or you) may offer to refinance the loan, usually for a longer term. Or you may find another lender willing to extend you credit to refinance this loan.

While this option is tempting, especially if the new installment payments are lower than the original payments, it might not be in your best interest in the long run. Some things to consider in refinancing the car loan include:

• Finance charges: Is the interest rate lower than the original loan?
• Value depreciation: Cars depreciate, usually rapidly. Is it worth refinancing a loan for another three to five years if the car is already, for example, four or five years old?
• Will you have to make an upfront payment on the new loan?
• What are the other costs of the refinance: penalties, fees, costs?

Bankruptcy

It might make sense for some people to file for bankruptcy because of their overall financial circumstances. Bankruptcy will stop, at least temporarily:

• repossessions
• collection actions on the deficiency balance
• deficiency judgment lawsuits, and
• bank attachments or wage garnishments arising from deficiency judgments.

Generally, the two types of consumer bankruptcy petitions you may file are Chapter 7 and Chapter 13 bankruptcy. Which bankruptcy you file has a different impact on your car loan. While bankruptcy under either chapter will protect you from collection on the deficiency balance, neither bankruptcy will allow you to keep the car without some provision for payment. To learn more, see My car was repossessed. Can Chapter 7 help? and Car Repossession and Chapter 13 Bankruptcy.