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 and/or a deficiency, read on. This articles discusses some options to keep the car, resolve the debt, or protect yourself against a deficiency judgment. Not every option is right for you, even if it seems like the right choice at the moment, so explore each one carefully.
Just because you are late on a payment does not automatically mean you are in default. Some agreements may state that you are in default if you are one day late with the payment. Other agreements may state that you are not in default unless you are 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. (To learn more about when creditors can take your property if you default on a secured debt, see Repossession: When Can a Creditor Take Your Property?)
If you are 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 do make up the late payments, make sure to include all applicable late fees and charges. If you do not, then you might be in default because you didn't make the payments in the entire, correct amount.
If you are habitually late with payments, you might be putting yourself at risk. On one hand, if the creditor consistently accepts payments, it might have legally waived its rights to declare a default. On the other hand, it is never a good idea to rely upon the creditor's acceptance of future late payments because it may change its mind.
Even if you are in default, you might have the right to reinstate the loan. If you reinstate the loan, you can prevent a repossession or, if the car was already repossessed, get the car back.
With reinstatement, you bring the loan current by making up all of the past due payments, including applicable fees and late charges, in one lump sum. This is also called the right to cure the default. Not everyone has the right to reinstate, however. 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.
In many instances where reinstatement is allowed, you only get one bite at the apple. If you default again, you may no longer have the option of reinstating the loan. (Learn more about reinstating your car loan.)
After repossession, you usually have a right of redemption. This means that if you pay the entire outstanding balance due on the car loan, you can get the car back. 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 attorney 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 is not always realistic. If you could not afford to make the installment payments, then you probably can't pay the loan off either. Also, redemption might not be in your best interest if the payoff is more than what the car is worth.
Pros. On the other hand, if the balance of the loan 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. (Learn more about redeeming your car.)
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:
Typically, a creditor will sell the car at a public auction or a private dealer sale, which don'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 may be the route to go. A creditor may be agreeable to this option because it saves on resale costs, such as advertising and storage fees.
This can be a difficult option 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 may 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.
If you are in default, habitually late on payments, or simply wish to get out from under the car loan, you may consider surrendering the vehicle to the creditor. 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 sort of waiver agreement with the creditor, then it may still pursue you for the entire deficiency balance. (Learn more about deficiencies after a car repossession in Will I Owe Money If My Leased Car Is Repossessed?)
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, as a way of reducing your overall debt. Your personal, financial circumstances will ultimately determine whether surrendering the vehicle is in your best option.
You don't have to wait for the creditor to sue you before trying to settle. If the creditor violated your rights with respect to 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. (To learn more about defenses in these cases, see Defenses to Car Repo Deficiency Lawsuits.)
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 is a tempting option, 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 it to refinance a loan for another three to five years if the car is already, say, 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?
For some people, it might make sense to file for bankruptcy because of their overall financial circumstances. Bankruptcy will stop, at least temporarily:
collection actions on the deficiency balance
deficiency judgment lawsuits, and
bank attachments or wage garnishments arising from deficiency judgments.
Generally, there are two types of consumer bankruptcy petitions you may file: Chapter 7 or 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.)