The Differences Between a Charge Off and Repossession in Bankruptcy

A charge off and a repossession are two very different things—although both could happen to one debt. In this article, you’ll learn what each term means as well as how the bankruptcy court handles these events in Chapter 7 and Chapter 13 bankruptcy.

What Is a Charge Off?

Most people come across the term “charge off” after reviewing a credit report. Because it’s associated with an unpaid debt, many assume that charged off means that the debt is no longer collectible and that you no longer owe the money. It’s not the case.

A notation of a charge off indicates that the lender is no longer showing the account as a bad debt on the bottom line. Instead, the lender has transferred or sold the debt to a collection agency. In turn, the collection agency either collects the debt for the lender or, if the collection agency purchased the debt, collects it for its own benefit. Either way, a charge off is merely an accounting term, and you still owe the debt.

As an aside, the Federal Reserve requires a lender to charge off a credit card debt when it is 180 days late. A car loan or installment loan must be charged off when it is 120 days late.

Charge Offs in Bankruptcy

When you file for bankruptcy, you agree to disclose your entire financial situation in exchange for the benefits provided by the chapter that you file. (Find out which bankruptcy will be better for you in What Is the Difference Between Chapter 7 and Chapter 13 Bankruptcy?)

You must list all debts when you fill out your bankruptcy paperwork—including charged off accounts. If you don’t list it, you risk the debt not being discharged.

Most charge offs occur with unsecured debt, like a credit card balance, medical bill, or personal loan. If you file for Chapter 7 bankruptcy, you can expect the court to discharge (wipe out) the debt within three to four months (the average time it takes for a Chapter 7 case to end). In a Chapter 13 bankruptcy, you’ll pay any discretionary income—the amount remaining after paying allowed monthly expenses—to your unsecured creditors over the course of your Chapter 13 bankruptcy payment plan. All unsecured debts get discharged when you complete your plan.

If the charge off is a secured debt—such as a car loan or mortgage—then you’ve likely already lost the collateral—the house or the car—through repossession (see below) or foreclosure. In that case, you’ll list the account as an unsecured debt in your bankruptcy paperwork.

If a debt has been charged off but you still have the collateral, and you’d like to keep it, you should speak with a bankruptcy attorney as soon as possible.

(Do you want to keep a car in bankruptcy? Find out how in Can You File Bankruptcy on a Car Loan and Keep the Car?)

What Is a Repossession?

A repossession occurs when a creditor takes possession of the collateral—usually a car—that you put up when taking out a loan. Here’s how it works.

Before a lender agrees to lend you money for a car purchase, you must agree to guarantee payment of the loan with the vehicle. The contract creates a lien in favor of the lender. The lien allows the lender to take the car, sell it, and apply the sales proceeds to the loan if you default on your payment. If the auction price isn’t enough to pay off the loan, you’ll still owe the remainder called a “deficiency balance.” (The lender releases the lien on the car after you pay the loan balance.)

If you lose the car, most state laws will give you some time to get the car back. The process is called “reinstating the loan.” Reinstatement requires you to pay any past-due amount, as well as the lender’s costs for the repossession.

Repossessions can occur with property other than cars as well. Furniture, jewelry and other personal property pledged to secure a loan can be repossessed, as long as the lender follows the state laws.

A foreclosure is similar to a repossession other than it involves a mortgage, and the collateral is the real estate purchased, such as a house or commercial building. Foreclosure laws differ by state.

Repossessions in Bankruptcy

In Chapter 13 bankruptcy, it’s possible to reinstate a loan through your three to five-year repayment plan so that you can keep the collateral. In fact, this is one of the key benefits of a Chapter 13 bankruptcy case. Not only will it stop a repossession (or a foreclosure) in its tracks, but you can spread out your payment arrearages over the repayment plan rather than paying the entire overdue amount up front. You’ll have to continue paying your monthly payments, too, but by the end of the payment plan, you’ll own the car free and clear. If you don’t want to keep the car, the balanced owed will get discharged with other qualifying debt at the end of your plan.

(For more information, read What Bankruptcy Can and Cannot Do.)

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