Vehicle Repossession: Know Your Rights and Responsibilities
When you finance a car or truck, the lender holds certain rights on the property until you make your final loan payment. This means that if you default on the contract by missing payments or let the vehicle’s damage insurance lapse, the lender may have the right to repossess (claim) the vehicle. Therefore, if you are having financial trouble, contact your lender immediately. Don’t wait until you have missed a payment or two. Depending on the state you live in, the lender may not need a court order or give advance warning to repossess the vehicle. In some cases, a lender may repossess after just one missed payment.
Before the vehicle is repossessed
You may be able to afford the payments by decreasing your expenses or increasing your income. Review your spending plan carefully to see if there are any areas where you can cut back, or consider obtaining a second or part-time job to add to your income.
If you can’t make cash-flow changes that will enable you to afford the payments, you have a couple of options:
- You can contact your lender and ask for assistance.
- If you can get more than you owe on the loan, you may choose to sell the vehicle.
- You may give the vehicle back to the lender. This is called a voluntary repossession. Not only can it save you the repossession fee, the lender may also agree to waive the deficiency balance and not report it as a repossession on your credit report. (Get these promises in writing!)
- Filing for bankruptcy is a last resort option but it may not make sense to do it for just stopping a vehicle repossession.
Do not be afraid to contact your lender. In almost all cases, they don’t want the vehicle—they want you to repay the loan. The earlier you make this contact, the better. If you wait until after you have missed a payment, they may not give you a break.
Now that you’ve looked at your cash-flow and know what you have to work with, you can begin to negotiate. Explain your situation: whether it is temporary or permanent, and how much money you have (if any) to go toward the payment. Your options for resolution may include:
- Making no or reduced payments for a period of time. When that time frame is up, you either increase your future payments until you repay the balance due, or add the amount you owe to the loan and make extra payments at the end.
- If your credit rating is good and the value of your vehicle is greater than the loan balance, you may be able to refinance the loan with a better interest rate or longer term. For example, if you have two years left on your contract, you may be able to get a new loan where you have five years to repay–which will reduce the payment because of the longer time frame.
Neither of these options are guaranteed. When you took out the loan, you promised to make the payments as agreed. However, it does not hurt to ask, and if you have a long and positive relationship with your lender, you may very well be able to work out a deal.
After the vehicle is repossessed
If you are unable to make an arrangement with your lender and do not make your payments, eventually they can take the next step and hire someone to repossess the vehicle. Once that happens, you have the right to reinstate the contract by paying all past due installments, late fees, and costs the lender has incurred in repossessing and storing the property.
If you are unable to reinstate the contract, the lender will then sell the car at an auction. They will notify you of the auction date, and you may attend and bid on your vehicle. Whether you or someone else buys it, however, you will be responsible for the deficiency balance if the vehicle sells for less than the loan amount. A deficiency balance is the difference between the amount that you owed on the loan and the price the vehicle sold for at auction—plus repossession, storage, and auction costs.
This deficiency balance is an unsecured debt. Some lenders may sue for this sum, while others may forgive it. If the lender does forgive it, the IRS will consider that amount income, and will assess tax due.
Dealing with a vehicle payment problem quickly, knowledgably, and aggressively is very important. If you are having trouble making your payment, don’t wait until the “repossessor” is at your door. Contact your lender as soon as you can. If you need help with your spending plan so you can find a way to make your payments, contact BALANCE for a free coaching appointment.
Revised January 2016.