If you fail to make your car payments or otherwise default on your loan, you risk having your car repossessed by your lender. Read on to learn more about how car repossessions work, how to avoid them, and what your options are if your car gets repossessed. When you finance or lease a car, you normally give the lender a security interest in the vehicle. Every state has its own rules regarding repossession, but having a security interest generally means your lender can repossess the car without notice if you default on the loan. Many things can constitute a default, but the most common reasons are not making timely loan payments or not having car insurance.
How Do Car Repossessions Work?
In most states, car lenders can seize your vehicle without prior notice if you’re in default. However, they can’t breach the peace while they do it. Breaching the peace usually means using or threatening to use physical force against you to take the car back. But it can also simply involve repossessing the car from your closed garage. If your lender commits a breach of the peace, you might be entitled to damages or use it to defend against a deficiency lawsuit.
What Will the Lender Do After Repossessing Your Car?
The lender can keep the car or sell it to satisfy your loan obligation. Each state has its own rules regarding sale procedures and notice requirements. However, you usually have a right to know when and where the sale will take place. Also, your lender must sell the car in a commercially reasonable manner. This generally means the lender has to follow standard sales practices, but it is not required to obtain the highest possible price. You might have a claim for damages or a defense against a deficiency if the sale wasn’t commercially reasonable.
Repossession is only one of the remedies available to your lender if you default on your loan. Having your car repossessed doesn’t get you off the hook for your obligation to pay the entire balance of the loan. If the proceeds from the sale of the vehicle aren’t enough to cover the balance of your loan, the remaining portion is called the deficiency balance. In most states, your lender can sue you to collect this deficiency.
However, there are defenses to a deficiency action. The most common defenses are:
• the lender breached the peace when repossessing the car
• the lender did not sell the car in a commercially reasonable manner, or
• the lender lost the right to sue by waiting too long and letting the “statute of limitations” run.
How Can You Get Your Car Back?
You might still be able to get your car back if the lender has not sold it yet. Below, we discuss some of the options available to you for getting your car back.
Redeem the Car
Redeeming essentially means buying back the vehicle. You can generally redeem your car if you pay the lender your entire loan balance, including all arrears and repossession costs. But most people usually don’t have the money required to redeem a car.
Reinstate the Loan
Some states allow you to reinstate your loan and get the car back if you can cure all of your arrears and pay for the repossession costs. After you reinstate, you must continue to make regular payments on the loan. (Learn more about the difference between redemption and reinstatement.)
Buy It Back at the Auction
If your lender sells the car at an auction, you can bid on the vehicle to try to buy it back. But even if you buy back the car, you’ll still remain liable for any resulting deficiency balance.
File for Bankruptcy
If you file for bankruptcy prior to the sale, the automatic stay will prohibit the lender from selling the car without obtaining court permission. Depending on the type of bankruptcy you file, this can buy you more time to gather the necessary money to get your car back or allow you to cure your arrears through the bankruptcy.
How Can You Avoid Getting Your Car Repossessed?
If you’re behind on your loan payments, the best thing to do is to communicate with your lender. Your lender might be able to offer you a solution such as a reduction in payment amount or interest rate that can help you catch up on your payments and avoid repossession.
Unfortunately, the repossession process does not cancel your obligation to make payments under the loan or lease agreement. Once they seize the vehicle, the lender can sell it or put it up for auction. The proceeds of the sale will be subtracted from any balance that you owe. Repossession costs, interest charges, and late payment fees will be added. This deficiency in realizations is now an unsecured debt which you still owe to your auto lender. The lender will also report the late payments on your credit report, which will impact your credit score going forward.
This note will remain as part of your credit history for up to seven years.
The only way to avoid repossession is to make payment arrangements with your lender. Any payment plan will require you to catch up on all of your payment arrears and repay any repossession fees and recovery costs they may have incurred. Filing bankruptcy will not stop repossession because your auto lender is a secured lender. Secured creditors are not prohibited by the automatic stay in bankruptcy or consumer proposal from enforcing their security rights.
However, if you are struggling with your car loan payments because of other unsecured debts like credit cards or high-cost financing loans, it may be possible to file an insolvency proceeding with a Licensed Insolvency Trustee to eliminate this debt, freeing up cash flow in your budget so you can afford to catch up and continue with your car loan or lease.
Walking away after repossession
If you decide to walk away from your car loan, or if your lender has already repossessed your vehicle, it is possible to file bankruptcy or a proposal to eliminate the unsecured deficiency. Car repossession does not have to lead to continued financial hardship.
Lenders can repossess a vehicle that is parked on private property, but state laws generally restrict them from “breaching the peace” while doing so. For example, repossession agents cannot damage your property to get access to a vehicle. They typically cannot destroy locks to get into your garage, nor can they use (or threaten to use) physical force when taking your car.
If your car is taken and sold, the lender needs to sell it for a “commercially reasonable” price. It doesn’t need to be the highest price possible, but the lender must make an effort to get fair market value out of the car. Why? The sales proceeds will go toward paying off your debt, so it would be unfair to repossess the vehicle and “give it away” to somebody else.
Things don’t necessarily end after repossession. If your lender sells your car, the sales proceeds go toward your loan balance. In many cases, the car sells for less than you owe, so your loan is still not paid off. The amount you owe after the vehicle sells is called a deficiency. In addition to your loan balance, you also have to pay for costs related to repossession. Charges can include expenses for sending a repossession agent, storing the vehicle, preparing the vehicle for sale, and more. Those costs are all added to your deficiency balance.
If you can’t pay the balance, expect your lender to send your account to a collection agency. At that point, you can negotiate a settlement, pay nothing, or set up a repayment plan. In some cases, your debt will be forgiven or charged off (possibly resulting in tax liability for forgiven debt).
Want to hit the “Reset” button? One option is to get current on your past-due payments and pay repossession costs, which will get your loan reinstated. You’ll get the car back, and you’ll be back in roughly the same position you were in before repossession (although your credit will still show the default). As long as you continue to meet the terms of your contract going forward, the car is yours.
How many car payments can you miss before repossession?
In many states, your lender has the right to repossess your car after you’ve missed only one payment. Many lenders will give you more time, though, and many states require detailed notice before your lender repossesses your car. If you think you’ll miss a payment, contact your lender before it happens.
How long does car repossession stay on your credit?
Repossession can stay on your credit report for seven years, beginning from the date of the first missed payment.
Can you get a car loan after repossession?
It’s possible to get a loan after your car has been repossessed, but it will be more difficult and you’ll likely pay higher interest rates. If you need a new loan before your credit has improved, consider asking someone with better credit to co-sign with you.
Required Notices in Car Repossessions
Notice Generally Isn’t Required Before Repossession.
Car loan agreements usually specify that the lender can repossess your car when you’re late making payments. Most states don’t require car loan lenders to give debtors any kind of notice before they repossess vehicles. And courts and law enforcement don’t normally monitor the repossession process as it’s happening. So, you might not even know when or where the car will be repossessed. But in at least one situation, you’ll get notice ahead of time. In a few others, the lender might be limited in when it can repossess your car.
• The loan agreement. Your loan agreement should spell out what happens if you fall behind on payments and how far behind you have to be before the lender can repossess the car. Many loan agreements let creditors repossess a car if you’re just a month late on payments. You might even be one payment away from paying off the loan, but the lender can still repossess if you’re late. Other agreements will give you more wiggle room with payments before a bank can declare you in default and repossess the car.
• Your past payment history. If the lender had a pattern of previously accepting late payments from you, then it might have waived its right to repossess if you were late again. You might not be able to stop the bank from repossessing the car immediately, but you can raise the creditor’s prior acceptance of late payments as a defense if that creditor sues you for a deficiency balance.
• You’re in the military. If you’re in the military, the creditor usually must get a court order before it can repossess your car. You should, in most cases, get notice of that legal process. Though, some exceptions exist.
Notwithstanding whether the lender was supposed to give you notice before it repossessed the car, it is still required to provide you with specific notices after the repossession.
Notices After Your Car Is Repossessed
In most states, the bank must notify you, in writing, of the following matters within a short time, usually five days after repossessing the car, but before it is sold or auctioned:
Notice of Default and Right of Redemption/Right of Reinstatement
The lender must provide you written notice of your right of redemption and (or) right of reinstatement. It must tell you:
• the amount of the outstanding balance of the loan, including all fees and charges
• the deadline to redeem the loan
• the method by which you can redeem or pay off the loan to get the vehicle back, and
• if your state allows for the right of reinstatement, the amount necessary to bring the loan current and the steps you need to take to reinstate that loan.
Notice of Sale
If you don’t reinstate the car loan or redeem the car, the lender is also required to send you written notice if it intends to sell the vehicle. This notice may be combined with the first notice discussed above.
Usually, the notice must contain the following information:
• if the car is being sold at a private sale, the date of the intended sale
• if the lender intends to sell the car at a public auction, it must notify you of the time, date, and location of the auction (which gives you the opportunity to bid on the property or bring your own bidders)
• an explanation of your liability if you owe a deficiency balance after the sale
• how you can get an explanation of how the proceeds of the sale are applied to your debt obligation
• how you can get an explanation of how the lender calculated your debt obligation,
If the car is sold, the lender must provide you with an accounting of how the sale proceeds were applied against your debt. Most states allow the lender to apply the sale proceeds as follows, in this order:
• reasonable costs and expenses of repossessing, storing, and disposing of the vehicle, along with reasonable attorneys’ fees (if the loan agreement allows them), and
• the balance of the loan.
If the sale amount doesn’t cover the loan balance and costs. If the amount of the sale isn’t sufficient to cover all of these items, then you owe what’s called a “deficiency balance.” The creditor must notify you of the amount of that deficiency. Typically, if you don’t pay the deficiency, the creditor may take further action, such as suing you for the balance.
If the sale results in a surplus: If the creditor recovers more than what you owed, the extra money is called a “surplus balance.” The creditor must give you an accounting of the surplus and pay it to you, subject to one exception: If you have a co-signor and the loan agreement gives the co-signor rights to the excess, the creditor must pay the surplus to the co-signor. But surpluses aren’t common in car repossession sales because a vehicle is typically worth much less than what’s owed on the loan contract.
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