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. 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. 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 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.
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.
Technically, as soon as a credit account is delinquent, the lender can take action to repossess the property tied to the loan. In the case of a car loan, if you miss a payment, the bank could repossess the vehicle without notice. They can go on to your property to reclaim it as long as they don’t “breach the peace,” meaning use threats of force. Typically, the lender contracts with a third-party company to retrieve the property, such as a towing service that specializes in auto repossessions.
Sanitizing cars adds at least $20.53 to the cost of repossession, according to the American Recovery Association. Those costs are passed onto the consumer. The ARA said most of the 260 repossession companies it represents add a $50 cleaning charge on top of their usual fees.
Lenders do not need a court order to start the repossession process. They can shift into gear as soon as you miss a payment. They don’t want to – repossessing a car typically nets the lender only 30% of the loan value – but if you are late or missing payments, this is their best recourse. Once the property is seized, it is difficult, if not impossible, for the borrower to reverse the situation. The lender charges off the account and may go to court to pursue the borrower for any leftover amounts due, also called the “deficiency.”
Keeping Your Property
It is in the best interests of all parties for a borrower to take immediate action to cure a loan default before repossession occurs. The primary way to avoid repossession is to contact the lender before you miss a payment and ask them to negotiate a settlement that makes the account current. Talk to a representative from the bank or credit union where you received the loan. Offer them a reasonable proposal that tells them when you will make the next payment and when you expect to be completely back on track.
In most cases the lender would rather come to a payment arrangement than take back the property, which probably will be worth much less than the loan balance and require additional expenses before the creditor can sell it profitably on the open market.
Another way to avoid repossession would be to find a debt consolidation loan at a lower interest rate that what you currently pay on the car loan; ask a family member or friend to give you a personal loan or co-sign a loan for you.
The problem is you might have to get in line for someone to bail you out. Total auto debt in the U.S. was $1.37 trillion in 2021, according to Experian. That was a 6% increase from 2019.
If your financial situation has become drastic, you could save your car from repossession with bankruptcy. It may sound counterintuitive, but there are options to keep your car after filing bankruptcy. With Chapter 13 bankruptcy, you can make the car part of the repayment plan you present the court. If you file for Chapter 7 bankruptcy, the creditor is prevented from repossessing the car, but could go to court and receive an order that permits repossession.
Repo Laws and Regulations
Laws and regulations on repossessions vary from state-to-state and sometimes from locality-to-locality so it is best to consult with an attorney in your area if you are involved in repossession.
For instance, a repo company usually cannot trespass on private property to retrieve a car, but in most cases, they may have limited privileges to take a car from a driveway. What they can’t do is enter your garage to repossess the car.
In some cases the borrower can save his or her car from being taken by calling the police promptly. Again, laws vary by state and locality, but the police are responsible for keeping the peace and may have grounds to intervene if repo teams break the law. Generally, local authorities cannot help the repo team; the situation is a private matter involving a lender and borrower and must be resolved in a court of law.
Buying Back the Car
If your car has been repossessed, there is a chance, in some states, that you could get it back if you “reinstate” your loan, meaning pay the past-due amount on your loan, plus whatever your lender’s repossession expenses were. There also are laws in some states that allow you to buy back the vehicle by paying the full amount owed. That doesn’t mean “catching up” on missed payments. That means paying past-due payments and the entire remaining debt. There also is the possibility that you could get the car back by making a successful bid at a “repo” car sale.
Can Debt Settlement or Consolidation Help?
If you’re in danger of having your property repossessed, debt settlement or consolidation can help your situation. When you enter into a debt settlement plan, you or a company you hire negotiates with the lender on your behalf to pay off your balance. The settlement may involve lowering the amount that you owe on the loan. Another option is a consolidation loan, which bundles all of your debt into one loan so that you can make one manageable debt payment each month.
Remember that time is of the essence. You should consider contacting a debt specialist immediately if you’re concerned that repossession may happen or is already in process. Once completed, repossession is a bell that you cannot un-ring. You will lose a valuable possession and it remains a black mark on your credit history for seven years. The settlement may involve lowering the amount that you owe on the loan. Another option is a consolidation loan, which bundles all of your debt into one loan so that you can make one manageable debt payment each month. Remember that time is of the essence. You should consider contacting a debt specialist immediately if you’re concerned that repossession may happen or is already in process. Once completed, repossession is a bell that you cannot un-ring. You will lose a valuable possession and it remains a black mark on your credit history for seven years.
What Is A Charged-Off Car Loan In Bankruptcy?
Many people believe that once a loan appears as “charged off” on a credit report, they’re no longer responsible for the debt. This isn’t the case. When you stop paying on your car loan, the lender has a limited amount of time to take the loan off of the books by transferring or selling your loan. Despite the transfer, you remain responsible for paying the balance to whomever currently owns the debt.
It’s important to list all charged-off loans in your bankruptcy paperwork so that you can obtain a discharge of the debt. You’ll characterize it as either a secured or an unsecured debt, depending on whether the car has been sold at auction.
Secured and Unsecured Debt
Most car loans are secured. A borrower agrees to secure a loan by pledging property that the lender can take back if the borrower fails to pay according to the contract terms. Doing so gives the lender a lien that allows the lender to repossess the vehicle, if necessary. If you have a charged-off vehicle loan, but you still have possession of the car (or title is still in your name because the lender hasn’t sold it yet), then the loan balance is a secured debt. You’ll characterize it that way when you fill out your bankruptcy forms.
If the lender has sold the car (and the title isn’t in your name), then the loan balance is an unsecured debt.
It’s not secured by the collateral any longer. In most states, a lender has the right to collect a deficiency balance—the difference between what you owe and the proceeds from the vehicle auction. You’ll list the deficiency balance as an unsecured debt.
Secured Debts In Bankruptcy
In a Chapter 7 bankruptcy, if the car loan is still secured, then you’ll decide whether you want to keep the car or give it back to the creditor. If you keep it, you’ll either reaffirm the car loan (agree to keep making payments) or redeem the car (pay the value of the car in a lump sum). Here’s the tricky part: You usually can’t reaffirm a debt that is not current, and by definition, a charged-off debt isn’t current. So reaffirmation is a rare option. It’s more likely that you’ll either redeem or surrender the car. Redemption works well if the car’s value exceeds what you owe, it’s in decent condition, and you can pay the car’s value in one lump sum payment. If you redeem the car, you would then own it free and clear after your bankruptcy case. If you surrender the car, the creditor will take it back, sell it, and apply the sales proceeds to the loan. Any amount left owing gets discharged.
Chapter 13 Bankruptcy
In a Chapter 13 case, you can pay the loan back over the life of the plan and keep the car, even if the debt has been charged off. A Chapter 13 can also help you get a car back that has been repossessed by the creditor. You’ll likely have to pay the full amount that is owed on the car if you bought it less than two and a half years before your bankruptcy filing date. Otherwise, you might be able to cram down the loan and pay only what the car is worth. You can also surrender a car in Chapter 13. In that case, the lender will sell the car and apply the proceeds to the loan. Any unsecured leftover balance will receive a pro rata share (split among the unsecured creditors) of your discretionary income over the life of the plan.
Unsecured Debts in Bankruptcy
In a Chapter 7 bankruptcy, almost all unsecured debts get discharged so you’ll no longer owe them after your case is over—including an unsecured charged-off vehicle loan. In a Chapter 13 bankruptcy, unsecured debts usually receive a portion of the balance paid out over the life of the plan. At the end of the case, you’ll receive a discharge of any remaining amount owed.
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