How to Lose a Car, Not Your Credit Rating
Q: What are the rules when a bank repossesses your car? Do you still have to pay them what you owe and can they garnish your wages for payment? I have a friend who has just turned her life over to Christ and over the years she has made many, many bad decisions, and her financial situation is overwhelming.
A: I share your concerns for your friend. Unfortunately, she has placed herself in a lose-lose situation. She is vulnerable to lose the car and have to continue paying off the debt! Here are the laws she needs to know:
The Federal Trade Commission has some of the best information for understanding the rights of the loan holder as well as your own. The creditor – the one you are making payments to – has rights over the car, can sell your debt to someone who may deal with you harshly, and can often repossess the car (depending on what state you are in) after only one missed payment. The laws for repossession vary state by state, and you can find out about your specific location through the state attorney general’s office.
According to the FTC:
“Once you are in default, the laws of most states permit the creditor to repossess your car at any time, without notice, and to come onto your property to do so. But when seizing the vehicle, your creditor may not commit a ‘breach of the peace.’ In some states, that means using physical force, threats of force, or even removing your car from a closed garage without your permission. Should there be a breach of the peace in seizing your car, your creditor may be required to pay a penalty or to compensate you if any harm is done to you or your property.”
BUT THIS IS IMPORTANT: Just because they take the car does not mean you are debt free. A "deficiency judgment” could be assessed against you, defined as “the difference between what you owe on the contract (plus repossession and sale expenses) and what your creditor gets from the resale of your vehicle.” In some states, they have to tell you what happened to your car or when they are offering the car for sale again … but the car belongs to them and the debt belongs to you.
So if you bought a car for $10,000 and paid $5,000 before you ran into financial difficulty, the creditor can seize the car, charge you the cost of their time and a sales fee, and then still come after you if what they sell the car for is less than the $5,000 you still owe.
But redemption is not just a spiritual concept; it applies to car loans too.
The FTC notes that you may be able to “redeem” your car if the circumstances are right, by “paying the full amount you owe (usually, that includes your past due payments and the entire remaining debt), in addition to the expenses connected with the repossession, like storage, preparation for sale, and attorney fees. Or you could try to buy back the vehicle by bidding on it at the repossession sale. Some states have consumer protection laws that allow you to ‘reinstate’ your loan. This means you can reclaim your car by paying the amount you are behind on your loan, together with your creditor’s repossession expenses. Of course, if you reclaim your car, your future payments must be made on time, and you must meet the terms of your reinstated contract to avoid another repossession.”
What I hope is clear from all of this information is that it will cost you time, money, credit and legal troubles to default on a car loan, making it best to get rid of a costly car BEFORE the troubles hit. At Crown, we have an overview of different types of loans and how to make good choices as well as a free car loan calculator so you can see how soon you can get free of car debt. Sadly, having a car repossessed is something that is avoidable, if you’re paying attention to life’s details. Proverbs 22:3 says, “The prudent sees the evil and hides himself, but the naïve go on, and are punished for it.” So let’s talk about the best way to avoid the most severe punishments.
When struggling to cover a car payment, the best first step is to work with the loan company that has a vested interest in getting their money without the hassle of repossessing your car. And if you cannot make your payments and a reduced schedule will not help you, it is best if YOU sell the car, resolve the debt, and pick up a cheap option until your circumstances change.
Things have really gotten out of hand once legal remedies are put in place to take your car.
For those struggling with finances, begin by building a functional budget, so that you understand how money flows in and out. But to untangle some of these complicated debt situations, Crown also works with trusted partners, like those at Christian Credit Counselors, who can help you navigate the nuances of different contracts, like a car loan.
Your friend is not the first person to run into problems with a debt, but there are a lot of people – you included – standing by to help her get back on her feet and able to make good financial choices.
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