Avoid Car Repossession

If you have a car loan, then the car itself typically serves as security for the loan. This means that the car can be repossessed by the lender if you miss payments. In order to avoid car repossession, you should make all of your payments on time. However, if the lender repossesses the car, then you have other options for getting the car back. Because a car repossession stays on your credit report for seven years, you have a strong incentive to avoid repossession.

Steps

Making Missed Payments

1. Set up a payment system. In order to avoid going into default on the car loan, you should always make timely payments to the lender. Set up an automatic payment system if necessary so that you don’t miss any payments.
2. Tighten your budget. You should make it a priority to pay secured debts, like a car loan, before paying unsecured debts, like credit card payments or medical bills. Since you probably need your car to get to work, you should make your car payment the most important bill after essentials like rent and food.
   • Go through your monthly expenses and see where you can cut. You should be able to get rid of entertainment expenses (like movies or Netflix) as well as money spent at restaurants and bars.
   • If you don’t know how to make a budget, then you could contact credit counseling. Credit counselors can help you create a realistic budget. You can find credit counseling agencies by visiting the Department of Justice’s website, which maintains a directory of approved credit counseling agencies.
   • Also see Create a Household Budget for sample documents and helpful tips.
3. Make up any missed payments. You don’t necessarily enter “default” simply because you missed a payment. You should read your loan agreement, which will define default. Typically, you are not in default until the lender sends you a letter stating that your account is in default.
   • Accordingly, you should quickly make up any late payment before you enter default. As soon as possible, you should find the money to make the payment.
4. Calculate late fees. Although a late payment can keep you out of default, you may need to pay fees or late charges. Be sure to properly calculate these and tack them onto the monthly payment. If you don’t pay all of the fees, then you could still be in default.
   • If you can’t tell how much you owe, then call the lender and have them calculate the amount. Be sure to pay promptly.

Negotiating with the Lender

1. Call the lender. If you realize that you can’t make your payment, then you should call the bank and let them know. You should commit to being honest about your financial situation. Tell the person on the other end what you can afford and ask if the loan can be modified.
   • Sometimes you can refinance. A 60 month loan, for example, could be stretched out to 72 months. This would lower your monthly payments even though you would end up paying more over the life of the loan. Always get new contract terms in writing.
2. Do not hide the car. In some states it is illegal to hide a car to keep it from being repossessed. For this reason, you are better off calling the lender as soon as you know you will be late with a payment. If you can make full payment but at a later date, then let them know.
3. Decide if you can afford it. Maybe you splurged and bought a car that is too expensive for your budget. If so, then you will need to get rid of the car. However, if the car is in good condition and you think you can afford it, then you should prepare to negotiate with the lender.
   • You can ask for your loan to be modified. For example, you could extend the loan, or change the payment structure so that you will pay less now but make larger payments toward the end of the loan.
4. Ask if you can sell the car. If the lender won’t refinance or otherwise modify the loan, then you could ask whether you can sell the car yourself. By selling the car yourself, you can be assured that you will get the highest price possible. Typically, a lender will sell the car at auction and may settle for a lower price.
   • If you can sell the car yourself, then you might be able to avoid a deficiency. For example, if you owe $15,000 on the loan, you might be able to sell the car for $15,000, thus wiping out the money owed to the lender. If the lender sells the car itself, then it might settle for $11,000 at auction. You would be left with a $4,000 deficiency.
5. Surrender the car. Another option is simply to surrender the vehicle to the lender. Before doing this, though, you should try to negotiate something in return from the lender. Specifically, try to get the balance of the loan forgiven.
   • For example, if the lender repossesses a car and sells it for $10,000, it might leave you with a $5,000 deficiency. See if the lender will forgive the remainder of the loan.
   • If the lender agrees to forgive the balance of the loan, then get this agreement in writing.
6. Identify your defenses. You will have a stronger negotiating hand if you can identify illegal acts taken by the lender. Typically, you would raise these defenses at trial, when the lender tries to sue you for the remaining balance of the loan. However, you can also raise them during negotiations. By doing so, you alert the lender that a lawsuit could be very time-consuming.
   • For example, the lender may also have failed to give you written notice of your deficiency as required by the loan agreement. Read this agreement carefully and check if the lender followed the rules.
   • The lender might have miscalculated how much you owe. You should bring this to the lender’s attention. In court, a lender may be embarrassed to have to defend sloppy record keeping. To avoid that situation, the lender might be willing to negotiate with you.
   • Also, a lender must get a court order to repossess a car if you are in the military.
   • You can also note illegal acts taken by the repo man (if the car has already been repossessed). For example, if the repo man broke locks or damaged property in order to repossess the car, then he “breached the peace.” Take photographs of any damaged property to show the lender.

Reinstating the Loan

1. Read your loan agreement. You should check to see if the contract grants you the right to reinstate your loan. If so, then you can make your account current by paying all of the past due payments, including late fees and interest.
   • In some states, you are given an automatic right to reinstate the loan. To check if you have this right, then search “loan reinstatement” and your state.
   • In Illinois, for example, consumers who have paid at least 30% of the vehicle’s deferred payment price or the amount of payments due are eligible for reinstatement.
2. Contact the lender. If you want to reinstate the loan, then you should immediately contact the lender and check if this is an option. Your lender should have sent you a written notice explaining your right to reinstate. Nevertheless, the lender may have forgotten, so call and check.
   • If the lender agrees, then you will probably be given a limited amount of time to make the back payments, e.g., 15 days.
3. Think about redeeming the car. You can also do a “redemption.” This is similar to a reinstatement; however, instead of paying missed back payments, you instead pay off the entire loan.
   • You may not have the money to redeem the car. Nevertheless, a redemption (like reinstatement) might make sense if you are getting back a large income tax return or otherwise are soon coming into possession of a sum of money.

Filing for Bankruptcy

1. Understand the automatic stay. When you file for bankruptcy, you provide the court with a list of all creditors. These creditors are then sent a notice by the bankruptcy court telling them to stop all collection efforts. If the creditor continues collection, then it will face heavy fines. This notice is called the “automatic stay.”
   • You can stop a repossession by filing for bankruptcy. The automatic stay will then stop the lender from repossessing the vehicle.
   • Nevertheless, you should understand that once you emerge from bankruptcy the repossession can start up again unless you discharged the underlying car loan during the bankruptcy proceedings.
2. Meet with a lawyer. Filing for bankruptcy is a big step. It can have a far-reaching impact on your credit score and other areas of life. You should meet with a lawyer to discuss whether or not bankruptcy is a good option for you.
   • You can find a bankruptcy lawyer by visiting your state’s bar association, which should run a referral program.
   • You are strongly encouraged to use a lawyer to file for bankruptcy. People represented by lawyers have greater odds of completing bankrupt successfully than those who proceed without a lawyer.
3. Give your attorney a list of creditors. If you decide to go through with filing for bankruptcy, then you should give your attorney a list of creditors. Be sure that the lender is included in the list.
   • If, after filing, your car is repossessed, then tell your lawyer. You can bring suit against the lender for continuing collection efforts after the automatic stay has been issued.

Tips

• Even if you can’t avoid the repossession, know that the lender cannot keep personal possessions that you had stored inside the car. The lender should inform you of what personal objects are in the car and how you can retrieve them.

References

See also

• Apply for a Used Car Loan
• Redeem Your Repossessed Car
• Transfer a Car Lease
• Get Your Ex Off a Car Loan
• Get a Car Loan While in the Military
• Compare Car Loan Rates
• Buy a Car with Bad Credit
• Find Alternative Finances for Your Auto Loan
• Finance a Car
• Negotiate an Interest Rate on a Lease Buy Out Car Loan

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