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If you have an auto loan that you’ve fallen behind on, the lender may eventually decide to charge off the loan. A charge-off means the lender assumes you won’t repay the debt. Having a loan charged off does not mean you’re off the hook for repayment. And it doesn’t change the original terms of your loan.
In many cases, the lender may send the debt to a collection agency that will pursue repayment with you. Understand your responsibilities and what steps will happen before and after the car loan charge-off.
During a car loan charge-off, companies move an account, such as an auto loan, from their asset column to a liability for accounting purposes. Often lenders take this step after unsuccessfully trying to collect on a debt for an extended period. For record-keeping purposes, the lender is declaring the debt uncollectible.
Auto loans generally must be charged off after 120 days of nonpayment. An auto loan may be charged off in as little as 60 days if the lender is notified that the borrower has filed for bankruptcy.
When companies or lenders charge off a debt, they can write it off for tax purposes. However, you still owe the money and nothing about the terms of the loan changes as a result of a lender taking this step. You are still fully responsible for repaying the debt.
When a lender considers an auto loan debt uncollectible, it can choose to begin the charge-off process. Some of this process’s steps affect you, the borrower.
A car loan is typically secured by the vehicle bought with the loan. If you don’t make payments, the lender can repossess and sell the vehicle to cover the loss.
However, even when a lender charges off an auto loan, you may be able to continue driving the car — at least for a little while. In some states, lenders must issue a default notice and give you the opportunity to bring the loan current before repossession. In such cases, you can avoid repossession if you pay off the debt or make satisfactory payment arrangements. However, not all states have this requirement. In those states, your car could be repossessed anytime.
If you used an unsecured loan to buy the vehicle, the car doesn’t back the loan and cannot be repossessed by the lender. However, the lender could still sue you to recoup the losses of the unpaid loan. That could lead to eventual garnished wages or other consequences.
When your car loan has been charged off, there are several steps you can take. Remember that the car loan charge-off will remain on your credit report for seven years. It will affect your ability to get more car loans. Loan charge-offs may force you to seek bad-credit auto loans with higher interest rates, so resolve the debt directly if you can.
You can contact the lender or collections agency to ask if you can pay a flat amount to clear up the debt. This payment is known as a car loan settlement. The paid amount is often lower than the remaining balance. Settling a car loan will ding your credit score but may look better to future lenders than leaving the debt unresolved.
You might also try to negotiate loan terms that are more manageable for you. If you show you are willing to pay off the loan, the lender may be willing to work with you. For instance, the lender may agree to longer terms so the monthly payments are more manageable (though this will mean paying more interest over time).
You could also look into your state’s statute of limitations on debt collection. It will tell you how long the lender or a collection agency can continue to try and collect from you. The statute of limitations ranges between three to 10 years from the date of default, depending on where you live.
Be aware that continuing to skip payments will result in additional damage to your credit score.
If you’re facing financial difficulties, you may be considering filing for bankruptcy. All charged-off loans must be included when filing for bankruptcy. What happens next depends on the type of bankruptcy you pursue.
Options may include:
Can you refinance a car that has been charged off? If you’re having trouble paying off your auto loan, auto loan refinancing can mean more manageable payments. You can refinance your car after a charge-off if you act quickly and show the lender you are willing to work to pay off the loan.
Since the charge-off is likely already on your credit score, it might be harder to refinance, especially if you are looking for lower rates. You may need a co-signer for a refinance if your credit score dipped enough after the charge-off.
When a car loan is charged off, you’re still responsible for repaying the debt. You’ll likely have to deal with a third-party collection agency. Your car can be repossessed, or you could be sued for repayment. Charged-off accounts also damage your credit score.
If you are behind on auto loan payments, the first step is contacting the lender or collection agency to pay off the debt or negotiate manageable repayment terms. You may even seek a car loan settlement. If you’re being sued for repayment, you should likely contact an attorney.
Mia Taylor is a contributor to Bankrate and an award-winning journalist who has two decades of experience and worked as a staff reporter or contributor for some of the nation's leading newspapers and websites including The Atlanta Journal-Constitution, the San Diego Union-Tribune, TheStreet, MSN and Credit.com.
