If you have fallen behind on your auto loan, it’s important to understand how car repossession laws may help. After all, having your car repossessed could be disastrous to your finances, especially if you need your vehicle to get to and from your job.
The number of consumers who were late paying their auto loans rose during the 3rd quarter of this year, which means that a growing number of them are at risk for the loss of their wheels.
Although most lenders won’t initiate repossession until a consumer has missed three payments in a row, depending on the terms of your loan agreement, your auto lender may have the right to take your car back once you’ve missed just one or two payments.
Car repossession laws are a matter of state law. And in most states auto lenders are not obligated to give you any advance notice that your car is about to be repossessed (a repossession notice). Therefore, if you’ve fallen behind on your car loan you may walk out the door of your home on your way one morning and discover that your car is no longer in the driveway or you may leave work at the end of the day and find that your car is not in the parking lot.
After your car has been repossessed, your auto lender will probably sell it in a public auction. You will be notified about when and where the auction will take place so that you can buy back your car. However you’ll have to pay for it with cash.
Warning! You May Still Owe Even After Your Truck or Car Has Been Repo'd
Once you car has been sold, the lender will apply the sale proceeds to the balance due on your car loan. If the proceeds are not enough to wipe out the balance due and to reimburse the lender for the costs it incurred taking your car back, storing it and auctioning it off, you’ll likely be expected to pay that money. It's called a "deficiency" and is legal under most state truck and car repossession laws.
If you can’t pay the deficiency, your auto lender may turn your account over to a debt collector or it may even sue you for the money assuming that the amount due is substantial enough and that the lender believes that it has a good chance of collecting on the court’s judgment should it win its lawsuit against you.
If your auto lender decides not to go after you for the money, your troubles may still not be over however. That’s because the IRS may expect you to pay taxes on the amount that you owed but was forgiven by the lender. However, the agency may agree not to treat this money as income if you can prove to it that you were insolvent -- broke -- at the time that your debt was forgiven. If you need help making this argument to the IRS, get in touch with a tax CPA or tax attorney.
For more information about auto repossessions including what the “repo man” auto can and can’t do to take back your car and what you should do if your car is repossessed with some of your personal items in it, purchase a copy of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights.