If Your Car Is Charged Off, Can You Keep It?

A “charged-off” debt is an internal accounting classification used by financial institutions. It indicates a lender has deemed a debt unlikely to be collected and written it off as a loss on their financial statements. This action is primarily for bookkeeping purposes and does not mean the borrower’s obligation to repay the debt has been forgiven.

Understanding a Charged-Off Car Loan

A charged-off car loan occurs when a lender classifies the outstanding balance as an uncollectible loss. This typically happens after an extended period of delinquency, often when payments have been missed for 120 to 180 days. Regulatory guidelines, such as those from the Federal Deposit Insurance Corporation (FDIC), encourage lenders to charge off loans when they become severely past due. The charge-off is an internal accounting adjustment, moving the loan from an asset to a liability on the lender’s books. This allows the lender to account for the anticipated loss and potentially gain tax benefits from the write-off.

Implications for Car Possession

If a car loan is charged off, it does not automatically mean the borrower gets to keep the car. The vehicle typically serves as collateral for the loan, meaning the lender retains a security interest in it. This security interest gives the lender the legal right to repossess the vehicle if the borrower defaults on the loan terms.

A charge-off is an accounting decision, separate from the lender’s right to repossession. Repossession can occur either before or after a charge-off, depending on various factors, including the lender’s policies and state laws regarding default notices.

In most cases, lenders will repossess the car to mitigate their losses, especially when the loan is secured by the vehicle. However, in rare instances, particularly with unsecured personal loans used for car purchases, repossession might not be an immediate outcome, though such loans are uncommon for vehicle financing. Even if the vehicle is not immediately repossessed after a charge-off, the borrower cannot sell or trade it in because the lender still holds a lien on the title until the debt is fully satisfied.

Lender Actions and Debt Collection

After a car loan is charged off, the original lender or a third-party entity can take several actions to collect the outstanding debt. Repossession typically involves the lender or a hired company seizing the car, often without prior notice in many states.

Charged-off debts are frequently sold to third-party debt collection agencies or specialized debt buyers at a reduced price. These collection entities then assume the right to pursue the debt from the borrower. They may contact the borrower through various means, including phone calls and letters, to demand payment.

If collection efforts are unsuccessful, the lender or debt buyer can pursue legal action against the borrower to obtain a judgment for the outstanding balance. This can lead to consequences such as wage garnishment or liens on other property if a court judgment is obtained. This legal recourse can apply even after a repossession if there is a deficiency balance remaining.

Options for the Borrower

Borrowers facing a charged-off car loan have several avenues to address the outstanding debt. One approach is to negotiate with the original lender or the debt buyer for a settlement. This often involves paying a reduced lump sum, less than the full outstanding balance.

If the vehicle has been repossessed and sold, borrowers may still owe a “deficiency balance.” This is the difference between the amount owed on the loan and the proceeds from the car’s sale, plus any repossession and sale costs. Borrowers can attempt to negotiate a payment plan for this deficiency balance to avoid further legal action.

As a last resort for debt relief, bankruptcy can be a consideration. Filing for bankruptcy can potentially discharge charged-off debts, including car loans, depending on the type of bankruptcy and whether the borrower wishes to keep the vehicle. It is a serious financial step with long-term implications for credit.