What Happens When Your Car Is Repossessed?
Understand what happens when your car is repossessed. Learn about the process, your rights, and the financial implications.
Car repossession occurs when a lender takes back a vehicle because the borrower has not met the terms of their loan agreement.
Understanding the Repossession Process
Vehicle repossession typically begins when a borrower defaults on their auto loan agreement. This default often results from missed payments or other loan contract violations, such as failing to maintain required insurance. The specific number of missed payments that constitutes a default varies, with some contracts allowing repossession after just one missed payment, while others might wait for two or three.
Once a loan is in default, the lender has the right to repossess the vehicle without a court order in most states. Lenders commonly employ repossession agencies to retrieve the vehicle, often by towing it from a driveway, public street, or parking lot. Borrowers often receive no advance notice, as lenders are not required to warn about the time or location of repossession.
However, repossession agents are generally prohibited from “breaching the peace” during the process, meaning they cannot use physical force, threaten violence, or remove a vehicle from a closed garage without permission. Some vehicles may even have electronic disabling devices, or “kill switches,” installed by the lender, which can prevent the car from starting if payments are missed.
Consumer Protections and Notifications
After a vehicle is repossessed, consumers are afforded specific legal protections and notifications. The lender is typically required to send several written notices outlining key rights and deadlines.
One notice is the “notice of intent to sell,” informing you the lender plans to sell the vehicle. This notice specifies if the sale will be public (an auction) or private, and for public sales, includes the time, date, and location. It also explains your potential liability for any deficiency balance.
Notices also inform you of your “right of redemption.” This right allows you to reclaim your vehicle by paying the entire outstanding loan balance, plus associated repossession fees and costs. The notice details the amount required and the deadline, often a short timeframe.
Some states or loan agreements grant a “right of reinstatement.” This right allows you to get your vehicle back by paying only past-due loan payments, late fees, and reasonable repossession expenses, bringing the loan current. The notice specifies the amount needed and the deadline, which is also a limited period.
Pathways to Vehicle Recovery
After repossession, you can recover your vehicle by exercising your right of redemption or, if applicable, your right of reinstatement. Both options require prompt communication with your lender.
To exercise your right of redemption, contact your lender or the repossession company for the payoff amount. This includes the remaining loan balance, accrued interest, and all repossession fees like towing and storage. You must pay the full amount in a lump sum within the redemption period specified in the notice.
If your loan agreement or state law provides for a right of reinstatement, contact your lender immediately for a reinstatement quote. This quote details the total amount to bring your loan current, including missed payments, late fees, and repossession expenses. You must pay this amount within the short timeframe provided in the reinstatement notice.
Acting quickly is important, as deadlines for both redemption and reinstatement are typically very short, often expiring before the lender sells the vehicle. If you do not exercise these rights within the timeframe, the lender can sell the car. You may still bid on your vehicle if it is sold at a public auction.
Managing Post-Repossession Debt
Even after a vehicle is repossessed and sold, borrowers often find themselves still owing money to the lender, a situation referred to as a “deficiency balance.” This balance arises when the sale price of the repossessed vehicle does not cover the full amount owed on the loan, plus the costs associated with the repossession and sale. The lender will subtract the sale proceeds from your outstanding loan balance, and then add any expenses like towing, storage, and auction fees.
For example, if you owed $12,000 on your loan and the repossessed vehicle sold for $3,500, with repossession and sale fees totaling $150, your deficiency balance would be $8,650. Lenders will typically send a demand for payment of this deficiency balance after the sale. If you do not pay, the debt may be turned over to a collection agency, leading to collection calls and letters.
In many cases, if collection efforts are unsuccessful, the lender or debt collector may initiate a lawsuit to recover the deficiency balance. A judgment against you can lead to further collection actions, such as wage garnishment or bank account levies, depending on state laws. A repossession, including any resulting deficiency balance, can significantly impact your credit score.
The repossession itself, along with any late payments that led to it, will be reported to credit bureaus and typically remain on your credit report for up to seven years from the date of the first missed payment that led to the default. This negative mark can make it more challenging to obtain future loans, credit cards, or even housing. Addressing any deficiency balance, even through negotiation, can be a step toward mitigating the long-term financial impact.