What to Do When Your Car Is Repossessed & the Company Won't Give You a Settlement?

Automobile repossession is a serious issue and, in extreme cases, can lead to bankruptcy. A company or lender that will not offer a settlement on auto repossession may be preparing to resolve the issue by filing a civil lawsuit, if necessary. A lawsuit allows the lender to win a judgment for the full balance on the loan after the repossession.

Process

Lenders sell cars at auction or private sale after repossession. Repossession usually occurs after the owner falls two or three payments behind. The repossession takes longer if the owner hides the car or tries to avoid repossession. Some people who know they cannot afford the car payments make arrangements for a voluntary repossession. The lender agrees to a date and time for the debtor to return the car during voluntary repossession.

Loan Balance

Money from the sale of the car isn't always enough to pay off the balance on the loan. Cars depreciate so rapidly that it is common for the balance on the loan to exceed the car's value. For example, the lender may sell the car for $7,000, but the balance on the loan is $10,000. That leaves a $3,000 gap the former owner of the car must pay if the lender pursues the remaining balance.

Deficiency Judgment

The lender can consider settling the remaining balance -- or file a lawsuit for the entire amount. Debt settlement allows a debtor to pay off a debt for less than the full amount owed. However, the lender is not required to agree to a settlement, and he can take a hard stance by indicating a willingness to sue for the entire amount. A court victory by the lender results in a so-called "deficiency judgment" that requires the former owner of the car to pay the full amount. If the debtor does not pay, the lender can seek garnishment of the debtor's bank account or wages.

Alternatives

There are few options for a debtor whose lender will not settle. The possibility of a judgment and garnishment gives the lender complete leverage. One option for the debtor is to file for bankruptcy. A deficiency judgment is an unsecured debt and typically is wiped out in just a few months during Chapter 7 bankruptcy. Chapter 13, another form of bankruptcy, is also an option, but it requires a payment plan lasting three to five years. A debtor must list all debts in bankruptcy, not just the deficiency judgment. Usually only people with low incomes qualify for Chapter 7 because of income limits set by states. People who want to avoid bankruptcy following repossession should try to negotiate an agreement to pay the full balance in installments, or borrow money from another source to pay the debt.