What Happens When a Financial Company Discharges Your Car Loan?

Banks, credit unions and other financial institutions offering automobile loans usually order repossession of the vehicle after the borrower falls more than two months behind. Eventually the lender lists the account as charged-off, a term that some borrowers may confuse with a discharge. A charge-off does not relieve the borrower of responsibility for the car loan, even after the lender repossesses the vehicle and sells it at auction.

Process

Some people who realize they cannot afford their automobiles arrange for a voluntary repossession. They contact the lender, explain their financial situation and make arrangements to turn the car over to the lender. Other people continue driving the car after defaulting on the loan, forcing the lender to dispatch a repossession agent--usually a tow truck driver--to retrieve the vehicle. The lender then sells the car at a private sale or auction.

Pitfalls

Repossession results in a negative entry on your credit report and also can lead to financial problems. After selling the car, the lender subtracts the proceeds from the balance remaining on the loan. Often the sales price is not enough to pay off the loan, resulting in a deficiency balance. The former car owner is responsible for paying the balance, and faces a possible civil lawsuit if the debt remains unpaid. A successful lawsuit by the lender results in a deficiency judgment signed by a judge.

Considerations

Deficiency judgments can lead to bank or wage garnishment and could force the borrower into bankruptcy in some instances. Garnishment allows the lender to freeze the borrower's bank account through the court order. Banks must to comply and will not notify the account holder in advance of the garnishment. After garnishment, the account holder can access the account only to deposit money. The bank blocks all other functions, including cashing of checks and use of a debit card for purchases.

Alternative

Car owners facing repossession should work closely with the lender for a solution that avoids the filing of a lawsuit or garnishment. A deficiency balance is an unsecured debt, making it eligible for debt settlement. During debt settlement, the borrower makes an offer to pay the debt for less than the full balance. The negotiations are completely voluntary on both sides but can lead to an agreement that could include the option of paying in installments.