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If you are having trouble making payments on an auto loan, the lender may decide to charge off the debt, which means they believe you won’t be able to pay it back. Even if a loan is charged off, you are still responsible for paying it back. And it doesn’t change the original terms of your loan.
In many instances, the lender may assign the debt to a collection company, which will work with you to seek payment. Recognize your duties and the procedures that must be followed both before and after the charge-off.
What an auto loan charge-off is
Companies change an account, such as an auto loan, from their asset column to a liability during a charge-off for accounting reasons. Lenders frequently take this action after making numerous unsuccessful attempts to collect a debt. For record-keeping purposes, the lender is declaring the debt uncollectible.
Generally, auto loans must be written off after 120 days of nonpayment. If the lender is informed that the borrower has filed for bankruptcy, an auto loan may be charged off in as little as 60 days.
Companies and lenders are able to write off debt when they cancel it for tax purposes. However, if a lender takes this action, you still owe the money, and the loan’s terms remain the same. You are still fully responsible for repaying the debt.
How an auto loan charge-off works
Lenders have the option to start the charge-off procedure when they believe an auto loan debt is uncollectible. Some of this process’s steps affect you, the borrower.
Driving a charged-off car
Usually, the car that was purchased with the loan is used as collateral for a car loan. If you don’t make payments, the lender may seize and sell your car to make up the difference.
However, even if a lender pays off an auto loan, you might still be able to use the vehicle, at least temporarily. Depending on where you live, a lender must send you a notice of default and give you the chance to catch up on your loan before taking it back. In these circumstances, if you pay off the debt or come to an acceptable payment arrangement, you can avoid repossession. However, not all states have this requirement.
If you purchased the vehicle with an unsecured loan, the vehicle does not support the loan and cannot be repossessed by the lender.
What to do if your car loan is charged off
Several actions can be taken after your auto loan has been charged off. You can get in touch with the lender and inquire if you can pay a set sum to settle the debt if the account hasn’t been turned over to a collection agency yet. This payment is known as a car loan settlement. You could also try to bargain for loans with more manageable terms.
To find out how long a lender or collection agency can try to collect money from you, you could also research the state’s statute of limitations on debt collection. Depending on where you live, the statute of limitations runs from the date of default for three to ten years.
Keep in mind that a charge-off will appear on your credit report for seven years and may make it more difficult for you to obtain future auto loans. Charge-offs on loans will also affect your future interest rates, so if you can, settle the debt up front.
If you’re having trouble making ends meet, you might be thinking about declaring bankruptcy. All charged-off loans must be included when filing for bankruptcy. Depending on the type of bankruptcy you file, what happens next
Options may include:
Even after a car loan is written off, you are still liable for the debt. You’ll probably have to deal with a third-party collection agency once a lender has charged off an auto loan. You could be sued for repayment or your vehicle could be repossessed. Charged-off accounts also damage your credit score.
To pay off the debt or work out manageable repayment terms if you are behind on your auto loan payments, your first course of action should be to contact the lender or collection agency. You may even seek a car loan settlement. You should probably speak with a lawyer if you are being sued for repayment.
FAQ
Can my car still be repossessed after a charge off?
Even after a car loan is written off, you are still liable for the debt. You’ll probably have to deal with a third-party collection agency once a lender has charged off an auto loan. You could be sued for repayment or your vehicle could be repossessed.
What does it mean if an auto loan is charged off?
An auto loan charge-off occurs when the creditor deems the debt uncollectible. You continue to owe the charged-off debt, so the creditor can still collect it.
Is a charge off worse than a repo?
When a car is repossessed, the lender not only keeps the money you’ve already paid, they also take your car and after it is sold, you are still responsible for the remaining debt. However, when an unsecured auto loan is paid off, the debt is discharged and you are no longer responsible for it.
Can I trade in a charged off vehicle?
If a secured auto loan is charged off by your lender without your vehicle being repossessed, you probably won’t be able to sell or trade it in.