If you have a car loan that you have fallen behind on, the lender may eventually decide to pay off the loan, which means the lender assumes that you are not going to repay the debt. Having a loan written off does not mean you are off the hook for repayment. And this does not change the initial conditions of your loan.
In many cases, the lender can simply send the debt to a collection agency who will pursue repayment with you. Understand what your responsibilities are in such situations and what steps will take place before and after disbarment.
What is a car loan write-off
An imputation is a procedure by which businesses move an account, such as a car loan, from their asset column to a liability for accounting purposes. Often, lenders take this action after trying unsuccessfully to collect on a debt for an extended period of time. For record keeping purposes, the lender declares the debt uncollectible. Auto loans generally must be written off after 120 days of non-payment.
When companies or lenders cancel a debt, they can cancel it for tax purposes. However, you still owe the money and nothing about the terms of the loan changes as a result of a lender taking this action. You are still fully responsible for repaying the debt.
How a car loan forgiveness works
When a lender deems an auto loan debt uncollectible, they may choose to begin the write-off process, which includes a variety of steps with ramifications that will affect you.
- Debt is transferred from assets to liabilities. The first step in an auto loan write-off is simply an accounting classification. The lender moves the loan from its asset column and officially classifies it as a liability. At this point, the loan is no longer considered income for the lender.
- Fault notification. Depending on the state you live in, the lender may be required to send you a notice of default and give you a chance to pay off the outstanding debt. Not all states require it.
- A third-party collection agency may take over the collection. Often, when a loan is written off by the original lender, it is sent to a third party, such as a collection agency, who takes over the repayment of the debt. Collection efforts may even include suing you for reimbursement. If there is a judgment against you, part of your wages may be garnished as reimbursement.
- The charge is reported to the credit bureaus. Once a debt is canceled by a lender, your credit score also takes a hit. This is because the write-off is reported to all credit bureaus as a disparaging remark, and it typically stays on your report for up to seven years. You may see up to 100 points drop in your credit score and have trouble getting a car loan in the future.
- Vehicle recovery. In cases of secured auto loans, when the debt is secured by the vehicle itself, the car may ultimately be repossessed through the write-off process.
You may be able to drive a loaded car
A car loan is usually secured using the vehicle purchased with the loan. If you don’t make payments, the lender can repossess and sell the vehicle to recover the money owed.
However, even when a car loan is canceled by a lender, you may still be able to drive the car, at least for a little while. Depending on where you live, a lender is required to issue a notice of default and give you the opportunity to put the loan into effect before repossession. In such cases, you can avoid repossession if you repay the debt or make satisfactory payment arrangements. However, not all states have this requirement.
If you used an unsecured loan to purchase the vehicle, the loan is not secured by the car and cannot be repossessed by the lender. In such cases, the lender will have to go to court and obtain a judgment against you in order to gain access to your assets.
What to do if your car loan has been written off
Once your auto loan is paid off, there are several steps you can take. If the account has not yet been turned over to a collection agency, you can contact the lender directly and ask if you can pay a lump sum to completely settle the debt. You can also try to negotiate loan terms that are more manageable for you.
You can also check your state’s statute of limitations on debt collection efforts to find out how much longer the lender or a collection agency can continue to try to collect from you. Depending on where you live, the limitation period can be three to 10 years from the date of the defect.
Keep in mind that the write-off will remain on your credit report for seven years and will affect your ability to obtain other car loans. Loan write-offs will also affect the future interest rates you will be offered, so it may be best to try to settle the debt directly.
The bottom line
When a car loan is canceled, you are still responsible for paying off the debt. Once a lender has canceled a car loan, it often means you’ll have to deal with a third-party collection agency — and worse, your car may be repossessed or you could be sued for reimbursement. Debited accounts also damage your credit report.
If you are behind on car loan payments, try to contact the lender or even the collection agency to negotiate manageable repayment terms. If you are being sued for reimbursement, you should probably contact a lawyer.