I Defaulted on my Car Loan but the Bank Won’t Take the Car Back.
What can you do if you default on your car loan and can’t catch up? By voluntarily surrendering the vehicle to the title holder, you may avoid an even worse situation. The lender repossesses the car and resells it, possibly leaving a deficiency balance. Unless you notify them that you plan to file for chapter 7 bankruptcy, the lender can sue you to recover that amount. The bankruptcy filing will then discharge the remaining debt. But what can you do if the lender refuses to repossess the vehicle?
I Can’t Pay but Still the Lender Won’t Repossess the Car
A new car depreciates or loses value almost immediately after you drive it off a dealer’s lot. According to bankrate.com, as a quick rule of thumb, a car will lose between 15% and 20% of its value each year. A car in its second year will be worth 80% to 85% of its first-year value and a car in its third year will be worth 80% to 85% of its second-year value.
Due to depreciation and longer terms of auto loans, you may reach a point where you owe more than the car is worth. You wonder whether paying off the loan is even a financially sound decision. Perhaps you’ve lost your job or in the midst of some major financial setback. Unable to pay your loan payments, you might try giving the car back to the bank by filing a chapter 7 bankruptcy.
The bank likely will refuse to repossess the car due to the costs involved — cost of towing, any necessary repairs, possible storage, and reselling. Thus, the cost of repossession may exceed the fair market value of the car. Chapter 7 does not release the lien on the vehicle. Since the lien is attached to the vehicle, although chapter 7 relieves you of the financial responsibility, the lien remains to the vehicle.
What Happens When the Title Holder Refuses to Repossess?
What if you file chapter 7 bankruptcy but the lender refuses to repossess the car or release the title? If the lender attempts this to coerce you into paying off the loan, notify your bankruptcy lawyer. The lender will be advised that refusal to release the title or repossess the car is a violation of the terms of your discharge. Should they continue to refuse to abide by the discharge order, you have grounds for legal action against them. They may also be ordered to pay your legal fees.
What You Can Do if the Lender Refuses to Repossess the Vehicle
You have several options open to you if the lender refuses to abide by the ruing of the bankruptcy court.
- Quote the decision in a similar, previous case originally filed in the United States Bankruptcy Court for the District of Maine (Pratt vs. General Motors Acceptance Corporation). This may increase the chances of the bankruptcy court in your jurisdiction ruling in your favor. The case cited involved a lender’s refusal to remove the lien so the debtor could junk a worthless car. This case evolved even though the debtor offered a voluntary repossession. The lender’s decision was an attempt to coerce the debtor into paying off the balance of the worthless car. When the case was reviewed by the bankruptcy court, they ruled in favor of the debtor.
- Your attorney can file a motion requesting you be permitted to redeem the car for $1. Under bankruptcy laws, you are permitted to keep your vehicle if you pay the lender the full value of the car in a lump sum. The court looks at this as redemption of the car.
If the title holder contests the $1 redemption payment, this is a sign he agrees the car has value and just refuses to repossess it. Accepting the $1 compels him to release the lien. This action becomes a win-win for the debtor and forces the lender to repossess the vehicle following the discharge of debts. If you live in a state that allows the placement of a garage keepers’ or mechanics’ lien, you can take the car to the shop for repairs and not pay the bill. The repair shop can then assess a mechanics’ lien and sell the vehicle after providing the lender with notification. This leaves the lender with two choices: pay the repair bill or allow the garage or towing company to tow the car to a junkyard where they can receive reimbursement for their work, and you get rid of the car without forcing the lender to release the lien.
- Unless a court order (chapter 7 bankruptcy) states otherwise, a lender has no obligation to repossess your car if you don’t make the payments. The lender also has no obligation to release the lien. As a result, you will be unable to sell the car because you do not have clear title, nor can you send it to the junkyard. This leaves you and the lender both stuck.
Why Would the Lender Refuse to Repossess a Car?
Depending on the circumstances, the lender may choose not to repossess the vehicle but instead, use other methods such as garnishing wages to attempt collecting the money. After all, if the lender repossesses the car, he must pay money to:
- Find and tow the car
- Make repairs to the car
- Find someone to buy the car
If the debtor has a job, the lender may find it more cost-effective to sue him and file to garnish his wages or attach his bank account funds. When a car is worth only a few thousand dollars, the lender may have no real incentive to spend the money to repossess.
A debtor in Ohio stated he defaulted on his car loan, after which he offered to pay the missed payments and three payments in advance. The lender refused the offer, and the debtor told them to come get it. They never did and as of the date of the writing in 2015, it had been seven years. Unfortunately, the debtor also does not have a clear title to the vehicle, so he can not sell it, trade it, or junk it without the title. There is also still the possibility the lender could repossess the vehicle if they believe it financially feasible to do so.
It is becoming more common for lenders to refuse to repossess vehicles in default or surrendered in a Chapter 7 bankruptcy. They have little financial incentive if the vehicle is only worth a few thousand dollars. In bankruptcy, the debtor can ask his lawyer to petition the court to allow you to pay $1 to redeem the car. If the lender refuses, this shows they agree the car is not worthless. Accepting the $1 obligates them to release the lien on the car or agree to repossess it.
Read Our Article: How to Get Out of a Car Loan You Can’t Afford