Falling behind on any sort of loan payment can create a financial headache; late payments, interest fees and late fees can compound quickly if you’re not careful. And missing even one or two monthly payments between $200-$500 can make it nearly impossible to catchup. An overwhelming number of Canadians are only dollars away from financial insolvency after paying regular monthly bills. If you are one of these people, catching up on default auto loan payments might not be an option. In this case, the bank that lent you the money may repossess your vehicle. But if this happens, are you still liable for the remaining balance?
Your Obligations Under the Loan Contract
Many people assume that once the bank repossesses a vehicle due to loan default, all their troubles end there. Unfortunately, that is almost never the case. When you sign an auto loan agreement, you pledge to repay the amount you borrow. Your inability to repay does not render your loan contract void, and neither does repossession. If the bank repossesses your vehicle, it will sell the car at auction and keep the amount it receives. It will then hold you accountable for the difference between what the car sold for and what you currently owe.
For instance, say you still owe $12,000 on your vehicle. It sells for $5,000 at auction. You would still owe the bank $7,000. From that point, you would have two options:
- Pay off the remaining balance through installment payments
- Become the subject of a lawsuit – in which you will likely have to pay the balance off in full
Reinstating Your Auto Loan
If repossession doesn’t release you from your repayment obligations, it does not make much sense to let your vehicle go. Fortunately, you can keep your car by working with your auto lender. More often than not, auto lenders are willing to work with borrowers to save themselves the cost and hassle of a lawsuit.
Many lenders are willing to modify existing loans to reduce payments to an affordable amount. To help a borrower reinstate the loan, your lender may work the late payments into the new amount owed. However, some companies require borrowers to pay the full overdue amount, plus late fees, before agreeing to modify a loan. Depending on how far behind you are, and what lender you’re working with, you may not be able to get your car back unless you agree to pay the value of the loan in full. However, the latter scenario is the worst-case scenario.
Filing for Bankruptcy
If you choose to file for bankruptcy, you may be able to keep your vehicle. If you file for a Chapter 7, the judge may allow you to keep your car if you agree to pay the arrears and reaffirm the loan with your bank. If you want to get rid of your auto loan payments, you can let the vehicle go. Because of the protections that bankruptcy offers, the lender cannot pursue further collections actions.
If you file for Chapter 13 bankruptcy, the judge and a bankruptcy trustee would devise a repayment plan designed to help you catch up on all past-due accounts, including your auto loan. Once caught up, you would reaffirm your loan with the bank and resume payments from the date you filed for bankruptcy. To benefit from the protections that bankruptcy affords, such as the automatic stay, which prevents lenders from pursuing collections actions, you must remain current on all your payments. If you drop the ball on any, the judge may dismiss your case.
Review Your Other Options
You do have other options that will allow you to keep your vehicle, stop collection calls and remove the risk of repossession. One such option is refinancing your loan through a different lender. If your original lender will not work with you to reaffirm your loan, shop around for one who will. There are plenty of lenders out there who are likely willing to refinance your loan with a lower payment. Though you would still have to make payments in full, the monthly payments would at least be more manageable.
Another option that may be available to you is a personal loan. If your financial struggles were only temporary and you can meet your regular monthly obligation from now on, a personal loan can help you catch up on past-due payments. Shop around for a loan that has low rates and reasonable terms. Also, before you go this route, sit down and review your finances. You want to be absolutely sure that you can keep up with your car and loan payments each month; otherwise, you will find yourself back in the same situation you’re in now.
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