When you finance a car or truck, the lender holds certain rights on the property until you make your final loan payment. This means that if you default on the contract by missing payments, the lender may have the right to repossess (claim) the vehicle. Therefore, if you are having financial trouble, contact your lender immediately. Don’t wait until you have missed a payment or two. Depending on the state you live in, the lender may not need a court order or give advance warning to repossess the vehicle. In some cases, a lender may repossess after just one missed payment.
Before the vehicle is repossessed
If you can’t make budgetary changes that will enable you to afford the payments, you have a couple of options:
Do not be afraid to contact your lender. In almost all cases, they don’t want the vehicle – they want you to repay the loan. The earlier you make this contact, the better. If you wait until after you have missed a payment, they may not give you a break.
Now that you’ve looked at your cash flow and know what you have to work with, you can begin to negotiate. Explain your situation: whether it is temporary or permanent, and how much money you have (if any) to go toward the payment. Your options for resolution may include:
Neither of these options is guaranteed. When you took out the loan, you promised to make the payments as agreed. However, it does not hurt to ask, and if you have a long and positive relationship with your lender, you may very well be able to work out a deal.
After the vehicle is repossessed
If you are unable to reinstate the contract, the lender will then sell the car at auction. They will notify you of the auction date, and you may attend and bid on your vehicle. Whether you or someone else buys it, however, you will be responsible for the deficiency balance if the vehicle sells for less than the loan amount. A deficiency balance is the difference between the amount that you owed on the loan and the price the vehicle sold for at auction – plus repossession, storage, and auction costs.
This deficiency balance is an unsecured debt. Some lenders may sue for this sum, while others may forgive it. If the lender does forgive it, the IRS will consider that amount income, and will assess tax due.
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