Can bank charge off auto loan with totaled car despite continued payments?

October 11, 2009 10:55 PM

Car was totaled, bank that gave auto loan charged off the loan account because the collateral is gone despite us continuing with full and on time payments. What are our options?

Our car was considered totaled by the insurance company, but the insurance company is refusing to pay for various reasons (not the point of this post, we've already hired a lawyer) so we can't pay off the loan in full. We've continued to make monthly payments in full to the bank that holds the loan.

However, the bank then sends us a letter saying they are charging off the account. A check of the credit report confirms that they have listed it as a negative account there. We call/write with proof that all payments have been made on time and in the full amount, they respond that it is their policy to charge off loans that have lost their collateral.

Is this legit? What are our options? It just seems wrong that they can charge off an account when we've been making all the payments and have proof of our payments.

posted by Nickel to work & money (4 comments total)

IANAL or a banker, but I've bought a few cars on credit. An auto loan differs from a personal or a signature loan, in that the auto loan is made with only a partial nod to you, the borrower's, credit worthiness. The vehicle itself actually secures the loan, and in most instances of good bank lending, a car loan should only be for about 90% of the car's Blue Book value. If such a loan should default, the bank has the option to recover its money by seizing and selling the vehicle. However, once that option is gone, the bank's surety of recovery drops simply to your ability and willingness to continue paying on the loan, which is not nearly enough surety to impress bank regulators and deposit insurers. Most banks, by regulation, have to charge off asset secured loans as soon as they know that the assets securing such loans have been destroyed.

You might find that the bank is willing to reverse the charge off on your credit report, and give you a personal loan, if you are willing to come up with some extra cash. If your credit is good, and you have other collateral, like a life insurance policy, or CDs you can pledge, you could probably pay off the car loan, get a smaller personal loan, and fight your insurance battle to settlement (or not). The fact that you're having issues with the insurance company in settling is being taken into account by the bank, but not directly. In most states, the loan contract for a secured auto loan says that, as long as there is a lien on the vehicle, you're required to maintain comprehensive and collision insurance, payable to the lien holder, in good standing. The insurance normally immediately pays the bank the loss value of the vehicle when totaled, and the fact that they haven't is evidence to the bank that you may not have kept up your loan contract obligations regarding maintenance of appropriate insurance, and is another reason for them calling the loan, and putting it in default.

In some states, it's a necessary step in further recovery efforts directed towards you. You should be talking with your attorney about all this, because your options are very much dependent on state law in your jurisdiction. Good luck.
posted by paulsc at 11:59 PM on October 11 [3 favorites has favorites]

What Paulsc said, to the letter.

One added thought: make this negative credit-report item part of your negotiations with your insurance company. It's a big additional piece of injury that you are suffering from (what you allege) is a breach of their coverage obligations, and might lead them out of fear or compassion to pay your claim that much sooner.
posted by MattD at 4:49 AM on October 12

You are under-collateralized on your loan. I imagine you first got a request from the bank to pay off the balance. It appears that they have essentially exercised their right to call your loan due to the lack of collateral. I think most, if not all, auto loan agreements are structured this way.
posted by caddis at 7:45 AM on October 12

... might lead them out of fear or compassion to pay your claim that much sooner.

If my experience in trying to get my insurance company (AAA) to pay up for a totalled car is any indication, you should not be expecting anything resembling compassion or any other positive human trait. Play it for fear.
posted by contraption at 9:37 AM on October 12