What will happen if I stop making loan payments on a totaled car?

June 26, 2010 7:11 AM

What will happen if I stop making loan payments on my totaled car?

My car was totaled and the insurance payment did not cover the loan amount. I have been paying each month but am still nowhere close to paying off the full amount and am struggling each month to make the payments and pay all my other bills. I know this is a morally dubious area, and am not looking for judgments. I just want to know what the potential consequences would be if I stopped making payments. I know my credit will be ruined, but are there other negative consequences I need to be aware of? There is no car remaining to be repossessed. Could I be sued? Could the bank garnish my wages?

posted by anonymous to work & money (12 answers total)

They can absolutely come after more than just the car if you default.
posted by Hiker at 7:12 AM on June 26, 2010 [1 favorite]

Yeah, you're personally responsible for the amount if you default. Read your loan document.
posted by lockestockbarrel at 7:22 AM on June 26, 2010

Either pay the bill in full, call the bank and work out an alternate repayment schedule, or file for bankruptcy. Whatever you do, don't default.

If you stop making payments, you will be in default. Once that happens, the bank can and probably will take action against you. This will start with a collection agency, which entities tend to be notoriously unpleasant to deal with. If you do not pay the agency, they will likely file suit against you for the amount you owe--and they'll likely win unless they're egregiously incompetent which, while possible, isn't something you want to bank on.

The result will be a judgment against you which, if you do not pay in full promptly, will result in the garnishment of your wages.

Thing is, banks are actually a lot more willing to be reasonable about repayment schedules than you might think. They want their money, and they don't want to have to spend money to get their money. Indeed, letting you repay the loan for longer means they make more in interest, so it's entirely possible you can work something out here. That'd be my recommendation.
posted by valkyryn at 7:22 AM on June 26, 2010 [5 favorites]

I used to work in collections at a law firm, almost exclusively for car loans.

Everyone here is exactly right (except for the part about being unpleasant to deal with - I always thought I was very nice).
posted by Lucinda at 7:27 AM on June 26, 2010 [3 favorites]

The insurance should have been sufficient for you to buy an equivalent used car, leaving you in the same condition you were in: same (essentially) car, and same payment. (Replacement cost, not retire-upside-down-loan cost.) If you didnt get a replacement car, the system's presumptions don't work.

And, yes, you can be sued, and if you don't pay the jugment your wages can be garnisheed and your bank account attached. Car lenders often don't bother to do that when there's a deficiency after a repo, but in your case -- with no repo -- they might be more tempted.
posted by MattD at 7:29 AM on June 26, 2010

This is what gap insurance is for - if you total a car and the insurance payout is less than the loan, the gap insurance will pay you for the difference to pay off the loan on the car. Barring that you're stuck with the loan.
posted by msbutah at 8:03 AM on June 26, 2010 [1 favorite]

The insurance should have been sufficient for you to buy an equivalent used car, leaving you in the same condition you were in: same (essentially) car, and same payment. (Replacement cost, not retire-upside-down-loan cost.) If you didnt get a replacement car, the system's presumptions don't work.

The problem with that is what msbutah relates- the amount someone owes on the loan doesn't march in lockstep with what the car's book value is.

Wait, never mind. You are saying the asker should have taken the settlement and bought another for cash, and continued making payments on the old one as if nothing changed. That's correct. Except for the fact that when you have a loan on a car, your lender is usually a named beneficiary (or something like that) on the policy and they get the cash, so that might have been impossible.

And yes, the other answerers are correct, walking away is financially bad news. Something can be worked out, and if it can't, that's what bankruptcy is for.
posted by gjc at 8:17 AM on June 26, 2010

gk, if the noteholder is paid as an additional insured, the payment should be reduced by an amount equal to the required payment to buy the replacement car -- so same equivalnce of transportation asset and cost. I.e. if loan was 20% underwater the old loan payment will be 20% of its prior amount, but the (now cheaper) replacement car should carry only a payment of 80% of the old, with some smudge for changes in interest rates, double registration costs, and deductibles. If this totally fails than the car insurance underpaid for the claim.
posted by MattD at 8:38 AM on June 26, 2010

MattD

Wha?

The others are right, to the extent I've scanned them. But the insurance company is not obligated (unless there's gap coverage) to pay the amount of the loan, only for the value of the car. They should have paid the policyholder roughly a typical dealer's asking price, plus tax and reg costs, to buy a similar used car. Given typical lending practices nowadays, with 60 or 72 month loans with very little down, it is VERY easy to be upside down, and once the collateral is totalled the bank has every right to call the loan.

Assuming I didn't have the cash to pay the difference, I would be working with the bank to roll this amount into a loan for a replacement car; I would be buying the CHEAPEST thing I could get so that my new loan was as small as possible, and I would be trying to save money so that next time I didn't have to borrow money for a car, or at least as little as possible. And get gap coverage!

But it looks like this happened some time ago, the bank's made a payment arrangement, and the OP is having trouble making the payments on a car he/she no longer has. My first step if I were OP would be discuss with the bank whether reduced payments were possible, and if they didn't make a deal I could live with, I'd stop paying and start saving money to try to make a lump sum settlement with them.

www.daveramsey.com - Dave Ramsey has a fairly comprehensive plan for dealing with financial struggles brought on by too much debt, and how to deal with creditors if you're in that fix. His philosophy is don't just walk into bankruptcy because life has gotten hard, because banktuptcy is a huge black mark and often doesn't solve the difficulties.
posted by randomkeystrike at 8:54 AM on June 26, 2010

If you own a home, liens will be filed against it.
posted by jeffamaphone at 10:04 AM on June 26, 2010

Just to run through the series:

Late payments would get reported to the big 3 agencies and would go in your credit report. That info would be calculated into credit scoring as well, which would drag your credit scores down. To what degree depends on other items in your report. If this gets bad enough, your likelihood of being approved for future credit drops. Since most credit approvals are automated these days, a typical scenarios would be--you're turned down, you might be able to call a human and ask for them to make an exception for you, but it's a big hassle. If you're applying for a mortgage, it could be one of the factors that determines how good a mortgage you can get. Late payments will age off your report in a couple of years.

With late enough payments, and no evidence of cooperation on your part, the lender would send the account out to collection. This would be reported to the bureaus and affect your credit scores. It's the same effect as late payments, but worse. The collection agency will send stronger letters and probably try to call you. This will be reported while it's in active collections, plus a couple of years.

If it's a small debt (note: unlikely in this case) either the lender or the agency could write it off as a bad debt. "We give up, we're taking it as a tax deduction." This would stay on your report for 5(?) years with a notation like P&L or Profit & Loss.

Up to this point, everything is private.

For anything else, the next step is that you'd be taken to court. If it's lower than the dollar limit for small claims/conciliation court in your jurisdiction, you'd be taken there, higher than, and you'd go to a regular civil court. The presumption is that you'd be able to defend yourself in small claims, while civil court involves real lawyers and legal costs. At this point, it's a matter of public record, and someone who wanted to find out would know that you had been taken to court.

Assuming that you really do owe the money and the lender or agency has their paperwork in order, the next step is that a judgment would be entered against you. The judgment would go on your credit report for seven years, even if paid. It's also a public record, so the information would be visible at the courthouse at least, possibly also in court websites, indefinitely. This is worse than being sent out to collection.

It's at this point that legal action could be taken to get payment from you. Garnishing wages, getting funds out of a checking account, etc. are the typical things that happen (if you're famous for having a Picasso in your living room, that could be a target, too). Court costs, etc. could have driven up the final amount.

So what are the end points of the process?

It gets paid. Maybe you get more money and just pay it, maybe you cut a new deal with them, maybe they garnish your wages.

You could declare bankruptcy, which is a separate conversation (and has changed for the worse recently for debtors, this moves beyond my expertise).

You can "put up with it", essentially do nothing, live with bad credit and the attendant hassles, and it will age away. (And eventually, we all die, but that's not recommended as a specific solution here.) If you had a court judgment against you 30 years ago, nobody is likely to know or care unless you're running for Congress, say.

Finally, attach all appropriate disclaimers: I've worked in the industry, but I am not a lawyer, this is not legal advice, it's USA-centric but still could vary from location to location, this is all hypothetical, etc. etc. etc.
posted by gimonca at 10:24 AM on June 26, 2010

All seems good advice above, but first check if there is insurance on the loan itself to cover this contingency.
posted by aeschenkarnos at 2:59 AM on June 27, 2010