When a car customer with a lot of financing can't pay on time, an auto loan charge off might happen. However, most agree that it is in the best interest of the customer to see that it doesn't. Auto loan senders have the system on their side when a buyer puts themselves in a "default" situation by not making the payments that they agreed to. Often, when a default occurs, the lender ends up with the car and whatever cash has been paid, while the customer just ends up with bad credit.
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Many times, an auto loan charge off will go hand in hand with a car repossession, and both of these events can happen quickly; when the driver least expects them. Car financing companies and other lenders can legally pick up a vehicle from the street or even a property owner's driveway. In fact, many times, the auto loan lender has the title to the vehicle, or a lien on the title until the last payment has been made.
As an alternative to repossession, a car loan company can freeze the vehicle, but usually, it's more in their interest to do an actual repossession to get the vehicle back into inventory.
Some car buyers mistakenly think that because the vehicle has been repossessed, the debt is canceled, but this is not the case. A charge off does not let someone loose from the responsibility of paying the money. However, it does put them in what most people would agree is a decidedly detrimental position. The driver no longer has the vehicle they paid money on, sometimes for many months. They also still owe an amount of money that is due in full immediately. The charge-off balance will generally be the difference between what the buyer promised to pay and the amount that the lender can re-sell the car for. Many times, this will be a significant amount of money.
The Best Options
With that in mind, experts counsel those involved in auto loans to do anything and everything they can to protect their investment. Some say drivers who are late making their payments, and without accessible cash, should raid savings and investments, sell assets or somehow raise the cash in the short term to avoid losing out in a charge off situation.
A Possible Solution
When a charge off has been done, it may look like the damage is done, and the situation may seem to be completely in deadlock. But, some auto loan companies may be willing to make a trade: in exchange for payments up front, the lender can make an attempt to take the bad mark off of the customer's credit report. Otherwise, it would seem that the debt-ridden car buyer would have little reason to pay up for the charge off amount. Generally, after the charge off, the negotiations begin about how to address the situation. Alternately, the lender walks away with everything and the debtor does their own "charge off" by starting over again from square one, using public transit or walking.
Getting an car loan charge off during bankruptcy will is not the same process as when you fail to make payments and your lender eventually writes off the loan and more than likely repossesses the car. However, both types of personal bankruptcy procedures will allow a consumer to keep the car by applying for a loan to pay for the established "value" of the car.
341 Meeting
There are two personal bankruptcy procedures: Chapter 13 and Chapter 7. The former requires the court to appoint a trustee that will arrange for scheduled payments a consumer must follow to satisfy debt and the latter procedure will liquidate all consumer assets and deliver these to creditors. A meeting called a "341" is convened by a bankruptcy trustee who confirms all consumer asset values and all debt information. This meeting has to take place before any lender will consider a loan.
Get a Letter
If involved in a Chapter 13 bankruptcy procedure, all your financial activity is controlled by a court-appointed trustee. You need to apply first to the trustee for permission to seek a loan to pay for the value of your car and obtain a permission letter from that trustee. The request and obtaining of a permission letter can take up to a month to acquire.
Find a Lender
Once the "permission" requirements are fulfilled, you need to find a lender specializing in value loans to individuals in bankruptcy. There are financial institutions that specialize in these types loans. Surfing the net can help identify these willing lenders.
Negotiate with at Least Three Lenders
It is highly recommended to identify a minimum of three willing lenders. Get all the information you can from each and compare the rates offered. Keep in mind that you are what is termed a "high" risk so do not be surprised that these rates will be a lot higher than normal prime. However, since you are financing the actual value established by the bankruptcy procedure, your "re-financed" deal will help you get out from under any upside down loan you may have had originally. More often than not, a visit with a potential lender will allow you to personally explain reasons you had that compelled bankruptcy. Putting a face on the negotiations is an important step towards a successful transaction.
Car Type Is Critical
Although your ability to pay—taking into account all your bankruptcy requirements—is an important decision-making factor, lenders will also examine the type of vehicle you have when making a loan. There are certain vehicles considered "risky" such as sports cars or others that have lower safety ratings. Also, choosing "economy" types may not necessarily be in your best interest when trying to secure an auto loan in any financial situation. Cars in this category are sometimes associated with less than acceptable safety features that put potential lenders off.
Although requirements, interest rates and monthly payments may result in an overall higher payment than you realized before, the total cost will match the vehicle's value while all the associated interest and fees in the original loan will be charged off by that loan's lender.
A loan charge off can stay on your credit report for a long time, making it a potential time bomb if you plan on applying for credit for major purchases. While the impact of a charge off decreases over time, many lenders and creditors do not look favorably upon borrowers with numerous charge offs on their credit report.
A charge off is a notation on a credit report that states that a credit loan was incurred and payments failed to be made to resolve the financial obligation. Having a charge off placed on your credit report does not usually mean that you are relieved of the credit obligation. It simply means that the credit has not been able to collect on the loan. A charge off does not prevent the lender from continuing to attempt to collect on the financial obligation and very often lenders will sell the charge off to a collection company which will attempt to not only collect the loan amount, but will also tack on their own charges on top of the credit balance.
Credit Reports
A charge off will stay on a credit report for up to seven years. In some cases, a creditor will resubmit a charge off every time they sell the obligation to a credit collection company. This means that you may discover an old financial obligation noted several times on your credit report as if it were a new obligation that has not been paid. This can extend the impact of a charge off well beyond the initial seven years.
Impact on Lenders
In many cases, a charge off will have less and less impact over time - if it is not repeatedly reported as a new credit charge that has not been paid. As a result, potential lenders often look at the most recent years of credit payments as a way to gauge the credit worthiness of a potential credit applicant. However, as stated earlier, many creditors attempt to keep charge offs at the top of recent unpaid credit obligations by repeatedly reporting charge offs. This can result in new creditors being reluctant to offer credit to anyone who has multiple or recent charge offs on their credit report.
Resolving Charge Offs
It is almost always in the best interests of a person with a charge off on their credit report to approach the lender and attempt to resolve the problem. This may mean offering to make multiple payments or one financial payment that resolves the entire credit obligation. When contacting the creditor, have all of your information available about the credit obligation and ask to speak with someone who can approve financial arrangements. Once you have reached a compromise, ask that you be sent a written agreement on company letterhead, so you have proof of a financial agreement. Make sure that you meet the agreement and then submit the information, along with proof of payment, to the credit reporting agency to have the charge off removed from your credit report.
Loan charge offs have a potentially huge impact on credit reporting. Charge offs can remain on a credit report for seven years or longer and may even be reported repeatedly as a new unpaid financial obligation. If you decide to negotiate with a credit to resolve a charge off, make sure you get any agreements in writing and retain proof of payment so you can have the negative credit statement removed from your credit report.
