If you are behind on your car payments, the finance company may repossess your vehicle as a way to recover the money they are owed. Having the vehicle towed, however, is just the start of your financial problems. In most cases, the vehicle will be worth less than the loan balance, which means you will likely have a residual debt (called a deficiency or shortfall) after repossession. Below I’ll explain when a lender can repossess a vehicle and what the implications are for you going forward.
What is repossession
Repossession can happen whether you finance or lease your vehicle.
In the case of a leased car, the dealership or auto seller retains ownership of the vehicle. You signed a contract or lease agreement with terms allowing the leasor to seize the vehicle if you fail to keep up with your monthly lease payments.
If you purchased your vehicle, you own the vehicle, but the car lender will register a lien against your car as collateral to ensure payment. If you default on your payments, they have the right to repossess the car.
You will receive notice that you are behind on your payments, but the lender does not have to notify you when they send someone to pick up your car. If the lender takes action, this is known as an involuntary repossession. If you know you can’t afford your vehicle any longer, you can also surrender your vehicle willingly, something known as voluntary repossession or voluntary surrender.
Unfortunately, the repossession process does not cancel your obligation to make payments under the loan or lease agreement.
Once they seize the vehicle, the lender can sell it or put it up for auction. The proceeds of the sale will be subtracted from any balance that you owe. Repossession costs, interest charges, and late payment fees will be added. This deficiency in realizations is now an unsecured debt which you still owe to your auto lender.
The lender will also report the late payments on your credit report, which will impact your credit score going forward. This note will remain as part of your credit history for up to seven years.
The only way to avoid repossession is to make payment arrangements with your lender. Any payment plan will require you to catch up on all of your payment arrears and repay any repossession fees and recovery costs they may have incurred.
Filing bankruptcy will not stop a repossession because your auto lender is a secured lender. Secured creditors are not prohibited by the automatic stay in bankruptcy or consumer proposal from enforcing their security rights.
However, if you are struggling with your car loan payments because of other unsecured debts like credit cards or high-cost financing loans, it may be possible to file an insolvency proceeding with a Licensed Insolvency Trustee to eliminate this debt, freeing up cash flow in your budget so you can afford to catch up and continue with your car loan or lease.
Walking away after repossession
If you decide to walk away from your car loan, or if your lender has already repossessed your vehicle, it is possible to file bankruptcy or a proposal to eliminate the unsecured deficiency.
Car repossession does not have to lead to continued financial hardship. While we don’t recommend people pursue the last resort of bankruptcy just to deal with a car loan deficiency, if you have other debts filing a bankruptcy or proposal to deal with all your debt problems can make sense.
Roughly 10% of all insolvencies in Canada involve vehicles with a deficiency or shortfall. So, while it is not common, it certainly is an option if you find yourself having purchased or leased more car than you should have.