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The Debt Adviser

What it takes to provoke the repo man

Dear Debt Adviser:
I cannot afford to make my car payment this month. If I miss one payment, can they repossess my car? I will be able to make the payment within a month.
Kelley

Dear Kelley:
It is not likely that your lender will repossess your car after one missed payment, however, depending on the loan contract and state law, the lender may have the right to do so.

In many states, the creditor or lessor may legally seize your vehicle as soon as you default on your loan or lease. Check your loan agreement and determine what constitutes default in your state.

If you're in default, your creditor may repossess the vehicle if it believes you will not honor your loan agreement. Once repossessed, the creditor may sell your car in either a public or a private sale to recover a portion of what is owed. Depending on the laws in your state, you may be entitled to know the date of the sale.

If you are thinking that it might be best to just go ahead and let them repossess your vehicle, your troubles will not be over when your vehicle is sold. In fact, you will be trading one set of troubles for a worse set. Although the sale of a repossessed vehicle must be conducted in a commercially reasonable manner or according to standard custom in a particular business or an established market, this does not mean the car will sell for the balance you owe. It only means that the sale price may not be far below fair market value.

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You will be responsible for the difference in what the creditor collects from the sale of your car and the balance due on your loan. This is called a deficiency balance and your creditor can obtain a judgment against you in court to collect the deficiency. For example, if you owe $5,000 on the car and the creditor sells the car for $3,000, the deficiency is $2,000 plus all sorts of fees you owe under the loan contract default provisions. So, with this course of action you end up with the worst of both worlds. You still owe a payment, but you have no car. I've seen the interest on a deficiency balance increase dramatically, because the person is now a bad risk, resulting in a payment not much less than the original one that can go on nearly forever! As a bonus, your credit report will show the default and you will have all the expensive issues that go with bad credit. However, failure to sell the car in a commercially reasonable manner may give you legal recourse for damages or defense against a deficiency judgment. But don't bet on getting much satisfaction from this route. It will involve expensive attorneys, litigation and more stress than anyone would like.

I've taken you down this dark road on purpose to answer your question regarding repossession. There is a better route. Now for the road that I recommend you travel. Contact your lender before the payment due date and let them know that you are having trouble meeting this month's payment on time. The sooner you talk to them, the better your chances of getting a favorable response. If you already missed it, call anyway before you miss a second payment. Penalties and fees may take a big chunk out of your next payment before it is applied, and you could be further behind than you think. Be prepared to give a firm date by which you will make the payment and to assure them that the following month's payment will be made on time. If you have a good story about why you were late, tell them. It's really none of their business, but it is their money, so be prepared to explain. In the end they are people too, and often will cut you some slack if you communicate the whole situation. Ask about penalties and fees. Ask if they can be waived once you make the next payment on time.

I do not know why you are experiencing difficulty making this month's car payment, but it is imperative that you find out. Your inability to pay a scheduled payment may be a sign of significant financial problems. You have me worried about the state of your finances. I hope I have successfully passed that worry on to you. I recommend that you review the following exercises and implement any that you are not currently using.

  • Develop a spending plan to take control of your monthly spending. The plan lets you decide how and when to spend your income.
  • Begin to put aside three to six months of living expenses in an emergency savings account. This will take time, but it will help you avoid using already committed money such as your car payment for emergency expenditures.
  • Determine your debt- to-income ratio. If you are spending more than 15 percent of your gross monthly income to satisfy unsecured debt payments (credit card or personal loans), do your best to pay down the debt as quickly as possible.
  • Stop all credit card purchases unless you have a plan in place to pay off the balance.

There, I feel better already. The rest is up to you!

The Debt Adviser, Steve Bucci, is the president of Consumer Credit Counseling Service of Southern New England. Visit CCCS for additional debt advice or click here to ask a debt question.

-- Posted: May 30, 2003

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