Can a debt collector repo your car?

It happens. We fall behind on our payments, and before we know it, we are asking, “Can a creditor take my car if I am making payments, even if I am behind?”

When you take out a personal loan or another form of debt, it’s important to have a plan to pay it back according to the terms you agreed to. If you go too long without making a payment, you risk hearing from a debt collector.

In many cases, depending on the type of debt in question, a debt collector won’t be able to repossess your car simply for lack of payment. However, there are a few exceptions to that rule that may make it possible.

What assets can a debt collector take?

There are two forms of debt—secured and unsecured debt.

Unsecured debt is debt that is not backed by valuable collateral, such as a car or a home. It’s difficult for a creditor to seize assets for failing to make payments on unsecured debt. For example, if you’ve defaulted on an unsecured credit card debt, collectors do not have legal rights to simply repossess your car because of the lack of payment. Creditors cannot repossess property not specifically listed as collateral on a debt.

Secured debt, on the other hand, is debt that is backed by property. While laws vary depending on the state where you live and the debt contract, creditors can typically repossess property you pledged as collateral for secured debt. Examples of this type of debt might include a mortgage loan that is backed by the home or an auto loan that is backed by a car. If you fail to make payments on your mortgage, a lender can seek to foreclose on your home. Similarly, if you fail to make payments on an auto loan, the lender can repossess the car.

What assets can debt collectors take in bankruptcy?

Depending on the type of bankruptcy you choose, you may not have to give up your possessions. In some cases, your assets will be evaluated and may be used to repay some of your outstanding debt.

Chapter 11

Both individuals and businesses can use Chapter 11 bankruptcy. This type of filing allows for reorganizing or restructuring debt, and as part of the process, the filer has four months–though this timeline can sometimes be extended—to develop a financial plan to repay debts while also keeping their valuable assets.

An automatic stay goes into effect when you file for Chapter 11, meaning all foreclosures and repossessions of property are suspended. Filing for Chapter 11 is much more complicated and expensive than other types of bankruptcy. There is a filing fee of $1,738, and you can expect to spend a minimum of $10,000 on legal fees. For this reason, Chapter 11 is mostly used by businesses, while individuals often utilize Chapter 7 or Chapter 13.

Still, individuals may opt for Chapter 11 if they don’t want to pursue Chapter 7 and be required to liquidate assets.

Chapter 13

Like Chapter 11, a Chapter 13 bankruptcy filing also allows for restructuring debts and creating a plan to repay the debt over years. As part of this approach, the filer must make payments from disposable income every month. In addition, when filing a petition for Chapter 13, the filer must also submit a list of all creditors and amounts owed, as well as a list of the debtor’s income, property, and all monthly living expenses.

Like Chapter 11, one of the benefits of filing Chapter 13 is that it protects personal property. Filing the petition under Chapter 13 “automatically stays” (stops) most collection actions against the debtor or the debtor’s property. For instance, it protects filers from losing their homes to foreclosure, stopping foreclosure proceedings.

Yet another benefit of Chapter 13 is the debtor does not have to pay all of the debts owed, and the court can force creditors to accept altered repayment terms. The terms can be different from what the original agreement was before Chapter 13 was filed, said New Jersey bankruptcy attorney Edward Hanratty.

“Chapter 13 is usually used to help people who are behind on a mortgage, car note or taxes,” said Hanratty.

People who choose Chapter 13 are generally individuals whose debt payments are too much to handle but have a job and want to hold onto their assets.

What should you do if a debt collector tries to repossess your car?

So, can a collection agency repossess your car?

If you default on a car loan by failing to make payments, the creditor is allowed to repossess your vehicle without being granted a judgment in court. This is because the car is collateral for the car loan. Additionally, if you opened a car title loan, a collector might be able to take your car if you fail to repay the debt. That’s because when you sign up for a car title loan, you give the lender the title in exchange for money.

Depending on the state in which you live, the lender can come after your car as soon as you default on your loan or lease, according to the Federal Trade Commission (FTC). Your loan should make clear what specifically causes you to be in default.

When a lender seeks to repossess your vehicle, they are not allowed to “breach the peace.” The exact definition of breaching the peace can vary, but in some parts of the country, that may mean not using physical force or threatening to do so. It can also mean not removing the vehicle from a closed garage without your consent.

If you are threatened with repossession, try to talk with your lender about developing a repayment plan. It may be possible to negotiate a revised payment schedule. If you reach an agreement on this front, get it in writing to avoid challenges down the road.

In cases where an agreement cannot be reached, you may be able to return the car voluntarily. This approach may result in you paying fewer fees.

Bottom line

Falling behind on debt payments can have various consequences depending on the type of debt in question. Debt collectors cannot repossess your possessions if the debt is unsecured, such as a credit card or student loan.

In the case of secured debt, however, particularly auto loans, for which the car is collateral, failure to make payments can result in repossession of the vehicle.

If you’re falling behind on debt obligations or have encountered a financial emergency, the best course of action is to contact creditors as soon as possible. You may be able to negotiate a new repayment schedule that helps you through the rough patch.