If you have an auto loan that you’ve fallen behind on, the lender may eventually decide to charge off the loan, which means the lender assumes you’re not going to repay the debt. Having a loan charged off does not mean you’re off the hook for repayment. And it doesn’t change the original terms of your loan.

In many cases, the lender may send the debt to a collection agency that will pursue repayment with you. Understand your responsibilities and what steps will happen before and after the charge-off.

What an auto loan charge-off is

During a charge-off, companies move an account, such as an auto loan, from their asset column to a liability for accounting purposes. Often lenders take this step after unsuccessfully trying to collect on a debt for an extended period. For record-keeping purposes, the lender is declaring the debt uncollectible.

Auto loans generally must be charged off after 120 days of nonpayment. An auto loan may be charged off in as little as 60 days if the lender is notified that the borrower has filed for bankruptcy.

When companies or lenders charge off a debt, they’re able to write it off for tax purposes. However, you still owe the money and nothing about the terms of the loan changes as a result of a lender taking this step. You are still fully responsible for repaying the debt.

How an auto loan charge-off works

When a lender considers an auto loan debt uncollectible, it can choose to begin the charge-off process. Some of this process’s steps affect you, the borrower.

  1. The debt is shifted from asset to liability. Step one of an auto loan charge-off is simply an accounting classification. The lender shifts the loan from its assets column and officially categorizes it as a liability, which means the loan is no longer considered income for the lender. Instead, it is considered a loss.
  2. Notification of default. Depending on your state, the lender may be required to send you a notice of default and give you a chance to repay the outstanding debt. Not every state requires this.
  3. A third-party collection agency may take over collection. Often when the original lender charges off a loan, it’s sent to a third party, such as a collection agency, which takes over pursuing debt repayment. Collection efforts may include suing you for repayment. If there’s a judgment against you, a portion of your wages may be garnished as repayment.
  4. The charge-off is reported to credit bureaus. Once a debt is charged off by a lender, your credit score also takes a hit. This is because the charge-off is typically reported to all credit bureaus. The account will be listed on your credit profile as charged off, which is a serious negative mark indicating you did not fulfill your obligation. This negative mark may remain on your report for up to seven years. You may see as much as a 100-point drop in your credit score and can have trouble securing a car loan in the future.
  5. Vehicle repossession. With secured auto loans, when the vehicle secures the debt, the car may ultimately be repossessed by a debt collector. A car repossession can impact your credit score for years.

Driving a charged-off car

A car loan is typically secured using the vehicle bought with the loan. If you don’t make payments, the lender can repossess and sell the vehicle to cover the loss.

However, even when a lender charges off an auto loan, you may be able to continue driving the car — at least for a little while. Depending on where you live, a lender is required to issue a default notice and allow you the opportunity to bring the loan current before repossession. In such cases, you can avoid repossession if you pay off the debt or make satisfactory payment arrangements. However, not all states have this requirement.

If you used an unsecured loan to buy the vehicle, the car doesn’t back the loan and cannot be repossessed by the lender.

What to do if your car loan is charged off

When your car loan has been charged off, there are several steps you can take. If the account has not yet been turned over to a collection agency, you can contact the lender and ask if you can pay a flat amount to clear up the debt. This payment is known as a car loan settlement. You might also try to negotiate loan terms that are more manageable for you.

You could also look into the statute of limitations on debt collection for your state to learn how long the lender or a collection agency can continue to try and collect from you. The statute of limitations ranges between three to 10 years from the date of default, depending on where you live.

Remember that the charge-off will remain on your credit report for seven years and affect your ability to get more car loans. Loan charge-offs will also affect your future interest rates, so resolve the debt directly if you can.

If you’re facing financial difficulties, you may be considering filing for bankruptcy. All charged-off loans must be included when filing for bankruptcy. What happens next depends on the type of bankruptcy you pursue.

Options may include:

  • Reaffirming the loan and continuing to make payments.
  • Redeeming the car by paying off the loan in a lump sum.
  • Surrendering the car to the creditor, who will sell it to pay off the outstanding debt and discharge the remainder.

The bottom line

When a car loan is charged off, you’re still responsible for repaying the debt. Once a lender has charged off an auto loan, you’ll likely have to deal with a third-party collection agency. Your car can be repossessed, or you could be sued for repayment. Charged-off accounts also damage your credit score.

If you are behind on auto loan payments, the first step is to try reaching out to the lender or collection agency to pay off the debt or negotiate manageable repayment terms. You may even seek a car loan settlement. If you’re being sued for repayment, you should likely contact an attorney.