Over the weekend I had a question from a reader who co-signed a loan on a motorcycle for a family member. The family member no longer has a license, and the vehicle can’t be used now. As they’re struggling with some debt, they’re not sure if they should just let the vehicle be repossessed, and what will happen if they do. (Question edited for clarity, and to keep it anonymous)
I signed for a motorcycle a while ago for a family member, and neither of us is now able to ride it. I need advice about letting the bank repossess the motorcycle since we can’t use it anymore. I owe $17,000 and it is only worth $10,000. What should I do? I don’t want to file bankruptcy. Please advise.
As usual when I give advice on situations like this, I can’t tell the person what to do, only give them advice on what I might do if I was in a similar situation.
Before we get too far, let’s look at what might happen if you were to let the bank repossess your underwater vehicle.
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When Can A Bank Repossess
A lender will lend money to the borrower based on a contract that usually involves having a lien on the property the loan is for. In other words, the vehicle is collateral for the loan.
So in this example, I’m assuming the bank has a lien on the motorcycle. Because they have a lien, as soon as you default on your loan according to the contract, the bank is usually within their rights to repossess your vehicle. What constitutes a default can vary, so check your state law and loan details.
Voluntary Repossession
Sometimes a borrower can do what is called a “voluntary repossession”. This can sometimes end up being a better situation because it can reduce the creditor’s expenses in retaking the car, and can reduce the amount you end up owing the creditor in the long run. (Typically you’re responsible for the costs of repossession). Something to note, however, is that you’ll still be responsible for any deficiencies on the loan (if it is sold at auction for less than you owe), and the repossession will still show on your credit report in most cases.
Repossession Process
How the process works will vary depending on what state and locality you’re in. Usually 0nce the borrower has defaulted, however, the lender will give the borrower notice of their intention to repossess, although in many states they don’t have to. Once any required filings and notifications have been made, the bank can come and repossess the vehicle at their leisure.
After the vehicle is repossessed, the debtor will then be given a chance to come current on the loan, plus any repossession costs in order to keep the vehicle. If that isn’t done, the bank or finance company can sell or keep the vehicle, at their discretion.
If the vehicle is sold at auction for more than what is owed to the debtor, in most cases the bank or finance company must pay the borrower the difference after all repossession costs are taken into account.
If there is a deficiency in the amount received for the car versus what is owed, the bank can sue for a deficiency judgement, and try to collect on the remaining owed balance. If you’re being sued for a deficiency, you’ll be notified of a court date.
If $17,000 is owed on a $10,000 motorcycle, it sounds like you may be in that situation, and the bank may sue for a deficiency judgement (although not necessarily). If they win the judgement they can collect their funds through wage garnishment or a bank levy (where money is taken from your bank accounts). Social Security income can’t be touched, however.
A Plan Of Action
It’s hard to say exactly what to do in a situation like this without knowing the full details about the situation. What is the full debt obligation? What’s the income, and what is the likelihood of being able to get out of debt? What is the possibility of ending up in bankruptcy anyway?
All of those things are issues that must be considered, and without knowing all of that and getting a full picture I can’t say for sure what avenue I’d take. In reality you may want to sit down with an accredited credit counselor to hash through your current situation.
I recommend working with the National Foundation for Credit Counseling to find an accredited non-profit agency that can help you come up with a good plan for dealing with and possibly negotiating your debt. They will look at your full financial picture, not just the vehicle and possible repossession. They can help you to figure out what the best plan of action, and whether that is some sort of debt management plan, debt settlement, or if some sort of bankruptcy might be the best option. They’ll know the laws in your state, and be able to give more solid advice
Repossession Recap
Here are some general things to know in case you do decide to go down the road of having your vehicle repossessed.
- Repossession can happen as soon as you default according to your contract.
- Bank or finance company may or may not have to notify you before they repossess, depending on laws in your state.
- Voluntary repossession can sometimes save on some costs since the bank doesn’t have to hire a company to physically repossess.
- You may be liable for amount still owed after the car is sold, depending on if the bank wants to sue for a deficiency judgement.
- It will most likely show a ding on your credit report if your car is repossessed.
Hopefully this brief look at having a vehicle repossessed is helpful, and I wish you the best as you wind your way through this process of getting out of debt.
Have you ever had a vehicle repossessed? Tell us about how the process worked for you, or advice you have for the reader.
I’ve coached a few people that have had vehicles repossessed and my brother also had it happen. Basically, they’ll come grab the vehicle in the middle of the night (sometimes during the day); generally I’d say you have about 3 months of past due payments before they’ll pull the trigger – sometimes it’s less, sometimes it’s longer. After repossession, they will auction off the vehicle a few weeks later and ultimately you will owe the difference between what the car sells for and the loan amount (potentially some additional fees involved).
So, say they sell the motorcycle for $3k and the loan is at $7k. You’ll owe $4,000; at that time the lender will contact you in an attempt to collect. As with all collection agents, they’re going to be mean, but you have a few options: (1) get on a monthly repayment plan, (2) avoid the repayment plan and push for a lump-sum settlement, or (3) if you don’t have the money for either #1 or #2 then you simply have to avoid paying them as long as possible, save up cash in the meantime in an attempt to execute option #2 and hope they don’t sue you.
In my brother’s situation he settled the debt after the collection company tried to collect for 1.5 years (they never sued him during this time). I believe he settled it for 40% of what they were trying to originally get from him.
I’d try to avoid voluntary repossession. I’d simply sell the motorcycle outright before trying to do that as when you voluntarily give it up you lose complete control of what they’re going to sell it for (as it would likely be auctioned off again).