It’s bad enough having your vehicle repossessed. It’s even worse when you no longer have a car but must continue to make payments. In a worst-case scenario, the bank can go to court and have your wages garnished, so payments are taken directly out of your paycheck and sent to the bank. Depending on how much you owe, this process might go on for years.
When a car is either leased or financed, the title is held by the lender until the loan payments are completed. With such loans, the vehicle serves as the collateral. If a borrower doesn’t pay back the loan, or defaults, the lender can repossess the automobile. Court orders aren’t necessary for the lender to repossess the car, and the lender can contact so-called “repo” companies to pick up the vehicle even if the borrower missed only one or two payments. Once a car is repossessed, the borrower has certain rights. These include notification of the repo, which doesn’t need to be done beforehand, and receiving notice if the bank sells or auctions off the vehicle. The bank must send you a statement after the car is sold, including the amount received for it. Other laws vary by state. In New York, for example, a bank must auction off a car within 90 days if the borrower paid more than 60 percent of the loan at the time of repossession.
When the car is sold, the bank credits a certain amount toward repossession expenses and fees and credits any remaining funds to the borrower’s balance. If the amount received is insufficient to pay off the loan, the bank may sue the borrower for the deficiency, or remainder of the loan. Since most borrowers dealing with car repossession are low income and cannot pay the deficiency, the bank may ask the court to garnish the borrower’s wages to receive their money.
Wage garnishment occurs when an order is issued by a court for an employer to withhold an allotted amount of money from an employee’s paycheck and send it to the creditor. In the case of a repossession, that’s the bank. Under federal law, wage garnishment cannot take more than 25 percent of the garnishee’s disposable earnings, or those remaining after all legally required deductions are made. Not all states allow creditors to garnish wages. If you live in Texas, Pennsylvania, North Carolina or South Carolina, your lender can’t garnish your wages for a repo. Other states limit the percentage of garnishment to below that of the federal level.
Other Deficiency Options
A borrower does have some options for paying a deficiency short of having the bank garnish their wages. If the deficiency is not substantial, it makes sense to try to borrow the money from friends or family and settle the debt with the lender. Sometimes the lender will set up a payment plan before going forward with wage garnishment. The lender might consider negotiating the debt to a lesser amount that you can afford, especially if you can prove financial hardship. As a last resort, filing for bankruptcy is a possibility, as repossession debt is generally dischargeable in bankruptcy court.
- Nolo: Options If You Owe a Deficiency After Car Reposession
- New York Times: The Car Was Repossessed, but the Debt Remains
- New York City Bar Association: Repossession
- U.S. Department of Labor: Fact Sheet #30: The Federal Wage Garnishment Law, Consumer Credit Protection Act's Title III (CCPA)
- Defense Credit Union Council: You Can Avoid Wage Garnishment
- Debt.org: Garnishment Process
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