When you take out an auto loan, your lender holds a lien against the vehicle until you pay off the loan in full. This lien gives your lender the legal right to seize your car if you don't make punctual loan payments. Depending on how much you owe and how much your vehicle is worth, you could face additional financial consequences after losing your car to repossession.
How It Works
Once it repossesses your car, your lender sells the car at auction or to a private buyer. The Federal Trade Commission notes that the lender does not have to sell the car for the vehicle's fair market value, but must only market it for a reasonable amount. If the car sells for less than you owe your lender, you remain legally responsible for paying off the remainder of the loan, which is known as the "deficiency."
Auto Loan Deficiency
Your auto loan deficiency includes not only your remaining loan balance, but also the expenses your lender incurred when it repossessed the vehicle. If you do not make arrangements with your lender to pay off the deficiency, your lender has the option to either write off the deficiency as a tax loss -- resulting in the IRS requiring you to pay income tax on the debt -- or file a lawsuit against you.
Wage Garnishment
Your lender must win a lawsuit against you for the loan deficiency in order to garnish your wages. After the lender wins its court case, the court issues a certificate of judgment that the lender files with the county clerk's office. Once the certificate of judgment is on record, your lender can request a writ of garnishment. Provided the lender knows where you work, it serves your employer with the writ of garnishment, which is a legal document requiring your employer to withhold a percentage of your take-home pay.
Garnishment Limitations
The Consumer Credit Act restricts the amount any creditor can force your employer to withhold from each paycheck. Your lender is legally entitled to either the amount by which your weekly paycheck exceeds 30 times the federal minimum wage or 25 percent of your income after taxes -- whichever is less.
Each state has the option to either adhere to the federal wage garnishment guidelines or place stricter regulations on garnishment -- including prohibiting the practice entirely. Thus, state laws vary regarding how much your lender can garnish from you after a repossession.
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