You may think you've hit pay dirt if your bank can't find your car lien, but don't celebrate your "free" car just yet. Even if the bank can't find your lien, you are still on the hook for paying for the car. In fact, if you're filing for bankruptcy, the lack of a lien can actually work against you. If you plan to sell your car or are facing bankruptcy, you will need to track down your lien, even if the bank can't find it.
Liens Defined
A bank's lien on a car is a claim of ownership. The lien says that the bank loaned you money for the car, and until that money is repaid, it is first in line take the car or take any proceeds you make from selling the car. With a lien, the bank can repossess your car if you fail to make loan payments and it is entitled to any money earned selling the car, up to your outstanding loan balance.
Unperfected Liens
When a bank issues a loan, it "perfects" the car lien. Perfecting the lien means the bank issues the lien and registers the lien on the car title -- in other words, it lets the state know that it holds a lien on the car. When the bank fails to complete these steps, the lien is said to be unperfected.
No Lien, No Payment?
Although it may seem like the bank doesn't have a leg to stand on if it hasn't perfected the lien or can't find a record of it, that is not the case. The lien is not the only part of the loan agreement that puts you on the hook for payment. The security agreement part of your loan contract states that you are using the car as collateral for the car loan. Even if the bank slips up on the lien paperwork, that security agreement gives the bank the right to repossess your car if you don't make loan payments.
Bankruptcy and Missing Liens
Missing liens can make bankruptcy proceedings more complex. If you are filing for a Chapter 7 bankruptcy, your bankruptcy trustee is treated by the courts as the buyer of your car. When the title, minus a lien, transfers to a new owner, the new owner has no obligation to pay the bank any outstanding loan balance on the car. For this reason, your bankruptcy trustee can sell your car to pay your creditors without satisfying your car loan, leaving you without a car and possibly with a loan still due.
In Chapter 13 bankruptcy, you will usually be allowed to keep your car if there is no lien, as long as you can come up with the market value of the car to divide amongst your creditors.
Selling Your Car Without a Lien
If there is no lien on your car title, you are free to sell your car. The new buyer can put the title in his name, and he is off the hook for any loan obligations still attached to the car you owe. If he gets a loan to purchase the car, his bank can put a lien on the title. However, if you still owe on the loan, even if the car has a new owner, the bank can come after you to pay.
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