A car loan is a secured installment account. A financial institution gives you money to purchase a vehicle. The car then acts as repayment collateral. You get a clean title to the vehicle once you pay the loan in full, or the bank takes it if you stop making the agreed-upon payments. Often a balance remains on the loan after the bank sells the repossessed car, and that money may be charged off.
Definition
A charge off is an accounting procedure by creditors when they deem a loan balance to be uncollectable. This action does not erase your repayment obligation unless a financial institution specifically cancels or forgives the bill, according to the Comptroller of the Currency Administrator of National Banks. The creditor gets tax benefits for charge offs. It can continue its own collection efforts or sell your bill to a debt collector.
Car Loan Charge Offs
Lenders can seize your car as soon as you default on your loan. The definition of default is spelled out in your contract, but the Federal Trade Commission explains that it usually means skipping a scheduled payment. Most states allow vehicle repossession at any time, even if it is on private property, as long as the repossessors do not threaten you, damage your property or use physical force. The bank then sells your car, which leaves an owed balance on your loan if the selling price is less than what you owe. You are legally liable for that amount, but your lender may charge it off if you refuse to pay it.
Effects
A charge off of your remaining balance, along with a repossession, is detrimental to your credit rating. Both of this items fall under your payment history when figured into your credit score, the MyFICO scoring information website advises. That history makes up 35 percent of the score, so it takes a big hit. Your missed payments before vehicle seizure and the charge off also figure into your score. The charge off and related negative information is reported by the Equifax, Experian and TransUnion credit bureaus for seven years, hampering your ability to get more another car loan or other types of credit.
Collection Efforts
Collection agencies profit by buying car loan charge offs and other debt for less than face value, then collecting as much as possible on the accounts. Debt collectors can sue you for the charged off amount in many states until the statute of limitations run out. Statutes vary widely in different states. MSN Money writer Liz Pulliam Weston explains that the collection time frame can be as little as two years or as long as 15 years. The collector can still demand payment after that time runs out but cannot sue you for the money.
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