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What Is A Charge Off On A Car Loan? (2021)

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In a Nutshell

A charge off on a car loan is debt that a creditor declares uncollectible. An auto loan charge off hurts your credit history and lowers your credit score. The charged off debt could stay on your credit report for seven years and drop your credit score by 100 points. The creditor can still collect the charged-off debt, and the person that took out the auto loan still owes the charged-off debt. Car loan debt feels like it will last forever, but even a car loan charge off can be discharged through bankruptcy.

Written by the Upsolve Team.  Reviewed by Attorney Andrea Wimmer
Updated December 28, 2020

A charge off on a car loan is debt that a creditor declares uncollectible. An auto loan charge off hurts your credit history and lowers your credit score. The charged off debt could stay on your credit report for seven years and drop your credit score by 100 points. The creditor can still collect the charged-off debt, and the person that took out the auto loan still owes the charged-off debt. Car loan debt feels like it will last forever, but even a car loan charge off can be discharged through bankruptcy. After a bankruptcy discharge, you’ll be able to clean up your credit history and jump start your credit score.

How Does a Charge Off Work?

At the beginning of an auto loan contract, monthly payments from installment loans are noted as “anticipated” in the loan company’s accounting records. In a charged-off account, the debt is removed from the original creditor’s accounting books so the debt stops being considered anticipated income. Government regulations give creditors deadlines for reporting overdue loan balances on vehicle loan charge off accounts. Information collectors, creditors, and collection agencies report these debts to major credit reporting agencies.

Charged off debt on a credit report often indicates the debt has landed with a debt collection agency. When debt goes to a collection agency, a frenzy of calls and letters from bill collectors can start. Sometimes, an original creditor will stop charging interest rates, but a collection agency will start charging interest again. One way to stop the collection activity is to file a Chapter 7 or Chapter 13 bankruptcy. Bankruptcy can help even if you have a repossessed car and wage garnishments. 

Is A Charge Off the Same As A Car Repossession? 

A car loan charge off is not the same as a car repossession, but they both hurt your credit. You can have your car repossessed and still have an auto loan charge-off on your credit report. Since a car loan is usually an installment loan with secured debt, a promise is made in the contract that the car can be taken back (repossessed) if payments aren’t made. The company that repossesses the car has to follow state laws regulating repossession, they can’t take your car anywhere, any place, or any time. 

When signing an auto loan contract, it’s easy to believe that the car value is equal to the amount of the loan, but that’s not how it works at the time of repossession. Often, a car gets sold for less than the amount of the loan, and the person that took out the loan is stuck owing the remainder of the loan—and they don’t have a car. This extra amount owed is the loan “deficiency.” The person that took out the auto loan will probably be stuck also owing the costs to repossess the car. If the amount owed after repossession (the deficiency) isn’t paid, the creditor must report the charged-off debt. If the car value covers the loan amount and there are no extra charges there is no deficiency.

If you defaulted on an unsecured loan—maybe you bought a used car using a mix of cash, a vehicle trade-in, and credit cards or a personal loan—the credit card debt or personal loan debt will be charged off, reported to credit bureaus, noted on your credit report, and your credit score will suffer. You can count on bad debt getting reported to credit bureaus, and Equifax and Experian will handle the bulk of detailed bad credit reports. But there are a lot of scammers and there are cases of illegal debt collectors pretending to be car repossession companies to scam consumers. Be careful.

When Does A Charge Off Get Reported? 

Charge offs are regulated by the government. A typical auto loan is called a “closed-end loan” in the banking world, and it must be classified as a loss and charged off after 120 days of nonpayment. Credit card loans, known as “open-ended loans,” can have 180 days of nonpayment before being a charge off.  These regulations are reported in the FDIC’s Uniform Retail Credit Classification and Account Management Policy

The Federal Reserve Board, FDIC, and other government and banking industries have uniform standards for charge-offs in the Uniform Policy for Classification of Consumer Installment Credit Based on Delinquency Status, and in individual institutional policies. The rules are in place for accounting, portfolio management, data management, and accountability. 

A financial institution can report charged-off debt earlier than 120 days. The Uniform Policy recommends that losses are reported as soon as they are known. Although in March of 2020 the CARES Act amended the Fair Credit Reporting Act to slow down credit reporting during the pandemic, the credit protection in Section 4021 of the CARES Act does not apply to debt that’s been charged-off. 

Do I Have to Pay A Car Loan Charge Off?

If you have a car loan charge off, you still owe the debt unless it gets discharged in a bankruptcy or a court order declares the debt isn’t valid for some other reason (such as fraud). If you file bankruptcy and the debt is discharged, you do not have to pay the auto loan charge off. 

Does The Statute of Limitations Stop Charge-off Debt?

A statute of limitations on debt collection doesn’t make debt go away, but it does protect you. A statute of limitations for debt sets a time limit for creditors to get a court judgment against you, not a time limit for debt to go away. Once the statute of limitations has passed, the debt is “time-barred.” Creditors can still contact you, but they can’t legally garnish your wages or get a court order for a judgment against you. Certain events can change the time when the statute (law) starts or stops—for instance, a late payment could make the statute of limitations clock start all over again. 

There may be a two-year statute of limitations in one state, and a ten-year statute of limitations in another state. The rules for collecting on charge-offs and other types of debt differ among states. There are federal laws and state laws governing debt collection. On top of that, laws applying to original creditors can be different than those applying to collection agencies. Bankruptcy attorneys and consumer protection attorneys get paid to know the details. 

Take time to get familiar with your rights on time-barred debt collection and strongly consider contacting an attorney if you get sued for a charge off. Even though debt collectors are time-barred, they could still harass you with collection calls in an attempt to re-start the statute of limitations. 

Can Chapter 7 Bankruptcy Help Get Rid of Car Loan Charge Offs?

Yes!  A Chapter 7 bankruptcy can help you get rid of debt from your car loan, including charge-offs, and you’ll be able to free yourself from lingering credit card debt and debt from medical bills. At the beginning of your bankruptcy action, when you file a petition for Chapter 7 bankruptcy, you’ll get an automatic stay. The automatic stay prohibits most creditors, collection agencies, and other bill collectors from contacting you. At the end of the bankruptcy process, you’ll get a discharge, which is a court order telling discharged creditors that you no longer owe the debt that was discharged during bankruptcy. You’ll have a fresh start so you can begin cleaning up your credit report and watch your credit score improve. You can contact a bankruptcy attorney to learn more or browse through Upsolve’s learning center

What’s the Difference Between A Discharge and Charge Off?

Bankruptcy discharge and a creditor charge off are polar opposites. A bankruptcy discharge means the debt is no longer owed, and collectors can’t collect. A creditor charge off means the debt is still owed and collectors can collect. In bankruptcy, a discharge is a formal court order that lets creditors know that they no longer have the legal power to collect the debt that was discharged. A charge off from a creditor is reported to credit bureaus so creditors know the debt still exists. A bankruptcy discharge gives you a fresh start so you can charge ahead with confidence, leaving your debt in your rearview mirror. A charge off is debt hiding around the corner waiting to run into you.

Consider Filing Bankruptcy If You Have a Car Loan Charge Off

You can talk to an attorney about your bankruptcy options and enjoy the attorney-client privilege. An attorney can tell you if a reaffirmation or redemption agreement can help you refinance your car. If you have a steady income but you have a car loan charge off and some property you’d like to keep, consider filing a Chapter 13 bankruptcy. A Chapter 13 bankruptcy will take a few years, but you can make payment arrangements. If you’re filing for Chapter 7 and are low-income, you can see if there’s a free attorney in your area, or you can file on your own if you’re comfortable with paperwork. There is nothing that says you have to hire an attorney if you can’t afford to! Upsolve has a website app that can drive you through the bankruptcy process, and you’ll be on the road to a fresh start! 

Written By:

The Upsolve Team

Upsolve is fortunate to have a remarkable team of bankruptcy attorneys, as well as finance and consumer rights professionals, as contributing writers to help us keep our content up to date, informative, and helpful to everyone.

Attorney Andrea Wimmer


Andrea practiced exclusively as a bankruptcy attorney in consumer Chapter 7 and Chapter 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team as Managing Editor. While in private practice, Andrea handled... read more about Attorney Andrea Wimmer

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