What Is A Charge Off On A Car Loan?

A charge off is what happens when a bank declares a debt uncollectible. This is the same for all types of debt and functions as a tax write off for the creditor. The creditor can still collect the charged-off debt, and the person who took out the auto loan still owes the charged-off debt. 

How it works

A car loan is a secured debt. 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 payments coming due under the payment plan stop being viewed as future 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.

What it means

Charged off debt on a credit report often indicates the debt is no longer with the original creditor but has instead landed with a debt collection agency. Credit collection agencies and debt collectors trying to collect on a charged off debt can file a lawsuit against you and even get a judgment. Once a judgment is granted, you may be subject to a wage garnishment. 

How does an auto loan charge-off impact my credit score?

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 as much as 100 points. 

Is a charge off worse than a car repossession? 

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. 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 have an auto loan charge-off on your credit report. One way to avoid this is to make payment arrangements or refinance your car loan to get your car back. 

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. 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. 

Charged-off Debt: Other types of debt

If you defaulted on an unsecured loan or credit card, the debt will be charged off, reported to the credit bureaus, noted on your credit report, and your credit score will suffer. You can count on bad debt getting reported to all the credit bureaus (Equifax, Experian, and Transunion).  

How are charge-offs regulated? 

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. 

Should I pay off charged off accounts?

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 collection of 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. 

Let’s Summarize…

Getting a car loan charged off doesn’t eliminate your obligation to pay the debt. It also doesn’t prevent a repossession. Once a car loan is charged off by the original creditor, you’ll likely be dealing with a collection agency or debt collector. If you get sued on a charged-off debt, 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 restart the statute of limitations.