If you’re delinquent on your car loan and you’ve missed payments for 120 days or more, you may end up with a “charge-off” on your credit report. A charge-off can cause your credit score to drop, and it may remain on your credit report for years.
Fortunately, there are steps you can take to remove a charge-off from your credit report. Here’s how to settle a charge-off auto loan.
Key Points
• A charge-off occurs when a lender writes off a delinquent auto loan as a loss, but this doesn’t eliminate the debt. You are still responsible for paying the remaining balance.
• You can negotiate with the lender to settle the charge-off for less than the full amount owed. This can help reduce the total amount you need to pay.
• Settling a charge-off can negatively impact your credit score, but it may be less damaging than leaving the debt unpaid. Paying the settlement can help improve your credit over time.
• Before settling, consult with a legal or financial advisor to understand the implications, such as potential tax consequences or the effect on future credit opportunities.
• Always get the settlement agreement in writing to ensure that both parties are clear on the terms and to protect yourself from future disputes.
What Is an Auto Loan Charge-Off?
When you take out a car loan, you’re expected to pay it back regularly over a certain period of time. If you miss payments for a specific amount of time, which is known as defaulting on an auto loan, your debt is considered to be delinquent. Your lender will try to collect on the debt. If they can’t, they may categorize it as uncollectible and put it in their books as a charged-off debt.
So what is a charge-off on a car loan? It’s an accounting practice that allows the lender to change your account from an asset to a liability and write it off for tax purposes. This usually takes place 120 days after you’ve stopped paying your car loan. The lender will report the charged-off status to the credit bureaus, and it will be listed on your credit report. As a result, your credit score will likely drop.
After a charge-off, you’re still responsible for paying the debt in full. The lender may sell the debt to a collections agency, and the agency will try to collect on the money from you. If they can’t, you may find yourself facing an auto repossession.
What Does an Auto Loan Charge-Off Mean for Your Credit?
When your car loan is charged off, the lender reports it to the three major credit bureaus. The charge-off will have a damaging impact on your credit score.
How long does a charge-off stay on your credit report? Typically, it remains on your credit history for seven years, impacting your credit and likely making it difficult to secure a loan in the future.
Recommended: Does Paying Off a Car Loan Help Your Credit?
Can Your Wages Be Garnished If You Don’t Settle an Auto Loan Charge-Off?
If you don’t settle an auto loan charge-off, your wages might be garnished if your car is repossessed by the lender and sold for less than the outstanding loan amount. In this case, you would owe a deficiency balance. If you don’t repay it, your lender may sue you. If they get a judgment against you, they could garnish your wages until the balance is paid off.
Similarly, if the lender sells the debt to a collections agency after a charge-off, the collections agency could sue you for the money you owe. If there is a judgment against you, your wages could be garnished until the debt is repaid.
Do You Pay Taxes When You Settle an Auto Loan Charge-Off?
If you settle the outstanding debt by paying it in full, you usually won’t owe any taxes. However, it’s possible to settle the debt for less than the full amount if the lender will work with you to do so. In that case, the difference between your settlement amount and the balance on the loan is treated as taxable income by the IRS, and you may owe federal income taxes on it.
Recommended: Pay Off a Car Loan Faster
How to Settle an Auto Loan Charge-Off
After a charge-off, you’re still legally obligated to repay what you owe. If you can pay your debt before it goes to collections, you may have a chance of having the charge-off removed from your credit report. Here’s how to settle a charge-off auto loan.
Determining the Debt
Contact your lender to make sure they still own your debt and haven’t sent it to collections. Find out how much the balance is and what you’ll need to pay.
If your debt has already been purchased by a collections agency, you’ll need to speak to that agency about a settlement plan.
Negotiating the Settlement Amount
If you can’t repay the full amount you owe, ask your lender about a settlement plan. They may be able to reduce the amount you owe, adjust the interest rate, or lower your monthly car payments to make it easier for you to pay.
Then, you’ll want to figure out how to remove an auto loan charge off, if possible. Ask the lender if they can remove the charge-off from your credit history in return for repayment. You could even inquire about a “pay-for-delete” arrangement, in which you agree to repay if the charge-off is removed from your credit report. This may be difficult to get, but it’s worth a try.
Getting a Written Settlement Agreement
Be sure to get the settlement agreement in writing, including the total settlement amount, the monthly payments, and whether the lender will remove the charge-off from your credit report. Once you’ve received the written confirmation, go ahead and start making payments.
Recommended: Guide to Gap Waivers
Tips for Paying Back an Auto Loan
To avoid a car loan charge-off, always make your auto loan payments by the due date. Paying your loans on time is the best way to pay down your debt and protect and build your credit. To avoid missing or forgetting payments, set up autopay on your account.
If you’re having money difficulties and you think you’re going to miss a payment, contact your lender immediately. They may be willing to work with you to make your payments more manageable. That might include lowering the interest rate on your car loan, extending the payment due dates, or even deferring payments for a short time until you regain your financial footing.
There are other ways to potentially make your monthly car loan easier to pay, including auto loan refinancing. When you refinance, you pay off your old loan with a new loan that ideally has a lower interest rate or better terms. Lengthening the term of your loan will reduce the amount you owe each month, though it will increase the amount of interest you pay in the long run.
Consider car loan refinancing when interest rates drop or when your financial situation improves, which might qualify you for a lower rate. Finally, it’s worth noting that even if your car has been repossessed, refinancing a car after repossession is possible, and might be something for you to explore.
The Takeaway
If your car loan has been charged-off, contact your lender about a settlement plan to repay the debt. Better yet, avoid a charge-off altogether by making your car payments in full and on time. If you’re in danger of missing a payment, contact your lender immediately.
If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.
FAQ
Is it possible to settle a charge-off on an auto loan?
Yes, if your lender agrees to work with you, it’s possible to settle a charge-off on a car loan. Contact the lender and ask about a settlement plan. They might reduce the amount you owe, or lower the interest rate or your monthly payments, for instance. Also ask the lender if they can remove the charge-off from your credit history in return for repayment.
How does settling a charge-off for an auto loan impact your credit?
As part of your settlement, you may be able to have the charge-off removed from your credit report, which might help to gradually strengthen your credit over time. Ask the lender to remove the charge-off in return for repayment. Be sure to get the terms of the agreement in writing.
How long does a charge-off stay on your credit report?
A charge-off stays on your credit report for seven years from the date it was first reported as delinquent. Paying the charge-off can improve your credit score over time, but it will not remove the entry before the seven-year period expires.
Photo credit: iStock/Tero Vesalainen
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