Dodging the repo man? Here’s what you need to know if you’ve missed a car payment.

When you buy a car from a dealer, unless you paid for the car in full, you likely signed a Finance Agreement or what is sometimes called a Retail Installment Contract.

In addition to providing disclosures as required by law, this document is important for you to understand because it contains both a ‘promise to pay’ and a ‘security agreement’ all in one.  These two provisions raise distinct legal issues of which you may be unaware.

The ‘promise to pay’ is exactly what it sounds like, your personal promise to pay a specified sum of money accordingly to a monthly schedule.  However, miss even one payment and the finance company can ‘accelerate’ the debt.  This means that monthly payments are no longer acceptable and the entire balance becomes immediately due.

The promise to pay is absolute.  That means even if you no longer have possession of the car, you are still required to pay the total balance due on the contract.  This rule applies equally if the car is destroyed in an accident or repossessed by the finance company.

The ‘security agreement’ is the provision that legally permits the finance company to take back possession of the car if you miss a payment.  Again though, even once they have the car, you are still required to pay the balance due, and can be sued if you fail to pay.

Most states, New Jersey included, have laws that require finance companies to follow certain rules after repossession of a car, including giving 14 days written notice that they intend to sell or auction the car, and requiring that they credit your balance due with any monies realized at the sale (less reasonable expenses).

Because most cars immediately lose value the moment you drive it off the lot, the car is not likely to sell at auction for anywhere near the amount you owe which will leave you with a large debt to the finance company.

If you fail to pay this debt, and are sued, a judgment granted by a court will allow the finance company to garnish your wages, levy your bank accounts or seize other property you own.

Bankruptcy can help in these situations in a variety of ways.

  1. Avoid Repossession. If you’ve fallen behind on payments and the car has not yet been repossessed, bankruptcy will allow you to ‘catch up’ on those payments over time.  As long as you resume making all necessary payments, you keep your car.


  1. Reduce the Monthly Payment. In some cases you can lower your interest rate and/or extend the term of the loan so that you pay less for the car overall, or pay less per month.


  1. Discharge the Debt Completely. If the car has already been repossessed, or if you decide you don’t want the car anymore, you can surrender it and completely remove the debt.  Bankruptcy will prevent the finance company from suing you to recover the balance.

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