App version: 0.1.0

Can You Settle a Charge-off for an Auto Loan?

Settling a Charge-Off for an Auto Loan
Austin Kilham
Austin KilhamUpdated April 3, 2023
Share this article:
Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
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. 

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. How car loans work is that you repay what you borrowed plus interest in monthly installments. 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.

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. 

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.

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. 

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 the payments. 

Tips for Paying Back an Auto Loan

To avoid a car loan charge-off, always make your auto loan payments by the due date. These tips for paying off a car loan may help you stay on track. 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.

More Auto Loan Tips From Lantern

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. Make your car payments in full and on time. If you’re in danger of missing a payment, contact your lender immediately. And if your monthly payments are unmanageable, consider an auto loan refinance. Lantern can help you compare refinancing rates and terms. You can get offers from top lenders in our network and choose a car refinance loan that’s best for you.

Frequently Asked Questions

Is it possible to settle a charge-off on an auto loan?
How does settling a charge-off for an auto loan impact your credit?
How long does a charge-off stay on your credit report?
Photo credit: iStock/MicroStockHub

About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
Share this article: