How to Legally Default on Car Loans

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Criminal law does not apply to debts unless fraud has been committed by the borrower or debtor. It is entirely legal to default on a car loan, although there are major consequences for doing so. All car loans are secured by the vehicle itself, so the auto loan company reserves the right of confiscating the vehicle if you stop making payments on your loan. They will also report your default to the credit bureaus, which will damage your credit rating and make it more difficult for you to get loans in the future.

Step 1

Stop making minimum payments on your auto loan. Once the auto loan becomes 90 days late or more, the loan will be considered in default and the repossession process will begin. The auto lender will report the confiscation and your loan default within days. The lender likely will sell the debt to a collection agency, which will then pursue you to try to get the debt settled or paid in full.

Step 2

Wait to begin receiving collection requests. Collection companies will call your phones, send you mail, faxes and may even leave messages at your door. They are entitled by the law to pursue you to pay the debt even if your car has been repossessed. Ask for a voluntary repossession if you know you will not be able to pay the auto loan. This will not discharge your debt, but the lender will be more willing to work with you and reduce the balance of your loan further if you make the repossession process easier for them.

Step 3

Consider settling the debt with the lender or collection agency if you can't pay it in full. Unless a judgment has been obtained against you, you will be able to legally settle the debt for less than the total amount. Request that any settlement agreement you reach with the collector be provided in writing before sending any payment.

Step 4

Defend yourself against any lawsuits that the auto lender or collection agency might file against you. You are more likely to receive a lawsuit regarding the loan if you have an income sufficient to support the auto loan but decided against making payments. If you lose the lawsuit, a judgment may be obtained against you to garnish your wages or confiscate your liquid assets to pay for the loan. Show up at any court dates and consider contacting a debt lawyer to assist in your defense.

Step 5

File for Chapter 7 personal bankruptcy if you would like to legally discharge the default auto loan without settling or paying it in full. Filing for bankruptcy will temporarily stop all judgments against you and attempts to collect on the debt even if you are ultimately unsuccessful. If you successfully declare bankruptcy with the assistance of a bankruptcy attorney, you will no longer need to worry about dealing with the defaulted car loan.

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