Can’t Afford Your Car Payment: Options, Credit Impact, and Deficiency

If you can’t afford your car payment, you have real options before a repossession agent shows up: call your lender about a deferment, refinance or modify the loan, sell the vehicle yourself, or arrange a voluntary surrender. Which one fits depends on whether your setback is temporary, whether you owe more than the car is worth, and how much time you have before you fall further behind. Your lender holds a security interest in the vehicle, meaning you don’t fully own it until the loan is paid off, and it can eventually seize the car if you default.¹ The sooner you act, the more of these options stay open.

Call Your Lender Before You Miss a Payment

The moment you know a payment will be late, contact your lender. Most have a hardship department that can adjust your due date, set up a short-term payment plan, or pause payments through a forbearance or deferment.² Have recent pay stubs, bank statements, and a rough budget ready so the representative can evaluate your situation in one call.

A deferment usually lets you skip one or more monthly payments and adds those amounts to the end of the loan. Your term gets longer, but you avoid default while you get back on your feet. These arrangements are built for temporary setbacks, like a short gap between jobs, not for a permanent drop in income.

Interest keeps accruing on the principal during the months you skip, so you’ll pay more over the life of the loan because the balance stays higher for longer. Some lenders also charge a processing fee for the modification. Ask about any added costs before agreeing.

Refinancing or Modifying the Loan

If your income has stabilized but the payment is still too high, refinancing or modifying the loan can lower what you owe each month. A loan modification renegotiates your existing terms with your current lender, often by stretching repayment from, say, 60 months to 72 or 84, so the same balance spreads across more payments.³ The trade-off is more total interest.

Refinancing through a different lender works differently. A new institution pays off your original balance, and you start over with a new interest rate and repayment schedule. Expect a formal application, a current credit report, and proof of steady income. Some lenders won’t consider borrowers who are already behind, so reaching out early improves your odds.³

The biggest obstacle either way is negative equity: owing more than the car is worth. Lenders cap loan-to-value ratios, and if your balance significantly exceeds the vehicle’s market value, you may need to bring cash to close the gap before anyone approves new terms. Check the current trade-in value through Kelley Blue Book or NADA Guides before you apply.

Selling the Car Yourself

A private sale is often the best financial move if you owe less than the car is worth. You sell the vehicle, use the proceeds to pay off the loan, and walk away with no repossession on your record. Check your loan’s payoff amount and the car’s approximate market value before listing, and review your contract for any prepayment penalty.²

What if you’re underwater? A private sale still brings in more than a lender’s auction would, but you’ll need to cover the remaining balance out of pocket or work out a payment plan with your lender for the difference. Some lenders will also buy the vehicle back directly, which simplifies the process.² Either route avoids repossession fees, auction markdowns, and the credit damage a repo causes.

Voluntary Surrender

If you can’t sell the car and can’t keep paying, you can return it to the lender on your own terms. Contact the recovery department, arrange a date and location for the handover (usually a repossession lot or dealership), and sign paperwork acknowledging the transfer. Take every personal belonging out of the car before you hand over the keys.

Voluntary surrender avoids towing fees and the stress of an unexpected repossession, but it doesn’t erase the loan. The lender will still sell the vehicle and hold you responsible for any remaining balance. Both voluntary surrender and involuntary repossession appear as negative marks on your credit report for up to seven years.⁴

What Happens If You Stop Paying

If you stop paying and don’t make other arrangements, the lender can send a licensed agent to seize the car without going to court first. The Uniform Commercial Code gives secured lenders the right to take possession of collateral after a default, so long as the repossession happens without a “breach of the peace.”⁵ The repo agent can’t use force, threats, or break into a locked garage. If you object during the attempt, the agent has to leave, though the lender will try again or seek a court order.

Many states require the lender to send a written “right to cure” notice first, giving you a window (often around 30 days) to catch up before repossession begins. Whether your state requires this notice, and how long you get, depends on local law. Your state attorney general’s office or a local legal aid organization can tell you your specific rights.

After the car is towed, the lender must send you a written notice before selling it. That notice has to describe your potential liability for any remaining balance and give a phone number you can call to find out what it would take to get the car back.⁶ Personal belongings found in the vehicle have to be inventoried and stored for you to pick up; the deadline for claiming them varies by state, and storage fees may apply.

You may be able to get the car back in one of two ways. Redemption means paying off the entire remaining loan balance plus repossession costs, storage fees, and reasonable attorney’s fees in a lump sum, and it’s available any time before the lender sells the car or contracts to sell it.⁷ Reinstatement is cheaper, when your state and contract allow it: you pay just the past-due amount plus fees, then resume regular payments. Reinstatement windows are short, often 10 to 15 days after the lender provides a quote.

The Deficiency Balance

After the lender sells the car, whether you surrendered it or it was taken, the sale proceeds are applied to what you owe. If the car sells for less than the total balance (including late fees and repossession costs), the leftover amount is a deficiency balance. Owed $15,000 and the car sold at auction for $10,000? The deficiency is $5,000 plus any added costs from the repossession and sale.

The lender can sue you for that amount. A deficiency judgment lets the lender garnish wages or place liens on other property. Federal law caps wage garnishment for this type of debt at 25 percent of your disposable earnings per pay period, or the amount by which your weekly disposable earnings exceed 30 times the federal minimum wage, whichever produces the smaller garnishment.⁸ A handful of states further restrict or prohibit deficiency judgments after car repossessions, so your exposure depends partly on where you live.

Tax on Forgiven Debt

If the lender eventually forgives or writes off part of your deficiency balance, the IRS generally treats the forgiven amount as taxable income. You’ll receive a Form 1099-C for the canceled debt and must report it on your tax return for the year it was canceled.⁹

One important exception: if your total debts exceeded your total assets when the debt was canceled (the IRS calls this insolvency), you can exclude the forgiven amount from income, up to the extent of your insolvency, by filing Form 982 with your return.¹⁰ A tax professional can help you figure out whether you qualify.

How Much Your Credit Takes

A repossession, whether voluntary or involuntary, can stay on your credit reports for up to seven years from the date of the first missed payment that led to the default.⁴ The higher your score before the repossession, the larger the drop. Both types count as derogatory marks, and there’s no meaningful scoring difference between the two.

The real advantage of voluntary surrender isn’t a better credit score. It’s avoiding the towing and storage fees that get tacked onto an involuntary repo and rolled into your deficiency balance. Expect a repossession on your record to make financing a car, renting an apartment, or qualifying for other credit harder and more expensive for years afterward.

If You’re on Active Duty

Active-duty servicemembers get extra protection under the Servicemembers Civil Relief Act. A lender can’t repossess your vehicle without first getting a court order, as long as you bought the car and made at least one payment before entering active duty.¹¹ The lender has to file suit and convince a judge before taking the car. Vehicles purchased after you entered active duty are not covered by this specific protection.

Bankruptcy as a Last Resort

Filing bankruptcy triggers an automatic stay that immediately halts most collection actions, including repossession. Once the petition is filed, creditors must stop trying to seize your property or collect debts without permission from the bankruptcy court.¹² If a repo agent already has your car, the stay may require the lender to return it while the case is pending.

In a Chapter 7 case, you can surrender the vehicle and discharge the remaining debt, including any deficiency balance, so you walk away owing nothing on the loan. Chapter 7 has income limits and stays on your credit report for up to ten years.

Chapter 13 lets you keep the car and restructure what you owe through a three-to-five-year repayment plan. If the vehicle is worth less than the balance, Chapter 13 may allow a “cramdown” that reduces the secured portion of the loan to the car’s current market value, with the unsecured portion treated like other unsecured debt in the plan (often paid at pennies on the dollar). The cramdown is only available if you bought the vehicle more than 910 days, roughly two and a half years, before filing.¹³ Cars bought more recently have to be paid at the full contract balance through the plan.

Bankruptcy carries serious long-term consequences for your credit and finances, and the process involves court supervision, attorney fees, and strict compliance with a repayment plan under Chapter 13. Talk to a bankruptcy attorney before filing to weigh whether the benefits outweigh the costs in your situation.

1
Federal Trade Commission. Financing or Leasing a Car
2
Consumer Financial Protection Bureau. What Should I Do if I Can’t Make My Car Payments?
3
Consumer Financial Protection Bureau. Worried About Making Your Auto Loan Payments? Your Lender May Have Options That Can Help
4
Consumer Financial Protection Bureau. What Happens if My Car Is Repossessed
5
LII / Legal Information Institute. UCC 9-609 – Secured Party’s Right to Take Possession After Default
6
LII / Legal Information Institute. UCC 9-614 – Contents and Form of Notification Before Disposition of Collateral: Consumer-Goods Transaction
7
LII / Legal Information Institute. UCC 9-623 – Right to Redeem Collateral
8
Office of the Law Revision Counsel. 15 USC 1673 – Restriction on Garnishment
9
Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not?
10
Internal Revenue Service. What if I Am Insolvent?
11
Consumer Financial Protection Bureau. I’m in the Military and Having Trouble Paying My Auto Loan. What Should I Know About Auto Repossession and Protections Under the Servicemembers Civil Relief Act (SCRA)?
12
Office of the Law Revision Counsel. 11 USC 362 – Automatic Stay
13
Office of the Law Revision Counsel. 11 USC 1325 – Confirmation of Plan