Dealing with Car Loan Debt and Vehicle Repossession

Vehicle repossession is a serious issue that can occur if you fail to keep up with your car loan payments. It’s a process that not only takes away your vehicle but can also leave you with a significant amount of debt. In this article, we’ll discuss the ins and outs of car loan debt and vehicle repossession, and offer some possible solutions to these stressful situations.

What Does Repossession Mean?

Repossession is a term used to describe the action taken by financial institutions to recover assets (in this case, vehicles) when borrowers default on their loans. This can happen whether you’ve purchased your car outright or if you’re leasing it.

In a lease scenario, the dealership or auto seller still owns the vehicle. You’ve essentially signed an agreement that allows the lessor to reclaim the vehicle if you’re unable to keep up with your lease payments.

On the other hand, if you’ve purchased your vehicle, you own it but the lender maintains a lien against the vehicle as a form of collateral. In case of default, the lender has the legal right to repossess the car.

The Repossession Process

The repossession process begins with a notice from your lender that you’re behind on your payments. However, they’re not obligated to inform you when they will be coming to repossess your car. This is known as an involuntary repossession. Alternatively, if you already know that you can’t afford the vehicle anymore, you can choose to surrender it voluntarily, a process known as voluntary repossession or voluntary surrender.

The Aftermath of Repossession: Loan Deficiencies

The repossession of your vehicle doesn’t absolve you of your obligation to continue making payments under the loan agreement. After the lender has taken the vehicle, they can choose to sell it or put it up for auction. The money raised from this sale will be deducted from the remaining balance of your loan.

Any repossession costs, late payment fees, and interest charges will be added to your loan balance. This deficiency, now known as an unsecured debt, is still owed to the lender.

Furthermore, the lender will report the late payments and repossession to credit bureaus, which can have a detrimental effect on your credit score for up to seven years.

How to Avoid Repossession

Avoiding repossession is possible by making arrangements with your lender. These arrangements will require you to pay off your payment arrears and any repossession fees and recovery costs the lender may have incurred.

Filing bankruptcy will not prevent a repossession as your auto lender is a secured lender. They are not prohibited by the automatic stay in bankruptcy or consumer proposal from enforcing their security rights.

However, if you’re struggling with your car loan payments because of other unsecured debts such as credit cards or high-cost loans, it might be feasible to file an insolvency proceeding with a Licensed Insolvency Trustee. This process can eliminate these debts, freeing up cash flow in your budget to catch up and continue with your car loan or lease.

The Option of Walking Away after Repossession

If you decide to walk away from your car loan, or if your lender has already repossessed your vehicle, it is possible to file a bankruptcy or a proposal to eliminate the unsecured deficiency.

Although filing for bankruptcy to deal with a car loan deficiency should be considered as a last resort, if you have other significant debts, it might make sense to file a bankruptcy or proposal to manage all your debt problems.

While not common, about 10% of all insolvencies in Canada involve vehicles with a deficiency. So, if you find yourself having purchased or leased a car beyond your means, know that you have options.


Dealing with car loan debt and vehicle repossession can be challenging. However, understanding the process and your options can help you navigate through this difficult time. Remember, you’re not alone, and there are resources available to help you make the best decision for your specific situation.

If you’re facing financial difficulties, it’s crucial to seek professional advice as soon as possible to explore all your options and make informed decisions.

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