In Ontario, you’re protected by the Ontario Collection and Debt Settlement Services Act (the “Act”). The Act sets out strict laws on what a debt collection agency can - and cannot - do. Among other things, it attempts to curb collection agencies from using harassing or intimidating tactics to get you to repay the debt you owe. Here's what this law covers.
Nobody takes out a car loan intending to miss their payments. However, things happen. Life happens. A layoff, an expensive divorce, or a health issue and, all of a sudden, you’re drowning in debt and you can’t make your payments. Unfortunately, if you continue to miss your car or truck payments, you may be at risk for vehicle repossession. In addition to losing your mode of transportation, there are other financial consequences that come with vehicle repossession.
When is a Vehicle Repossessed?
If you lease or finance a car and are unable to make your payments, your vehicle is at risk of being repossessed. If you get too far behind on your payments, the lender will likely notify you about the missed payments. If you’re unwilling to work with the vendor or simply unable to make your payments, the lender can send a bailiff to repossess your vehicle.
A lender will repossess a vehicle in an effort to recoup some of the money that you owe. They will typically try to sell your vehicle for a fair market price or put it up for auction. The proceeds from the sale of the vehicle will be used to pay off the balance of your loan. If the sale price doesn’t cover the entire amount of the loan, you are responsible for the difference. This difference is referred to as a deficiency.
What is a deficiency?
If your vehicle is repossessed and sold for an amount that doesn’t cover the entire balance, you are not in the clear. You are still responsible for paying the deficiency which includes any amount remaining on the balance of your loan, costs associated with the repossession, late payment fees, and interest charges.
How Does the Car Repossession Process Work in Canada?
Repossession laws can differ based on the province in which you live. For instance, in Alberta and British Columbia, they have what is called a seize or sue law. With this law, the creditor has a choice, they can either seize (repossess) the vehicle from the debtor or, they can sue the debtor for the amount owed. It’s up to the creditor to determine which way they want to go but they can’t do both.
This is not the case in Ontario. In Ontario, the creditor has the right to seize and sue for the balance remaining on the loan.
While repossession laws vary between provinces, the types of vehicle repossession are consistent across the country. There are two types of repossession include involuntary repossession and voluntary repossession.
Involuntary versus voluntary repossession
An involuntary repossession occurs if you miss your car payments and then refuse to work with the lender to come to some sort of repayment agreement. A voluntary repossession occurs when you recognize that you can afford to make your car payments and you voluntarily surrender the vehicle back to the lender. A voluntary repossession can help to prevent incurring additional costs associated with an involuntary repossession.
Will a Repossession Affect Your Credit Score?
Regardless of whether you are involved in an involuntary or voluntary car repossession, your credit report will likely suffer. A vehicle repo can stay on your credit report for up to seven years. This can make it difficult to take out another car loan, get a mortgage, or get approved for any other type of loan. Even if you do find a creditor who is willing to lend you money, it will probably come with a very high-interest rate.
How to Avoid Vehicle Repo
If you want to avoid seeing your car or truck end up in the repo depot, it’s recommended that you speak to a Licensed Insolvency Trustee (LIT) as soon as possible about your debt management options. However, there are some things you can do to try to avoid vehicle repossession including:
Speak to your lender
It’s important to remember that repossession is a last resort for the creditor. They don’t want to deal with the hassle of repossessing your car, selling it, and then coming after you for loan deficiency payments. Nobody wants this. So, as soon as you recognize that you won’t be able to make a payment, reach out to your lender and see what kind of repayment or refinancing arrangement you can come up with.
If there is absolutely no way you can afford to catch up on your payments or continue to make your payments moving forward, then it’s time to speak with a LIT to see what your options are.
Sell your car
If you can’t afford your car payments, you might want to consider selling your vehicle before vehicle repossession becomes an option. Selling your car or truck gives you a way to try and recoup as much money as possible to pay off your loan.
If you want to avoid repossession but know you can’t afford to make your payments, you can voluntarily surrender your vehicle. In this scenario, it’s best to let the lender know as soon as possible. As was previously mentioned, even if the repossession is voluntary, there are still financial consequences. First, your credit score will take a hit. Second, you will still be on the hook for any deficiency payments.
Can You Avoid Repossession by Filing for Bankruptcy?
If you are struggling with multiple debts and considering different debt management options, you should be aware that you cannot avoid repossession by filing for Bankruptcy or a Consumer Proposal. Your vehicle loan is a secured loan meaning it will not be eliminated in Bankruptcy.
Filing for Bankruptcy may help to free up some money through the elimination of unsecured debt such as credit cards or unsecured loans. This means you may have more money available to pay for your remaining secured loans, including your car payments.
However, before you make any decisions about Bankruptcy, it is important to speak to a Licensed Insolvency Trustee. A LIT can work with you to understand your financial situation and guide you through the different debt management options.
What Happens After Vehicle Repossession?
If your vehicle is repossessed and later on down the line you decide to file for Bankruptcy, your remaining car debt may be included. Before your car is repossessed, your debt is “secured” and won’t be included in Bankruptcy. However, after your vehicle is repossessed, any remaining debt becomes “unsecured.” Unsecured debt is typically included in Bankruptcy.
Who Can Help Me?
The prospect of losing your vehicle to repossession can be extremely stressful. If you are unable to make your vehicle payments and you are concerned about vehicle repossession, reach out to a LIT today. You don’t have to navigate through this process alone.