Why Didn't Repo and Charge-off Erase Old Debt?

Dear Debt Adviser,

I'm having trouble with an old boat loan. After I stopped making payments, the boat was repossessed and the loan was charged off. Now a collection agency is trying to collect. Do they have the power to do so after the charge-off and bank repo? Should I get with the bank and try to work it out with them first?

-- Jon

Dear Jon, For a valid debt, the collection agency does indeed have the power to collect. When a loan is secured with collateral such as a car, boat or home, and the loan goes unpaid, the lender can repossess the collateral to help satisfy at least a portion of what is owed. But it doesn't end there. The debt remains valid until it is paid in full or forgiven.

Even though you're getting calls from collectors, it may not be too late to work out matters with the bank that gave you the loan.

Before you contact anyone, you need to know what you will say. The lender will have sold your boat at auction and applied the sales amount to the balance of the loan. The amount left, or deficiency balance, is what the collection agency is attempting to collect. Banks use collection agencies because they see themselves as lenders, not collectors. Your deficiency balance is likely a large amount since you only paid a little before the boat was repossessed, and it most likely depreciated a lot as soon as it got wet.

To determine how much you can realistically pay to satisfy the balance, take a detailed look at your finances and decide how much you can afford. Then try contacting your original lender. If the loan was sold to an outside collection agency, it is unlikely your lender will talk with you about the loan balance. But you should still try to ask the original lender for the balance they determined you owe and request that they send you the paperwork. Then, when you talk with the collection agency, ask the agency to verify the debt is yours and make sure the amount is consistent with what you received from the original lender.

If the collector can provide you with verification of the debt, then they have the authority to collect what is owed.

Your best option is working out a repayment plan. Be sure to get the agreement in writing before making a payment. Keep copies of the signed agreement and of all subsequent payments.

Another option is to try to settle for less than the full amount due. Typically, you would need to make a significant lump-sum payment for this type of arrangement to work. You can negotiate a settlement yourself, but if the boat was large, it may be worth it to pay an attorney who specializes in settlements to negotiate on your behalf.

If you don't resolve the deficiency balance, expect to be sued. This is also a good time to get a lawyer. Because the debt is valid and owed by you, the collector will most likely be granted a judgment by the court. With a judgment, the collector can garnish wages or bank accounts and/or place a lien on any property owned by you. The only way to stop this type of collection activity is to file for bankruptcy. However, even bankruptcy may not prevent you from paying something on this debt. How do you know what to do? See that attorney for a consultation, and you'll know.

Good luck!

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