Your auto lender is the one that would try to garnish your wages and cash, not a dealership. Once you deposit your tax refund into your bank account, though, it may be available for your lender to take if you've defaulted on your car loan.

Tax Refunds and Auto Loans

Can a Dealership Take Your Tax Refund?A dealership wouldn’t be the one garnishing your wages; that’d be the auto lender that you're financed with. The good news is that your tax refund can’t typically be garnished unless you’re in specific circumstances.

Creditors can’t seize your tax refunds for credit card, medical, or car loan debts. Our sister site, a legal website, states that a creditor can seize your tax refund if you owe:

  • Federal taxes
  • State taxes
  • Child support
  • Alimony
  • Student loans

These creditors don’t need to sue you before they garnish your wages or tax refunds. Since your auto lender isn’t a government agency, they can’t simply garnish your wages or tax refund automatically.

However, your lender may be able to garnish your wages or charge your bank accounts if they sue you over a defaulted car loan and win.

Garnishment and Your Tax Refund

A private creditor can’t simply garnish your wages because you defaulted on your auto loan.

According to Nolo, a private creditor (for example, your car lender) first must sue you for the debt, then get a court order to garnish your income. This is called a money judgment, and there are limits on how much of your income can be garnished. This amount is usually up to 25% of your disposable income, or the amount by which your weekly disposable income exceeds 30 times the federal minimum wage (whichever is lower).

Your auto lender may not be able to take your tax refund before it’s sent to you, but once it is deposited into your bank account, it’s a different story. Your lender could get a money judgment that allows them to garnish money out of your bank account or your paycheck. They may not be able to take your tax refund before it’s issued to you, but once you cash that check, it could be fair game.

Worried About Defaulting?

If you’re worried about defaulting on your car loan and don’t want your income or bank accounts to be garnished, the first thing you should do is talk to your lender. They don’t want you to default, either, since they could lose money on the auto loan and have to go through the vehicle repossession process.

If you’re going through some difficult times, some lenders are able to arrange a deferment, which could pause your car payments for a little while. This doesn’t eliminate those payments, but those pushed back payments are often sent to the end of your loan.

This could give you a break you need to get everything caught up, and possibly help you avoid a default and repossession – both of which can do heavy damage on your credit reports.

Need a More Affordable Vehicle?

Your tax refund could be at risk if you can’t pay for the vehicle if your auto lender decides to sue you for your outstanding balance. If you no longer can afford your current car and want to avoid a repossession, or possible wage garnishment, it may be time to trade it in for another one.

If you’re struggling with credit issues, finding a lender to work with can be difficult, but it isn’t impossible and you can begin looking right now. Here at Auto Credit Express, we have a nationwide network of dealerships that work with bad credit auto lenders.

We match bad credit borrowers to dealers in their area, and we can look for one near you after you complete our online car loan request form. It’s completely free, secure, and there’s never an obligation to buy anything, so get started now!