The fact that repossession is a black mark on your credit is bad enough but it could also result in a tax bill from Uncle Sam.

Paying Taxes on a Repossessed Car?

Paying Taxes on a Repossessed car

At Auto Credit Express we believe it's our job to educate consumers with bad credit about the subprime auto loan process in the hopes that they will complete the process successfully.

That's because, according to information from Experian Automotive, consumers financing a vehicle from a high-risk lender are roughly twice as likely to have thier auto loan end in repossession versus buyers financing with a conventional vehicle loan. And, once repossessed, this could mean bad things for you come tax time.


According to the Federal Trade Commission, "Once you are in default, the laws of most states permit the creditor to repossess your car at any time, without notice, and to come onto your property to do so."

Depending on the state where you live, the bank must notify you within a certain number of days when the vehicle will be sold. During the interim, it may also be possible to buy back the vehicle for the balance owed plus any expenses related to the repossession. You also may be given the opportunity to reinstate the loan by paying the amount you are behind plus expenses – although the lender is not required to do this.

Vehicle Disposition

If nothing is done and the vehicle sells at auction (you also have the right to bid on the vehicle) for less than the contract balance plus expenses, the bank has a right to go to court and seek a judgment for the balance of the loan – called a deficiency judgment.

Borrowers that don't pay this judgment can have their wages garnished and even have their income tax refund seized (the IRS calls this a tax refund offset). But if the lender decides not to pursue the collection process, borrowers are still not off the hook.


If the lender decides to "write off" or cancel the debt, there's a good chance the borrower could receive a "cancellation of debt" form 1099-C from the lender listing the total amount still owed.

The good news is that the debt is forgiven. The bad news is that the IRS considers canceled or forgiven debt as taxable income to the borrower. Unless borrowers can prove they were insolvent (they owe more than they own in assets – and there are even rules regarding this practice) at the time the debt was forgiven, the amount on the 1099-C form has to be added to their other income for the tax year listed on the form.

The Bottom Line

Borrowers having problems paying their car loans should call the lender and explain their situation. Not only is repossession a black mark on their credit reports – often preventing them from getting a car loan for at least a year, it could end up costing them hundreds if not thousands of dollars in taxes owed to the government.

One more tip: if your credit history does include repossession, we want you to know that Auto Credit Express matches consumers with credit issues to those dealers that can offer them their best chances for car loan even with a repossession.

So if you're ready to reestablish your credit, you can begin now by filling out our online car loan application.