“My Trade-In Vehicle wasn’t paid off by the Dealer. Now it’s still on my credit report as past due. What can I do?”
Believe it or not, this question comes up fairly often. You go car shopping, and you find a car you like, negotiate a value for your trade-in vehicle, sign the papers and drive off in your new ride. You start making your new payments and all is well. Until you find out that your old car loan – the one that the dealer was supposed to pay off – hasn’t been paid off. And now you’re getting collection calls, and past due negative marks on your credit report.
Sometimes, it is a (mostly) honest mistake. Your old car note information got lost in a stack of other deals and the dealer didn’t send the check to the old lien holder until a couple of months had gone by. They eventually pay, but not before your credit takes a hit.
Other times, it is a regular practice of shady dealers. They gladly take your trade-in, and they give you credit for its value, minus the previous lien, and they’re supposed to pay off the old lien. But sometimes they don’t pay off anything for a couple of months, because they are waiting to see if they can obtain financing for your deal. Even though you’ve signed the papers and already driven off in the car. In the worst cases, they may not pay it off at all.
Regardless of their reasons, and even if they did it by mistake, a dealer’s failure to promptly pay off the lien on your trade-in vehicle can have serious negative consequences for you. See, the lienholder will blame you for their late payment. Your previous lienholder doesn’t care whose fault it is – all they know is that your payment is due on the first of the month, and if it is 30 days late, they’re going to report that to the credit bureaus, and it’s not going on the dealer’s credit report. It’s going on yours.
If you have otherwise clean recent credit history, this can have a serious impact on your ability to obtain a mortgage and can increase the cost of things like credit cards and other loans.
To make matters worse, the credit bureaus don’t care whose fault it is either. The Fair Credit Reporting Act only requires that the information they publish be as accurate as possible – not that it be a fair reflection of who is to blame for your negative credit marks. So if you dispute a “Past Due” amount on a car loan that was only past due because the dealer screwed up, they don’t have to fix it. And therefore they probably won’t.
So What Can You Do About It?
You’re not without hope, though. By taking your trade-in and adding the balance of your previous lien to the cost of your new vehicle, the Dealer is being entrusted with your property. They are taking your property partially for your benefit: to be liquidated to pay off your old lien. And they have a contractual duty to do just that. When they do not do so, they can be held liable to you for the damages caused by that failure.
The most common problem facing a buyer in these cases is proving that the dealer’s irresponsibility caused you damages, and proving the amount of those damages. Most often, the only financial harm that is caused by a dealer’s failure to pay off a trade-in is in the form of credit denials and increased cost of credit. While there have been cases of buyers who were unable to buy a home because of a dealer’s failure to promptly pay off a trade-in, this usually is not the case. Credit reports contain lots of information, and unless you can obtain evidence from a lender that you were denied credit, or your interest rate was higher primarily due to the unpaid previous car loan, then obtaining significant compensation from the dealer is going to be hard.
So where the dealer simply waited a month or two to pay off a trade-in, it may not be worth the money of filing a lawsuit unless you can show specific harm. You may simply want to file a small claims lawsuit or post a few negative reviews and BBB complaints against the seller.
However, if several months go by and the debt remains unpaid, then the dealer’s failure to pay the lien may be a sign of serious fraud, and you should talk to a lawyer immediately. Particularly if the previous lien holder begins pursuing you to collect the unpaid debt. Yes, this can happen.
This situation often involves two victims – you and the person that the fraudulent dealer sold your old car to. I’ve had clients who were sold vehicles that the dealer didn’t even own. If a dealer sells you a car that has a valid lien on it, then the previous lien holder may repossess the car from you – even though you never owed them a dime!
This can be immensely frustrating and disruptive to your whole life. The loss of your transportation can cause you to miss work and family commitments, not to mention the money that you’ve paid in good faith for the car. If you suspect that you’ve been sold a vehicle without clear title, then you need to call a lawyer immediately.