Wednesday, September 10, 2014

Does Getting Your Car Impounded Hurt Your Credit Scores?

If you want to see unbridled fury, you need look no further than the guy who's just watched as a tow
truck loaded up his car and headed to the impound lot. If you aren't familiar with impound lots, they're nothing more than prison for cars. And this is not a figurative statement. I've seen impound lots that had the whole metal-bars-and-barbed-wire thing going on. I guess they're concerned that someone, furious as having his car impounded, might just try to break in and take it back. If that's your plan, I'm sorry to burst your bubble of bright, shining hope here but stealing your car back?  Not gonna happen. It's car prison, remember? You'll have to pay bail.

Why Cars Get Impounded

The average American hears "impounded car" and automatically thinks of drug dealers and the cars  they use to smuggle and market their wares. Using this logic, as long as you aren't the Godfather, a drug mule or anything in between, you should be safe from having your car impounded. Right?


"Oh, that could never happen to me!" you say, but reality just isn't that kind. Below are just a few reasons your car could get towed to the impound lot. Remember, this is just a generalized list. Impound laws and procedures vary by state.

  • Road Rage (if you act on it in a dangerous or threatenng manner.)
  • Driving without a license
  • Driving 45 mph over the speed limit
  • Having expired tags and registration
  • Your car is evidence in a crime or contains evidence of a crime
  • You abandon your vehicle

Can't Pay Impound Fees? Tough Luck

The impound lot may be prison for cars, but the daily impound fees are closer to that of a swanky hotel. Basically, it could cost you several hundred dollars to get your car out of impound. This is true even if your car was impounded from the side of the road after you ran out of gas and made a 10 minute ride up to the gas station with a friend to get some (happened to me).

Impound fees increase every day that you don't redeem the vehicle. When you simply can't afford to pay your impound fees, one of two things will happen.

1. Your lienholder will pay off your impound fees and repossess the car itself. This only occurs if you still owe money on the car and have stopped making car payments since the vehicle was impounded. The lienholder then sells the car at auction.

2. The impound lot sells the car at auction.

Collections After an Impound

The fees your car incurs while impounded are your legal responsibility--even if the circumstances surrounding the vehicle's seizure were blatantly unfair. After a period of time which varies by state, the impound lot sells the car and applies that balance to your outstanding impound fees and, of course, any liens your car carries. If your car sells for enough money to cover these debts, its time to drop to your knees and thank your lucky stars that someone up there likes you. You no longer have a car, true, but you don't have a missing car and a huge debt load hovering over your head.

If the impound fees exceed the amount your car sold for at auction, you could find yourself in some serious credit trouble. The impound lot will likely turn your debt over to a collection agency. The collection agency will then add it to your credit report. And that's whe the real horror show begins.

How an Impound Affects Your Credit Scores

Although everyone's mileage will vary, you can expect to lose 100 points or more after a collection account for impound debt gets slapped on your credit report. The FICO scoring formula is kept very hush hush, so you won't know exactly how much an impound will hurt your credit score until it shows up on your credit report.

Impound fees can hurt your credit scores.

As much as it pains you to hand over your hard-earned cash to the very people who you may feel stole your car, paying off the collection account now can help you in two very crucial ways:

1. You won't get sued. 

Getting sued sucks. The consequences of a lawsuit suck even more. The collection agency wlll likely add its own legal fees to your unpaid impound fees--spiking your debt to unreasonable proportions. They'll then collect it a number of ways:
  • Garnishing your wages
  • Levying your bank accounts
  • Attaching liens to other property you own
  • Seizing certain assets (Have another car? Not for long)
And in case I forgot to mention it, court judgments in the collector's favor will also show up on your credit report. A judgment hacks away at your credit rating like a bad executioner. Court judgments aren't bound by the standard seven-year reporting period. A judgment over unpaid impound fees will remain on your credit report for the length of time the creditor has to legally enforce it: ten years in most states.

2. The collection for your unpaid impound fees will begin to age.

The Fair Isaac Corporation (the company responsible for the FICO credit scores that lenders use) knows that the most recently reported information on your credit report is the most accurate indicator of the credit risk you pose to lenders. This is good news for those with bad debts that haven't been updated in years, because the older the account, the less it hurts your credit scores.

Paying your delinquent impound fees may make steam shoot from your ears, but it helps ensure that the collection account connected to the debt doesn't get regularly updated by the collection agency. Federal law requires that the collector update the debt as "paid" with the credit bureaus, but afterward it will just sit there until the credit reporting period (seven years) expires.

Note: Paying a collection does not result in the collection agency removing it from your credit report any sooner. It also doesn't improve your credit scores. Paid collections for impound debt--or any other type of debt for that matter--are just as detrimental to your credit rating as unpaid collections.

If you don't pay up, the collection agency may just decide to "refresh" your impound debt on a regular basis--ensuring that it does the most damage possible to your credit scores before you either pay it or the credit reporting period expires.

How An Impounded Car Affects Your Credit

An impound itself doesn't have a direct effect on your credit scores. It's the consequences of not paying off the impound that's a problem. Worse still, impound fees increase by the day. So if you don't have the money to bail your car out of impound by the end of the first week, the fees might climb beyond your ability to pay.

Generally, the better your credit scores are when a derogatory item hits your report, the more damage that entry will do. For a person with credit scores above 750, a collection account and civil judgment are the credit equivalent of a nuclear bomb. Be smart when it comes to your impounded car--even if that means swallowing your pride and paying a debt you believe you don't rightfully owe. If you don't, you could lose the car and your decent credit rating. That's not a fair trade for your pride.

Related Posts:

Can a Collection Agency Put a Lien on Your House or Car?

Can a Collection Agency Take My House?

Make Yourself Judgment Proof

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