How to settle on car payments?

First, either you misunderstood the lender, or they are misspeaking—they cannot take the car and sue you for the full amount of the loan. If they repossess the car for nonpayment—which is an almost universal remedy in car loans—they can then come after you for the remaining balance, after the value of the repossessed car is applied to the loan. So they don’t get to have their cake and eat it, too—they can get the car back and try to recover any part of the loan not covered or paid out by the car, but they can’t take the car and sue you for the full amount as well.

Or course, since cars depreciate more quickly than their loans are paid off, if the car was new and fairly expensive, you could still owe a substantial amount. You should therefore try to settle the outstanding balance for less.

Once your car is repossessed, ask the lender for a statement of how much you owe. Then ask them how much they would take in settlement for it. They may not make you an offer, or only make you one that’s not worthwhile, but asking them is always a good first step. Many times, the lender will in fact come back with a reasonable settlement offer, since they do not want to go to the trouble and cost of suing—they’d rather get some of their money easily and cheaply, instead of fighting to get it all (and still possibly not recovering any more, at the end of the day, then you would have been willing to pay voluntarily).

You don’t have to accept whatever number they give you. You can come back with your own counter. You make your counter more attractive by (1) demonstrating your financial hardship—that this is all you could pay—and also (2) being able to pay as much as possible of your offer upfront, in a lump sum. Money in hand is a powerful incentive.

You have a high card in your hand: in your state, your income (Social Security and a firefighter’s pension) is protected from being garnished. That means that even if you were sued and the lender won, they could not get a court order diverting some of your income to them, as they could with the typical private sector salary or wages. This means that they are deprived of a tool often available to lenders to force debtors to pay, which helps you negotiate with them.

A good rule of thumb is to always check for exemptions in your state for your source(s) of income and property. The more of your money and belongings that are protected from creditors, the less leverage they have and the more you do.

If you are still concerned about what could happen, or are reluctant to try to negotiate with the lender yourself, you should retain an attorney to advise and represent you. Good luck.