What happens if a friend owns a new car which was purchased with an auto loan and he was at fault for an accident but his liability insurance is inadequate?

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What happens if a friend owns a new car which was purchased with an auto loan and he was at fault for an accident but his liability insurance is inadequate?

He is currently unemployed and owns nothing else. In an effort to recoup damages, if the other party sues him, can the car be seized? Can he be forced to sell the car, whose market value would be less than the outstanding loan balance or does the lender have first lien on the car if it is subject to a forced sale?

Asked on January 10, 2015 under Accident Law, California

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 6 years ago | Contributor

The lender has first call on the car, since their interest--the security interest they were given when the car was financed--predates any interest that may arise as the result of a lawsuit. Since the outstanding loan balance exceeds the car's value, there'd be no point in the injured person (if they sued and won) putting a lien on the car--that lien would never be paid.

However, the injured party, if they sue and win, will get a judgment against your friend which could be enforced against him for years to come--such as if he later gets a job, inherits money, buys property, etc. So just because he may be "collection proof" now does not mean he does not have to worry about the future.


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