Can my credit union refuse to release the lien on my car title even after I paid loan off because my checking account has a negative balance?

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Can my credit union refuse to release the lien on my car title even after I paid loan off because my checking account has a negative balance?

About 3 years ago I had financial problems; my checking account was overdrawn by $590. My bank charged me $2100 (approx) on return item fees. I refused to pay; they refused to work with me. My account was closed and the bank charged off the negative balance. I still have my car loan through them. Today I called the bank to get a payoff amount on my loan and was told that even if I pay the car off, they will not release the lien on the title. Is this legal?

Asked on January 13, 2012 under Bankruptcy Law, Arizona

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

As a general matter, once a secured debt is paid off, the security interest in the collateral must be released, even if there are other potential claims against the debtor.

However, if the other debt to the bank is still extant (that is, if it was not charged off), the bank may be allowed to apply any payments which are in excess of the normal monthly car payment as they choose--a debtor does not get to decide which debt payments are applied to. So this is one possible reason they might not have to release the car--they would be applying the surplus payments to what you owe under the other debt. Again, though, if that debt was actually charged off, they should not be able to do this, since what a debt is actually charged  off, the right to collect it is given up.

Also, check your various loan, financing, account, etc. agreements with the bank: if, for example, the loan agreement on the car states that the lien will not be released so long as you had any unsatisfied debt with the bank, that term could be enforceable.

Ask the bank on what grounds they are refusing to release the car--ask them to point to the specific agreement or provision giving them this right. If they won't answer or you are not satisfied by the answer, you should consult with an attorney; you may need to bring legal action.


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