Question: What happens to a lien on a title when the vehicle is totaled?
Answer: If everything goes perfectly, then the lien on your vehicle’s title will be lifted when your lien holder is paid off and signs the car's title over to the car insurance company handling your total loss claim.
When your car is totaled in an auto accident, the car’s actual cash value (ACV) should be paid out by either the at-fault party’s liability coverage or your own physical damage coverage (collision or comprehensive, depending on how the car was totaled).
The ACV of your vehicle is the amount it was worth the moment before the incident that totaled it and is determined by the car insurance company you filed your claim with.
When there is a lien holder on the vehicle, the settlement check for the car’s ACV goes to that financial institution and any money left over after the payout would come to you.
As part of the settlement process, the insurance company has the lien holder release the title on the vehicle and the insured signs documents stating that it has no further claim to the vehicle.
When the loan on the vehicle is satisfied by the insurance company payout, the lien on the title is taken off and the insurance company takes possession of the vehicle to dispose of it, usually by selling it for its salvage value.
Problems arise when you owe more than the ACV of your vehicle, so the settlement from the car insurance company doesn’t pay for the balance of your loan. Auto insurance companies only pay the current fair market value for your car, not the amount of your loan.
A remedy to this situation is gap insurance whose function is to pay the balance of a car loan that remains after the ACV has been paid by an insurer.
If you don’t have gap insurance and ACV doesn’t pay off your whole loan, then the lien holder will still release the title to the insurance company, but continue to hold you to the terms of your car loan. The lien on the title may be gone, but your responsibility to the lien holder hasn’t changed. Most lien holders will allow you to continue making loan payments or even let you roll this loan in with a new one for a replacement vehicle.
If you are stuck in this situation, you need to talk to your lender about how to pay off the remainder of your loan amount. If you fail to continue to make payments, the lender may take a lien out on other assets that you have.