Legal Question in Credit and Debt Law in Tennessee

They can report your car as stolen under the circumstances that you have mentioned; however, by making this threat they have a significant problem, especially if you have proof of the threat as having been made. The reason is that it is illegal, both civilly and criminally, to threaten the criminal prosecution of a debtor in Tennessee. The people at the dealership who made the threat have committed what is known as "extortion", otherwise known as "blackmail". You should be aware however, that because they may have threatened you that you cannot threaten them with criminal prosecution for their wrongdoing.

Also, if the threat was made by an outside collection agency that is working for the dealership, there is an added matter known as the Federal Fair Debt Collection Practices Act that would allow you to go against the collection agency for statutory damages and your attorney fees.

My suggestion is that you consult with a lawyer in your area who can more fully advise you as to your rights and obligations and quite possibly negotiate some sort of settlement for you with the dealership.