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I'm Lucy, and I'd be happy to answer your questions today. I'm sorry to hear that this happened.
Did the seller ever sign the title over to you? Do you have anything in writing confirming the sale? Have police contacted you yet?
Legally, the car is not stolen. If police show up, you can either show them proof of payment of the $500 or the title to establish that you purchased the car. You can also show them the texts you have from the seller that make it clear you bought it from him. He doesn't have any legal right to take the car from you. Police should tell him that it's a civil issue and that he needs to sue, if you covered yourself by making sure everything is in writing.
If police do take the car, you can sue the person who sold you the car for a refund of the $500. If you can't find a similar vehicle for what you were supposed to pay him, you can also sue for the difference between what you would have paid him and what you had to spend on a similar vehicle. And you can sue for the work put into the car, including any money spend fixing the oil issue.
In the even that police press criminal charges against you, which I hope doesn't happen, you can sue the seller for malicious prosecution after you win that case. On top of everything I mentioned above, you're also entitled to punitive damages and the cost of hiring a lawyer to beat the false charges.
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