What Is Voluntary Repossession, and is “Repo” Bad for Your Credit?

Getting in over your head with a bad auto loan can leave you strapped for cash and sinking in other areas of your finances. Bills start to lag behind and before you know it, you’re missing payments on the car loan itself. If you fail to make timely payments on your car, the lender may try to recoup their financial loss by physically taking the vehicle in a process known as repossession, or repo. Defaulting on your obligation to the lender can allow them to seize the vehicle almost immediately.

While repossession is often an involuntary procedure, there is also an alternative called voluntary repossession, or voluntary surrender. Voluntary repo might be able to save you a few headaches when it comes to the creditor taking the vehicle, but it won’t save you any money. In fact, it can be the start of a significant financial headache. How does voluntary repossession work?  And could it damage your credit?  Our bankruptcy attorneys weigh in.

What is Voluntary Repossession?

There is no way to hide an inability to pay off your loans, and in fact, dodging your creditors can make the situation worse.  If you think you are at risk of repossession, you should notify your lender immediately and try to explain your financial situation.  Some creditors will be understanding and will work with you to negotiate a late payment — but unfortunately, not all are so flexible.

If your creditor is unwilling to accept a late payment and insists on repossession, you may be able to convince them to settle (i.e. reduce) your debt in exchange for offering a voluntary repo.  However, whether a repossession is voluntary or not, you will still have to pay off whatever balance remains after the creditor sells the car and applies the sale proceeds to the loan, known as the deficiency balance.  Furthermore, volunteering to surrender your vehicle will not necessarily prevent the creditor from noting the late payment — or the repossession — on your credit report.

Will Voluntary Repossession Hurt Your Credit Score?

On one hand, voluntary surrender, is slightly preferable to involuntary repossession in that it demonstrates a willingness to work with your creditors.  It can also save you the worry of having your car unexpectedly repossessed in front of your friends or family, which is a major emotional benefit.  But unfortunately, the difference to the negative impact on your credit score is minimal.

Yes, you attempted to return the financed car without penalty, but from a lender’s perspective, the bottom line is the same.  Voluntary or not, a repossession is a repossession — and ultimately, an indicator that a debtor failed to keep up with their payments.

As one Experian spokesperson explains, “You will be viewed as high risk and will likely pay a much higher interest rate if you can get approved for a new loan at all.”  Experian also cautions, “It is considered very negative and would almost certainly have a substantial impact on your credit report and credit scores.  A voluntary surrender should be your last resort.”

The Rules for Auto Repossession

Depending on the laws in your state, your auto lender may have the ability to repossess your car the second your loan enters into default. However, there are rules as to what methods the creditor can use to retake their property. A creditor cannot commit a “breach of the peace” to reclaim real property. This act can include threats of violence, physical force, or breaking and entering to initiate the seizure. If your creditor commits a breach of peace, you may give you a legal defense in bankruptcy or other court to pursue damages or contest a deficiency judgment.

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What is a Deficiency Judgment?

When a repo man retakes possession of your property, they may be able to pursue you in civil court for the difference in your loan subtracted from the actual value of the property reclaimed. For example, if you have a loan with a balance of $50,000, and your car is only worth $30,000 when the creditor repossesses it, they may be able to sue you for the difference of $20,000. Deficiency judgments are legal in varying states, including Pennsylvania, under differing circumstances. It’s important you discuss your situation with your legal team so they can mount the most effective defense possible in working to preserve your income and ownership of any real property that a creditor might go after to satisfy the judgment.

Should I Surrender My Car if I’m Filing for Bankruptcy in Pennsylvania?

If you’re struggling financially, there may be a better plan than giving your car up for voluntary repo: filing for bankruptcy.  In fact, bankruptcy may even help you keep your car.

Whether you file for Chapter 7 bankruptcy or Chapter 13 bankruptcy, you’re still entitled to the protections of something called the automatic stay.  Taking effect as soon as you file, the automatic stay protects you from collection actions like wage garnishment, foreclosure and, you guessed it, auto repo.  Not only does the automatic stay freeze collection actions, it also gives you additional time to negotiate a possible solution with your creditors.

However, the strength of the stay depends partially on what comes beforehand.

When you file for Chapter 7, you must submit a form called your Statement of Intention (Form 8).  True to its name, this form outlines how you intend to approach your debts, including whether various pieces of property will be surrendered or retained.  If you indicate on your Statement of Intention that you plan to surrender the car, your creditors may file a motion requesting that the bankruptcy judge lift the stay which protects your car, since you were going to give it up anyway.  (On the positive side, you will not be liable for the deficiency balance, which is included in the Chapter 7 discharge.)

If you do not wish to surrender the car, you have two other options: redemption, and reaffirmation.

If you redeem, you will have to pay off the vehicle’s present-day market value in a single-sitting lump sum.  If the market value doesn’t cover the price you originally paid, the difference can be discharged.

If you reaffirm, you and your creditor will sign a contract stating you can keep the vehicle, on two conditions: you must continue to make your payments, and you accept full liability for the debt.  In other words, you waive your right to discharge, which means you must be able to convince the court you will actually be able to pay.  If the court thinks you don’t have sufficient funds to realistically cover the car, the judge may allow for a repossession to proceed, so it’s very important to be represented by an experienced bankruptcy lawyer.

Chapter 13 does not include a Statement of Intention, because it utilizes a three- to five-year repayment plan instead.  However, you can use the repayment plan to pay off your auto loans, including missed payments, provided you continue to meet the terms of your plan.

Pennsylvania Bankruptcy Attorneys Offering Free Consultations

Bankruptcy can be an effective tool against repossession and may be able to help get your finances back on track.  To set up a free and private legal consultation with our bankruptcy lawyers, call Young, Marr & Associates at (609) 755-3115 in New Jersey or (215) 701-6519 in Pennsylvania or contact our law offices online.

Have You:

Been paying credit card balances that seem to never go down?

Lost your job and are now having trouble keeping up?

Attempted to work out a payment arrangement to no avail?

Been notified of a mortgage foreclosure action?

Been denied for a mortgage or other line of credit?

If the answer to any of these questions is “yes” then bankruptcy may be an option that you should consider.

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