Is Voluntary Repossession 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. To rectify the situation, you could voluntarily surrender your car. But will that be bad for your credit?

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. And, voluntary repossession is treated similarly to involuntary repossession, in that it will negatively impact your credit and stay on your credit report for several years. If you are seriously struggling to make your car payments, bankruptcy might allow you to catch up and repay creditors, while keeping your vehicle.

For help with your case from the Dauphin County bankruptcy attorneys at Young, Marr, Mallis & Associates repossession, call our Pennsylvania office at (215) 701-6519 or our New Jersey office at (609) 755-3115.

What is Voluntary Repossession?

In some cases, lenders will allow debtors to engage in voluntary repossession, which involves returning property to a lender to avoid any complications that might arise due to missed payments.

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. This is 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.

To see if your lender will be open to voluntary repossession, our bankruptcy lawyers can begin the conversation. Generally, when debtors do not owe substantial amounts of money to lenders, lenders will be fine with a debtor surrendering their vehicle, as they can then sell it and more easily settle the debt. If a lender is against voluntary repossession, it could be because they are aware that you are unable to make your payments and wish to capitalize on that fact. This could be an indication of predatory lending practices. If it is, and our attorneys get proof of such behavior, we could use that as a defense against a lender that is attempting to repossess your vehicle.

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.

Will Voluntary Repossession Hurt Your Credit Score?

Suppose you are considering the pros of voluntarily surrendering your vehicle to avoid forced repossession or possible bankruptcy. In that case, it is important to understand that voluntary repossession can still negatively impact your credit score and remain on your credit report for several years.

Voluntary repossession will hurt your credit score, just like bankruptcy or forced repossession will. The only difference between voluntary repossession and bankruptcy in this regard is that you will not be working to repay your debts in the process. Instead, you will surrender your vehicle, and that surrender will likely be listed on your credit report. Although you did not quite get to the point of involuntary repossession, your voluntary repossession might stay on your credit report for up to seven years.

In addition to being visible on your credit report, a voluntary repossession can cause your credit score to drop dramatically, on average, by about 100 points. The reduction in a debtor’s credit score following a repossession might be more or less than the average decrease, depending on an individual person’s credit history.

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.

How Long Will a Voluntary Repossession Stay on Your Credit Report?

Repossession is not a positive thing, whether it’s voluntary or not. It can cause your credit score to drop significantly and can stay on your credit report for years without having a positive impact on your life in any way.

As previously mentioned, a repossession, whether voluntary or not, will remain on a person’s credit report for seven years. The seven-year period typically begin from the first missed payment date. There is nothing you can do to get a voluntary repossession erased from your credit report apart from attempting to negotiate with a lender. In rare cases, a lender might agree not to include repossession of a vehicle on a person’s credit report, provided they surrender their car voluntarily. Apart from that, the only thing that does erase a voluntary repossession from a person’s credit report is time.

This can make it difficult for you to make big purchases such as another car to replace the one you surrendered. Although bankruptcy will remain on your credit report for several years, it also comes with the added benefit of you possibly keeping your vehicle while you handle any other debts you might have. Certain debts are also dischargeable in bankruptcy, which is an added benefit of taking this route instead of that of voluntary repossession.

How Can You Get Out of a Car Loan You Can’t Afford to Avoid Repossession?

If you can’t afford your current car payments and you are facing repossession, contact our attorneys. If you were given a loan based on predatory lending practices, and the lender knew all along that you would be unable to pay it off, we can help you get out of your loan.

When lenders seek repayment for car loans, it is worth investigating the loan itself. Sometimes, lenders will give out loans to individuals that are unable to make the payments based on their income or expenses. This is considered predatory behavior because it sets a person up for failure, and lenders do this intentionally, knowing that they will be able to repossess the property once payments are not met.

Suppose a lender approaches you about repossession or threatens to seize your property. In that case, our attorneys can use proof of predatory lending practices as a defense in your case. If successful, this could alleviate your responsibility to repay previously missed car payments. Voluntarily surrendering your car when you cannot afford to pay the loan will not necessarily get you off the hook, as you might still owe money once your vehicle is sold.

Are There Rules for Auto Repossession?

There are rules for auto repossession. If a lender does not follow the proper procedures, you might be able to keep your car despite being behind on payments.

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. A breach of peace can include threats of violence, physical force, or breaking and entering to initiate the seizure. For example, a lender is not allowed to enter your garage to take your vehicle. If your creditor commits a breach of peace, such behavior may give you a legal defense in bankruptcy or other proceeding to pursue damages or contest a deficiency judgment.

What is a Deficiency Judgment for an Auto Repossession?

When a repo man retakes possession of your property, they may be able to pursue a claim against you in civil court for the difference in your loan subtracted from the actual value of the property reclaimed. This is known as a deficiency judgement.

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. Under Pennsylvania law, a deficiency judgment creates a judgment lien on a debtor’s property. Continuing the above example, if you own a home, the judgment for $20,000 will be a lien against your property. This means, that if you ever wish to sell your property, you will have to pay back the judgment through the proceeds of the sale.

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. Again, in cases of predatory lending practices, you may be able to get the deficiency judgment erased, whether your car is taken forcibly or through voluntary repossession. Voluntary repossession might allow you to negotiate a lower deficiency judgment as well, if it comes to that. That is not guaranteed when debtors voluntarily surrender the vehicles, however.

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 an automatic stay. Taking effect as soon as you file, an automatic stay protects you from collection actions like wage garnishment, foreclosure and, you guessed it, auto repossession. Not only will an automatic stay freeze collection actions, it will also give 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.

What if I Don’t Want to Voluntarily Surrender My Car in Bankruptcy?

If you do not wish to surrender your car during bankruptcy, 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.

Using Chapter 13 Bankruptcy to Avoid Voluntary Repossession

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.

In addition to the ability to pay back the money they are behind on, Chapter 13 offers additional options to debtors overwhelmed by a significant car loan. Under specific circumstances, a debtor could substantially lower their monthly payment by “cramming down” their car payment.

When Debtors Are Eligible for a “Cramdown”

Returning to the example above, suppose your car has a fair market value of $30,000, but the balance due on your loan is $50,000. At the time you file for bankruptcy, you are $2,000 behind in the payments. Typically, if you want to keep the car, you would pay the $2,000 back through your bankruptcy plan, while directly paying your lender the regular monthly contractual payment.

If you are eligible for a “cramdown,” a few critical things occur. First, our attorney will file a motion with the court to determine that the secured portion of the balance due is equal to the fair market value of your vehicle. Then, the remaining balance of $20,000 will be categorized as unsecured and dischargeable debt in your bankruptcy case. This means that you will pay the balance of $30,000 through your bankruptcy plan and the remaining $20,000 could be discharged. Additionally, you will no longer have a monthly payment to your lender. If you meet all of the eligibility requirements, your monthly car expense could be drastically lowered.

When Debtors Are Ineligible for a “Cramdown”

If you do not qualify for a “cramdown,” you could still take advantage of the five-year payment plan to lower your monthly bills. If you have less than five years remaining on your car loan, by paying off the entire balance through your bankruptcy plan, you could extend the amount of time, thus lowering your monthly payment. For example, suppose the remaining balance on your car is $15,000 and you have two years left on you on your loan. That would equal monthly payments of $625 to your lender. If you pay off the $15,000 through your bankruptcy plan, the payment would be stretched over five years. Therefore, your monthly payment would be $250. While this does not decrease the total amount due, it might make keeping your car feasible.

Judgment Liens in Pennsylvania Bankruptcies

Sometimes a car is repossessed before you can surrender your vehicle and a court enters a deficiency judgment against you. Unfortunately, now you have a judgment lien against your home. Filing for bankruptcy might be able to provide you some relief. Under certain circumstances, a debtor can “avoid” a lien in both Chapter 7 and Chapter 13.

A judgment lien attaches to and is secured by your home. For example, suppose your home is worth $250,000 and your mortgage balance is $230,000. When you sell your home, you will have to pay off your mortgage balance. If you have a $20,000 judgment lien from a Pennsylvania court order because of a deficiency judgment made in a repression case, you will also have to pay the $20,000 out of the proceeds from the sale of your property. This could significantly reduce your profits from the sale of your home.

If you file for bankruptcy, it might be possible to remove the judgment lien. By filing a motion to “avoid the lien,” our attorney would petition the court to have the lien moved to unsecured status. For you to be eligible to avoid a lien, the lien must not have impaired your exemption.

A Pennsylvania homeowner, using federal exemptions, can protect $25,150 of the equity in their home. Continuing the example above, your house is worth $250,000 and your mortgage is $230,000, leaving you $20,000 in equity. The federal exemption allows you to protect the $25,150. Therefore, there is no free equity for the judgment lien to attach. If this is the situation, the judgment lien would impair your exemption and could be avoided. However, if your mortgage was only $100,000, then there would be sufficient equity available for the judgment lien and you would not be permitted to avoid it. In either situation, a creditor has the right to oppose the motion and challenge the value of your property.

Pennsylvania Bankruptcy Attorneys Offering Free Consultations

To set up a free and private legal consultation with our Bucks County bankruptcy lawyers, call Young, Marr, Mallis & Associates at (609) 755-3115 in New Jersey or (215) 701-6519 in Pennsylvania or contact our law offices online.