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 Dauphin County bankruptcy attorneys at Young, Marr & Associates have thirty years of experience providing debt relief services and representation to those individuals and families facing a financial crisis. If you have any questions or are considering voluntary repossession, call our Pennsylvania office at (215) 701-6519 or our New Jersey office at (609) 755-3115 to schedule a free, confidential consultation to discuss your options.

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. For example, a lender is not allowed to enter your garage to take your vehicle. 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.

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. 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.

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 Bankruptcy and Auto Loans

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 you 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.

Returning to the example above, 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.

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, 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.

Bankruptcy is complicated, but it does offer debtor’s protections and options that are not ordinarily offered by creditors. If you are considering voluntarily surrendering your car, you should discuss your particular situation with our experienced bankruptcy attorney to see if you could benefit from any of the options above.

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, 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, 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 bankruptcy 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 the 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 be eligible to 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. At Young, Marr & Associates, our attorneys will thoroughly examine any judgment liens against you and determine whether they might be able to be handled in a bankruptcy.

Pennsylvania Bankruptcy Attorneys Offering Free Consultations

Having a vehicle repossessed is not only a financial set-back, it could also be embarrassing. At Young, Marr & Associates, our sympathetic attorneys have over two decades of providing professional and confidential assistance to people under economic stress. It is likely that, if you are on the verge of losing your car, there are other financial problems you are facing. Before you make any decisions, you should consult with one of our experienced Pennsylvania bankruptcy attorneys to see what options are available. 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 Bucks County 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.