Can I Do a Voluntary Repossession?

Voluntary repossession involves returning collateral, such as a vehicle, to a lender when loan payments become unmanageable. This proactive step can be considered by borrowers seeking to mitigate the repercussions of defaulting on a secured loan.

Understanding Voluntary Repossession

Voluntary repossession occurs when a borrower willingly surrenders an asset that serves as collateral for a secured loan to the lender. This contrasts with involuntary repossession, where the lender forcibly seizes the asset due to default. Secured loans, commonly used for vehicles, boats, or other significant purchases, mean the asset itself guarantees the loan, allowing the lender to reclaim it if payments cease.

With a voluntary surrender, the borrower controls the timing and circumstances of returning the asset, potentially avoiding the stress and surprise of an unexpected seizure. While both types of repossession negatively impact a credit report, a voluntary surrender might be perceived slightly more favorably by some lenders, as it demonstrates a willingness to cooperate.

Borrowers typically consider voluntary repossession when facing significant financial hardship. This option can prevent the additional fees often associated with involuntary repossessions, such as towing or storage charges. Lenders, too, may favor voluntary surrender as it reduces their costs and efforts involved in recovering the collateral.

Initiating a Voluntary Repossession

Initiating a voluntary repossession requires direct communication with the lender. Contacting the financial institution to inform them of the inability to continue making payments and the desire to surrender the collateral. Have account details and information about the asset readily available during this conversation.

During this initial contact, borrowers should discuss the specific terms for returning the asset, including the designated location and timeframe. Lenders may provide instructions on where to deliver the item, such as a dealership or a specific return center. Clarify any required documentation or procedures for the surrender.

Before returning the asset, borrowers should ensure all personal belongings are removed. The asset should be returned in reasonable condition, along with all keys, manuals, and any associated documentation. Obtaining written confirmation from the lender detailing the voluntary surrender and the agreed-upon terms.

Financial Outcomes of Voluntary Repossession

A voluntary repossession significantly impacts a borrower’s credit history. This negative mark typically remains on a credit report for up to seven years from the date of the first missed payment that led to the default. This can cause a substantial drop in credit scores, making it challenging to secure new credit or loans in the future, and often resulting in higher interest rates if approved.

After the asset is surrendered, the lender will sell it to recover a portion of the outstanding loan balance. However, the sale proceeds frequently do not cover the entire remaining loan amount. The difference between the loan balance and the amount recovered from the sale is known as a deficiency balance.

The borrower remains legally responsible for paying this deficiency balance. Lenders may pursue collection of this amount through various means, including using collections agencies or filing lawsuits to obtain a judgment. If a judgment is secured, the lender might pursue wage garnishment or other legal avenues to recover the debt.

If the lender forgives a deficiency balance, they are required to issue IRS Form 1099-C, “Cancellation of Debt,” to the borrower and the IRS. This canceled debt is generally considered taxable income by the IRS, meaning it must be reported on the borrower’s tax return. Exceptions to this taxable income rule may apply in situations of insolvency or bankruptcy.