Does a Repo Affect a Cosigner? What Happens Next

Vehicle repossession can be a distressing event for anyone involved with an auto loan. When a car loan defaults, the lender reclaims the vehicle that serves as collateral. This action has consequences for both the primary borrower and any cosigner. Understanding these implications is crucial for a cosigner, as their financial standing and legal obligations are directly affected.

The Cosigner’s Role

A cosigner on an auto loan assumes a significant financial and legal commitment. They agree to be equally responsible for the debt if the primary borrower fails to make payments, an obligation considered primary from the outset. This arrangement is legally termed “joint and several liability,” meaning the lender can pursue either the primary borrower or the cosigner, or both, for the entire amount owed. The cosigner guarantees the debt, often using their strong credit history or income to secure loan approval or more favorable terms. Even without vehicle ownership rights, the cosigner is fully bound by the loan agreement and accountable for all payments and associated costs if the primary borrower defaults.

Credit Impact

A vehicle repossession severely impacts the credit scores of both the primary borrower and the cosigner. Missed or late payments leading to repossession are reported to credit bureaus and appear on both credit reports. These negative marks can significantly lower credit scores. The repossession itself is a distinct derogatory mark that remains on credit reports for up to seven years. This period begins from the date of the first missed payment. Any subsequent collection activities or court judgments related to the outstanding debt will also appear on the cosigner’s credit report, further diminishing creditworthiness.

Financial and Legal Exposure

Beyond the immediate impact on credit, a cosigner faces substantial financial and legal exposure following a repossession. After the vehicle is repossessed, the lender sells it, often at auction, to recover the outstanding loan balance. If sale proceeds are less than the amount owed (including repossession and sale fees), a “deficiency balance” remains. The cosigner is legally responsible for this deficiency balance, which includes the remaining loan amount plus various fees incurred by the lender. Lenders pursue collection of this deficiency balance, initially through direct demands or by turning the debt over to collection agencies. If unpaid, the lender or collection agency may initiate legal action, filing a lawsuit against the cosigner. A successful lawsuit can result in a court judgment against the cosigner, leading to financial consequences such as wage garnishment, frozen bank accounts, or liens on other assets, depending on applicable laws.

Actions for Cosigners

When facing an impending or actual repossession, a cosigner has several proactive steps they can take. Maintaining open communication with both the primary borrower and the lender is important to ascertain the loan’s status and explore available options. Understanding the loan agreement is also crucial, as it outlines the specific obligations and rights of the cosigner. After a repossession is reported, regularly monitoring one’s credit report for accuracy is advised. Cosigners should also seek legal advice to understand their options, particularly concerning deficiency balances or potential lawsuits, and discuss options such as negotiating a settlement for a reduced amount or exploring possibilities like loan reinstatement or redemption, where permitted, with the lender or a legal professional.