Does Voluntary Repossession Hurt Your Credit?

Voluntary repossession is a financial decision made by individuals who can no longer meet the payment obligations for a secured loan, such as an auto loan. Instead of waiting for the lender to seize the asset, the borrower proactively returns the collateral. This action, while seemingly a responsible choice, carries significant implications for one’s financial standing and credit health.

Understanding Voluntary Repossession

Voluntary repossession, also known as voluntary surrender, occurs when a borrower returns a financed asset, often a vehicle, to the lender because they are unable to continue making the required payments. This proactive step is taken to avoid the more disruptive process of an involuntary repossession, where the lender forcibly seizes the property. The decision to voluntarily surrender an asset arises from financial hardship, making it difficult to maintain the loan agreement.

Initiating a voluntary repossession involves contacting the lender to inform them of the inability to pay and the intent to return the asset. The borrower then works with the lender to arrange a time and place for the surrender, such as dropping the vehicle off at a designated location. It is advisable to document the condition of the asset before surrender and retain records of all communications and the surrender process itself. This approach can provide the borrower with some control over the process.

Impact on Credit Report and Score

A voluntary repossession harms a credit report and credit score, similar to an involuntary repossession. It appears on a credit report as a “repossession” or “voluntary surrender,” marking a negative event in the borrower’s payment history. While the term “voluntary surrender” might be used, credit bureaus and lenders treat it as a default on the loan.

The primary credit scoring factor affected is payment history, which holds the largest weight in credit score calculations. A repossession indicates a failure to meet loan obligations, leading to a drop in credit scores. Additionally, if a deficiency balance arises, it can negatively impact the “amounts owed” category, which accounts for a portion of a credit score. An outstanding balance, especially if sent to collections, further reflects negatively on debt management.

A repossession, whether voluntary or involuntary, remains on a credit report for up to seven years from the date of the original delinquency. This lengthy presence can make it challenging to obtain new credit or loans during that period. Even though it is a voluntary action, the financial consequence to credit health is lasting.

Financial Consequences Beyond Your Credit Score

Beyond the immediate impact on credit scores, voluntary repossession carries other financial ramifications. A deficiency balance occurs when the amount owed on the loan exceeds the amount the lender recovers from selling the repossessed asset, after deducting sale-related expenses. For instance, if a borrower owes $15,000 on a vehicle, and it sells for $6,000 at auction, the deficiency balance could be $9,000, plus any additional fees and accrued interest.

Lenders sell repossessed assets at auction to recoup their losses. However, auction prices are frequently lower than the market value or the outstanding loan amount, resulting in a deficiency. The borrower remains legally responsible for this deficiency balance. Unpaid deficiency balances may lead to collection efforts, including sending the debt to a collections agency or pursuing a lawsuit.

What to Expect After Voluntary Repossession

After the voluntary repossession, the lender will proceed with selling the repossessed property. Following the sale, the lender will notify the borrower of the sale results and any resulting deficiency balance.

The borrower should retain all correspondence from the lender and credit bureaus regarding the repossession and the deficiency balance. This documentation helps in understanding financial obligations and for future reference.