How Bad Is a Voluntary Repossession?

Voluntary repossession involves a borrower proactively returning a financed vehicle to a lender when loan payments become unmanageable. This contrasts with an involuntary repossession, where the lender initiates vehicle seizure due to payment default.

Defining Voluntary Repossession

Voluntary repossession occurs when a borrower, unable to continue making payments, contacts their lender to arrange the return of the vehicle.

The process involves contacting the lender to arrange the vehicle’s return. The lender then provides instructions on where and how to return the vehicle, which may involve dropping it off at a specific location. Before surrendering the vehicle, remove all personal belongings and obtain documentation of the surrender. This proactive approach may help avoid certain fees associated with an involuntary repossession, such as towing and storage costs.

Impact on Credit Reports

A voluntary repossession affects an individual’s credit report and credit score. It is recorded as a negative item and can remain on credit reports for up to seven years from the original delinquency date, which is the date the account first became past due and was never brought current. While it may appear on a credit report as “voluntary surrender,” its impact on credit scores is substantial.

The credit bureaus, including Equifax, TransUnion, and Experian, receive reports of repossessions, which then negatively influence credit scores. The exact decrease in a credit score can vary, but a repossession results in a significant drop, around 100 points or more, depending on the individual’s credit history. This negative mark signals a higher risk to future lenders and can make obtaining new credit, particularly another auto loan, more challenging. Even after the seven-year period, the history of the repossession may still be considered by some lenders when evaluating creditworthiness.

Post-Repossession Financial Responsibilities

Even after a vehicle is voluntarily surrendered, borrowers often remain responsible for a financial obligation known as a deficiency balance. This balance is the difference between the outstanding loan amount and the price the lender receives from selling the repossessed vehicle, after deducting any sale-related expenses. For example, if a borrower owes $10,000 on a vehicle that sells for $7,000, there would be a $3,000 deficiency balance, plus any additional fees.

Lenders pursue collection efforts for this deficiency balance. This can involve the debt being sold to a collection agency, which will then attempt to recover the amount owed from the borrower. If collection efforts are unsuccessful, the lender or collection agency may initiate legal action, leading to a court judgment. A court judgment could result in wage garnishment or a levy against bank accounts to satisfy the debt.

If a portion of the debt is forgiven by the lender, there can be tax implications. When a lender cancels or forgives a debt of $600 or more, they are required to issue Form 1099-C to both the borrower and the Internal Revenue Service (IRS). Canceled debt is considered taxable income by the IRS and must be reported on the borrower’s tax return. However, certain exceptions, such as insolvency, may allow a borrower to exclude some or all of the canceled debt from their taxable income by filing Form 982.

Other Options for Vehicle Debt

Before considering voluntary repossession, individuals struggling with vehicle loan payments have several alternatives. One option involves negotiating directly with the lender for a loan modification or deferment. Lenders may be willing to work with borrowers to adjust payment schedules, reduce monthly payments, or temporarily pause payments, especially if contacted proactively before payments are missed.

Refinancing the auto loan is another alternative, which could result in a lower interest rate or a longer repayment term, thereby reducing the monthly payment. This option is often more accessible for those with good credit. Selling the vehicle privately or trading it in, even if it means a loss, can also be considered to pay off the outstanding loan balance. If the vehicle’s value is less than the loan amount (negative equity), the borrower would need to pay the difference to fully satisfy the loan.

Bankruptcy is a broader debt resolution option that can also impact vehicle debt. Both Chapter 7 and Chapter 13 bankruptcy have implications for car loans. While bankruptcy can discharge the car loan, keeping the vehicle often requires meeting specific conditions, such as reaffirming the debt or making payments through a Chapter 13 repayment plan. Obtaining a new car loan after bankruptcy can be more challenging, often involving higher interest rates and fees, though it is possible.