How Does a Voluntary Repo Affect a Cosigner?

When a borrower can no longer afford vehicle payments, they might choose a voluntary repossession. This involves arranging with the lender to return the vehicle to avoid an involuntary seizure. While this proactive step offers some control over the process, it still signifies a loan default. Cosigning a loan means agreeing to be responsible for the debt if the primary borrower fails to make payments. This article will detail the specific effects on the cosigner when a voluntary repossession occurs.

Cosigner’s Fundamental Responsibility

Cosigning a loan establishes a significant financial obligation for the individual. The cosigner is equally responsible for the entire debt. This principle is known as “joint and several liability,” meaning the lender can pursue either the primary borrower or the cosigner, or both, for the full loan amount. A lender can demand payment from the cosigner if the primary borrower misses payments or defaults on the loan terms. A voluntary repossession, although initiated by the borrower, is still a form of default on the loan agreement. Consequently, it does not absolve the cosigner of their responsibility. The cosigner’s obligation typically extends to the full outstanding loan amount, along with any associated fees or costs incurred by the lender.

Immediate Financial Consequences

Following a voluntary repossession, the most immediate financial consequence for a cosigner involves the “deficiency balance.” This balance represents the difference between the outstanding loan amount, plus any repossession and sale costs, and the amount the lender receives from selling the repossessed vehicle, typically at auction. Vehicles often sell for less than their outstanding loan balance at auction due to depreciation and sale expenses. Both the primary borrower and the cosigner are equally liable for this deficiency balance.

Lenders pursue collection of this deficiency balance from both parties. This process begins with communications, such as demand letters. If unpaid, lenders may escalate collection efforts, including legal action. Potential legal actions might involve filing a lawsuit to obtain a judgment, which could then lead to wage garnishments, bank levies, or liens on other property. Cosigners may also be contacted directly by collection agencies if the debt is sold or assigned for collection.

Credit Score Implications

A voluntary repossession impacts the cosigner’s credit report and score. The event is reported to credit bureaus and typically appears as a “repossession” or “voluntary surrender,” marking it as a negative entry. This derogatory mark can cause a substantial drop in the cosigner’s credit score (50 to 150 points). The severity of the impact depends on the cosigner’s overall credit history.

This negative information remains on credit reports for up to seven years from the original delinquency date. The presence of a repossession on a credit report signals to future lenders a significant risk factor. This can severely affect the cosigner’s ability to obtain new loans, such as mortgages, car loans, or credit cards, or to secure favorable interest rates for an extended period. Even if the deficiency balance is paid, the repossession entry remains for seven years.

Cosigner’s Proactive Steps

When faced with a voluntary repossession situation, a cosigner can take several proactive steps to manage the fallout. Communicate with the lender as soon as possible. Open communication may allow for negotiation of a payment plan or a settlement amount for the deficiency balance. Lenders may be willing to settle for a reduced lump sum or agree to a payment schedule.

Monitoring credit reports is important. Obtain copies of their credit reports from all major credit bureaus to see how the voluntary repossession is reported. This allows them to identify any inaccuracies and dispute them if necessary. Seeking independent financial advice or credit counseling can also be beneficial. These professionals can offer guidance on managing the financial impact, developing a budget, and strategies for rebuilding credit. Understanding the original loan agreement, particularly clauses related to default and cosigner liability, is also important for navigating the situation.