How Much Does a Voluntary Repo Affect Credit?
Understand the complex credit implications of a voluntary vehicle repossession, from how it's reported to score impact and long-term effects.
A voluntary repossession occurs when a borrower proactively returns a financed asset, such as a vehicle, to the lender because they are no longer able to meet the agreed-upon payment obligations. This action is typically taken to avoid an involuntary repossession, where the lender would seize the property without the borrower’s direct involvement. This article explains how a voluntary repossession impacts one’s credit report and overall financial standing.
Credit Reporting of Voluntary Repossession
A voluntary repossession is reported to the three major nationwide consumer credit bureaus: Equifax, Experian, and TransUnion. The entry may specifically appear as “voluntary repossession” or “voluntary surrender,” or the account status might be updated to reflect it was “closed by creditor” or “charged-off”. Any missed payments that occurred prior to the voluntary repossession will also be reported to the credit bureaus. Each late payment, especially those 30 days or more past due, can independently harm credit and contribute to the overall negative impact. The account status on the credit report will be updated to reflect the repossession, indicating that the loan was not fulfilled as originally agreed.
Impact on Credit Scores
A voluntary repossession significantly lowers credit scores, often leading to a substantial decrease. The exact number of points a credit score may drop can vary, but estimates suggest a range of 50 to 150 points, with an average around 100 points. The severity of this impact is influenced by several factors unique to an individual’s financial situation.
An individual’s prior credit history plays a role in determining the magnitude of the score drop. For example, someone with an excellent credit history may experience a larger numerical decrease than a person who already has a lower score due to previous negative marks. The number of missed payments leading up to the voluntary repossession also significantly affects the severity of the score reduction.
Other derogatory marks on the credit report can compound the effect. Factors such as an individual’s credit utilization and their overall credit profile, including the age and mix of their accounts, also contribute to how credit scoring models calculate the impact.
Credit Report Presence and Other Financial Considerations
A voluntary repossession typically remains on an individual’s credit report for up to seven years from the date of the original delinquency, which is the first missed payment that led to the repossession. While visible for this duration, its negative influence on credit scores tends to lessen over time, particularly in the later years. The older the negative mark, the less weight it carries in credit scoring models.
After a voluntary repossession, a borrower may still owe a “deficiency balance” to the lender. This balance is the difference between the amount owed on the loan and the amount the lender recovers from selling the repossessed vehicle, along with any associated fees like towing or storage. If this remaining balance is not paid, it can lead to further negative credit reporting, such as the debt being sent to collections or a judgment being entered against the borrower.
If a lender forgives a deficiency balance of $600 or more, this canceled debt may be considered taxable income by the Internal Revenue Service (IRS). The borrower might receive a Form 1099-C, “Cancellation of Debt,” from the lender. This form alerts both the taxpayer and the IRS to the amount of debt that may need to be reported as income on a tax return.