Is Voluntary Repossession a Good Idea?

Voluntary repossession occurs when a borrower returns a vehicle to the lender because they can no longer afford the payments. This action is a direct alternative to the lender forcibly seizing the asset.

Understanding Voluntary Repossession

Voluntary repossession is an agreement between a borrower and a lender where the borrower proactively returns a financed vehicle because they are unable to continue making the required loan payments. It is distinct from an involuntary repossession, where the lender seizes the vehicle without the borrower’s direct cooperation, often without prior warning.

Borrowers consider voluntary repossession due to severe financial hardship, such as job loss, unexpected medical expenses, or other circumstances that make loan payments unmanageable. Another reason might be if the vehicle’s market value is less than the outstanding loan balance, making it difficult to sell it privately to cover the debt. While returning the vehicle voluntarily might save on some fees associated with involuntary repossession, it does not eliminate the debt.

After a voluntary repossession, the lender sells the vehicle, often at a public auction. The proceeds from this sale are then applied to the outstanding loan balance. If the sale price is less than the amount owed on the loan, the borrower remains responsible for the difference, known as a deficiency balance.

The Voluntary Repossession Process

Initiating a voluntary repossession begins with contacting the lender directly to inform them of the inability to make payments and the intent to surrender the vehicle. This communication can occur via phone call or written notice. It is advisable to keep detailed records of all communications, including dates, times, and the names of individuals spoken with.

The lender will provide instructions on how and where to return the vehicle. This may involve dropping it off at a specific dealership or a designated location. Before returning the vehicle, borrowers should remove all personal belongings and take photographs of the vehicle’s condition to document its state.

During the handover, the lender may request the car keys, the vehicle title (if held by the borrower), and any accessories or manuals that came with the car. Borrowers may also be asked to sign a surrender agreement, which formally outlines the details of the repossession. It is advisable to obtain written documentation confirming the vehicle’s return and any agreements made.

Financial Implications

Voluntary repossession significantly impacts a borrower’s credit score. It appears as a negative mark on credit reports and can remain there for up to seven years from the date of the original delinquency. While it may be viewed slightly more favorably than an involuntary repossession due to the borrower’s cooperation, the credit score drop can still be substantial, potentially exceeding 100 points.

The “deficiency balance” is the difference between the outstanding loan amount and the price the vehicle sells for at auction, plus any additional fees incurred by the lender, such as towing, storage, and administrative costs. For example, if a borrower owes $15,000 and the vehicle sells for $6,000, the deficiency balance could be $9,000 plus fees.

Borrowers remain legally obligated to pay this deficiency balance. If the balance is not paid, the debt may be sold to a collection agency, leading to collection calls and potential lawsuits. A judgment against the borrower could result in wage garnishment or liens on other assets. This negative mark on the credit report can significantly hinder future borrowing capabilities, leading to higher interest rates or outright denial for new auto loans, mortgages, or other credit lines.

Other Options to Consider

Before considering voluntary repossession, borrowers have several alternatives to explore that may mitigate financial damage:

Negotiating with the lender. Many lenders work with borrowers to avoid repossession, offering payment extensions, temporary reductions, or loan modifications.
Selling the vehicle privately or trading it in. This allows control over the sale process and can minimize the deficiency balance. If the vehicle’s value exceeds the loan, a private sale can resolve the debt.
Refinancing the existing auto loan. Eligible borrowers may secure a lower interest rate or a longer repayment term, reducing monthly payments. This can make payments more manageable in the short term.
Seeking credit counseling services. These services offer valuable resources and guidance for navigating financial difficulties.
Considering bankruptcy. Chapter 7 can discharge the deficiency balance as unsecured debt. Chapter 13 allows for a repayment plan that may include the deficiency balance over three to five years.