What Happens If I Give My Car Back to the Bank?
Considering giving your car back to the bank? Learn the crucial financial and credit impacts, how to manage them, and better alternatives.
When financial difficulties make car payments unmanageable, many individuals consider returning their vehicle to the lender. This action, known as voluntary surrender or voluntary repossession, is a direct alternative to having the vehicle involuntarily repossessed. While it might seem like a straightforward solution, it carries significant financial and credit consequences that individuals should fully understand before proceeding.
Voluntary Vehicle Surrender
Voluntary vehicle surrender involves returning a financed vehicle to the lender. This differs from an involuntary repossession, where the car is seized. Voluntary surrender may offer minor advantages, such as avoiding the surprise and embarrassment of repossession, and avoiding tow and storage fees.
The process begins with the borrower contacting the lender. The lender provides instructions for return. Remove all personal belongings, keys, manuals, and the vehicle title to hand over to the lender.
After the vehicle is returned, the lender will sell it, typically at auction or private sale. Keep detailed records of the surrender, including date, location, and the name of the person interacted with. Sale proceeds are applied to the loan, but rarely cover the entire balance.
Financial Implications of Voluntary Surrender
Voluntary vehicle surrender has significant financial consequences. It is reported to credit bureaus and negatively impacts the borrower’s credit score. This derogatory mark can remain on a credit report for up to seven years from the original delinquency date, making it harder to obtain new credit, loans, or housing, often at higher interest rates.
Voluntary surrender often results in a “deficiency balance.” This happens because the vehicle’s auction sale price is often lower than the loan amount. The borrower remains legally responsible for the difference between the loan balance and the sale proceeds, plus lender fees like auction, reconditioning, and late payment charges.
Forgiven deficiency balances can become taxable income. If $600 or more, the lender issues IRS Form 1099-C, “Cancellation of Debt,” to the borrower and IRS. This debt is taxable unless an exclusion applies, such as insolvency or bankruptcy.
The lender will pursue collection of any remaining deficiency. This can involve phone calls, letters, or legal action. Unpaid balances reported to collections worsen credit damage.
Addressing a Deficiency Balance
A deficiency balance is the difference between the outstanding loan balance and the vehicle’s sale price, plus lender fees. For example, if a borrower owes $12,000 on a car loan and the lender sells the repossessed vehicle for $3,500, with an additional $150 in repossession and auction fees, the deficiency balance would be $8,650 ($12,000 – $3,500 + $150). Auction sale prices are often much lower than market value, creating substantial deficiencies.
Borrowers have several options to address a deficiency balance. Negotiating with the lender or collection agency for a settlement is one approach. Lenders may accept a lump sum payment for a reduced amount, especially if the borrower demonstrates financial hardship. If a lump sum is not feasible, an affordable payment plan can be arranged.
If the deficiency is unpaid or unsettled, the lender may initiate legal action for a judgment. A court judgment can have severe consequences, including wage garnishment, where earnings are withheld, or bank levies, allowing seizure of bank funds. Judgments can also lead to liens on other assets.
Bankruptcy is another option for discharging a deficiency balance, a complex decision with significant consequences. In a Chapter 7 bankruptcy, the deficiency balance can be discharged as unsecured debt. For Chapter 13 bankruptcy, the deficiency balance might be included in a repayment plan, with any remaining amount discharged upon completion. Seeking professional legal advice is advisable when considering bankruptcy.
Exploring Other Options
Before voluntary surrender, several alternatives can help borrowers avoid negative consequences. Proactive communication with the lender is often the first step. Lenders may offer solutions such as payment deferment, postponing payments, or forbearance, temporarily reducing or suspending payments. Some lenders may also consider loan modification to lower monthly payments.
Refinancing the auto loan is another viable option, especially if interest rates have dropped or credit score improved. Refinancing can lead to a lower interest rate or an extended loan term for more manageable payments. Eligibility depends on creditworthiness and the vehicle’s value.
Selling the vehicle privately can often yield a better price than an auction, which can help cover the loan or reduce deficiency. If the private sale price is less than the loan, the borrower pays the difference, possibly with a small personal loan. Trading or selling the vehicle to a dealership offers lower values than a private sale, but can be quicker.
Reviewing personal finances and implementing a stricter budget can free up funds for car payments. This involves reducing non-essential expenses to prioritize the car loan. Exploring these avenues before voluntary surrender can prevent long-term financial repercussions.