What Happens If I Voluntarily Repo My Car?
Considering voluntary car repossession? Understand the process, financial impact, and what happens next to make an informed decision.
Voluntary repossession, also known as voluntary surrender, occurs when a borrower returns a vehicle to a lender because they can no longer manage the associated loan payments. This action is a direct alternative to an involuntary repossession, where the car is seized by the lender without the borrower’s direct consent. While a borrower initiates the process, it still signifies a failure to meet the terms of the loan agreement.
Initiating Voluntary Repossession
The process of voluntarily surrendering a vehicle begins with the borrower proactively contacting their lender to communicate their inability to continue making payments and their intention to return the car. During this initial contact, it is helpful to inquire about any potential financial obligations that might remain after the vehicle is sold. Maintaining a record of this communication, including dates and names, is a prudent step.
After the initial notification, the lender will provide instructions on how and where to return the vehicle. This might involve dropping the car off at a specific dealership or location, or arranging for the lender to pick it up. Before the actual surrender, borrowers should ensure all personal belongings are removed from the vehicle.
The surrender process often involves signing a surrender agreement, formally documenting the vehicle’s return. Obtain written documentation of the surrender, noting the date, location, and the individual with whom the vehicle was left. This serves as proof of the voluntary return and can be useful for future reference.
Understanding the Financial Consequences
Voluntarily surrendering a vehicle carries significant financial consequences. It negatively impacts your credit report and score, recorded as a derogatory mark. This mark can remain on your credit report for up to seven years from the date of the first missed payment that led to the surrender. The specific reduction in a credit score can be substantial, potentially impacting future access to credit and loan terms.
A significant financial responsibility is the “deficiency balance.” This balance represents the difference between the outstanding loan amount (including accrued interest and fees) and the amount the lender receives from selling the vehicle. For example, if you owe $10,000 on a car and the lender sells it for $7,000, you remain responsible for the $3,000 difference, plus any additional costs incurred by the lender.
The borrower remains legally responsible for this deficiency balance. Lenders add various costs to the outstanding loan amount before calculating the deficiency, such as repossession fees, storage fees, reconditioning expenses, and auction fees. If this balance is not paid, the lender may pursue collection efforts, including turning the debt over to a third-party collection agency. Unpaid deficiency balances can further worsen credit damage. Lenders may also initiate legal action to recover the debt, potentially leading to wage garnishments or bank account freezes.
The Lender’s Post-Repossession Process
After a voluntary surrender, the lender’s primary objective is to recover as much of the outstanding loan balance as possible. The vehicle is sold, often through an auction, which can include public auctions, dealer-to-dealer auctions, or online platforms. Lenders are required to sell the vehicle in a “commercially reasonable manner,” meaning the sale should be conducted fairly and at a market-appropriate value.
Before selling the vehicle, lenders must notify the borrower of the impending sale. This notice includes information about the time, date, and location of the sale, particularly if it’s a public auction, and details about the borrower’s right to redeem the vehicle. The right of redemption allows the borrower to reclaim the vehicle by paying the full outstanding loan amount, along with any accrued fees, before the sale occurs.
Once the sale is complete, the proceeds are applied to the outstanding loan balance, first covering the costs associated with the repossession, storage, and sale, and then reducing the principal loan amount. The final deficiency amount is calculated by subtracting the net sale proceeds from the total outstanding debt. The lender must then provide the borrower with a notice detailing how the sale proceeds were applied and the exact deficiency balance owed.
If a portion of the debt is forgiven by the lender, especially if it exceeds $600, the borrower might receive a Form 1099-C, Cancellation of Debt. The Internal Revenue Service (IRS) considers canceled debt as taxable income, meaning the amount forgiven might need to be reported on the borrower’s tax return. However, specific exclusions, such as insolvency, might prevent the canceled debt from being taxable.