What Happens to a Co-Signer When a Car Is Repossessed?

When co-signing a car loan, an individual guarantees repayment to the lender. Co-signers take on equal legal responsibility for the loan. If the primary borrower fails to make payments, the lender can pursue the co-signer for the outstanding debt. Car repossession occurs when a lender takes back a vehicle due to the borrower’s failure to meet payment terms. This action helps the lender recover financial loss when a loan defaults.

Co-signer’s Financial Obligations After Repossession

After a car is repossessed, the co-signer faces direct financial consequences, primarily a “deficiency balance.” This balance arises when the repossessed vehicle is sold for less than the amount still owed on the loan. The deficiency balance is calculated by subtracting the sale price from the outstanding loan balance, then adding all associated fees. Fees can include costs for towing, storage, reconditioning, and auction expenses.

Both the primary borrower and co-signer are equally liable for this deficiency balance. For instance, if $8,000 remains on a loan and the repossessed car sells for $5,000, a $3,000 deficiency balance would arise, to which additional fees would be added. Lenders or their collection agencies will pursue the co-signer for this amount through various collection actions.

Collection actions often begin with phone calls and letters demanding payment. If the deficiency balance remains unpaid, the lender may escalate collection efforts by selling the debt to a third-party collection agency. Ultimately, the lender can file a lawsuit against both the primary borrower and the co-signer to obtain a judgment for the debt. A court judgment can then lead to more severe collection methods, such as wage garnishment or bank levies.

Credit Score Implications

Car repossession and unpaid debt significantly impact a co-signer’s credit report and score. The repossession is recorded as a negative mark on the co-signer’s credit report. This entry can remain on the credit report for up to seven years from the date of repossession.

The negative impact on credit scores often begins even before the repossession occurs, due to late payments on the loan. Each late payment is reported to credit bureaus and can cause a substantial drop in credit scores. Payment history accounts for a significant portion of credit scoring models, making missed payments particularly damaging.

If the deficiency balance remains unpaid, the account may eventually be reported as a “charge-off.” If collection agencies become involved, their activity will appear on the credit report as collection accounts. Should the lender pursue legal action and obtain a civil judgment, this too will be noted on the co-signer’s credit report. These negative entries can make it challenging to secure future loans, credit cards, or housing.

Actions for a Co-signer

After repossession, a co-signer should proactively engage with the lender to understand the financial situation. Request a detailed breakdown of the deficiency amount, including all fees and the vehicle’s sale price. This information helps determine the amount owed and verify the sale was commercially reasonable.

One course of action is to negotiate a settlement with the lender. Lenders may sometimes agree to accept a lower lump-sum payment than the total deficiency balance. If a settlement is not feasible or desired, making regular payments on the deficiency balance can prevent further collection actions and mitigate additional negative credit reporting.

Co-signers have certain rights. These rights include receiving formal notice of the vehicle’s sale, and the option to “redeem” the vehicle by paying the entire outstanding loan balance plus fees before it is sold. Another option, depending on state laws, may be to “reinstate” the loan by paying all past-due amounts and associated fees to bring the account current and regain possession of the vehicle. Act quickly if considering redemption or reinstatement, as these options are time-sensitive.

If financial complexities or aggressive collection efforts arise, seeking legal advice from a consumer debt or bankruptcy lawyer can help. Legal professionals can help understand rights, evaluate collection practices, and advise on options like challenging the deficiency or considering bankruptcy. They can also ensure proper notices were provided by the lender.