What Happens to a Cosigner if a Car Is Repossessed?

A cosigner on a car loan agrees to be equally responsible for the debt if the primary borrower fails to make payments. If the borrower defaults, typically due to missed payments, the lender can repossess the vehicle. The cosigner’s signature signifies a promise to repay the loan, even if they never drove the car or had possession of it.

Cosigner’s Financial Liability After Repossession

Once a car is repossessed, the cosigner becomes fully accountable for any remaining financial obligations. The lender will sell the repossessed vehicle, often at an auction, to recover the outstanding loan amount. However, the sale price is frequently less than the balance owed, especially considering depreciation.

The difference between the loan balance (plus repossession costs) and the sale price is known as a “deficiency balance.” This balance can include various fees such as towing, storage, reconditioning, auction fees, and legal expenses. For example, if $8,000 is owed and the car sells for $5,000, the deficiency is $3,000 plus fees. The cosigner is equally responsible for paying this entire deficiency balance.

The lender will pursue recovery of this deficiency from both the primary borrower and the cosigner. They are not required to exhaust collection efforts against the primary borrower before seeking payment from the cosigner. The cosigner can be held liable for the full amount, even if unaware of the missed payments.

Impact on the Cosigner’s Credit

A car repossession significantly harms the cosigner’s credit report and credit score. This negative event is reported to major credit bureaus and can remain on the credit report for approximately seven years from the date of the first missed payment.

Late payments leading up to the repossession also appear on the credit report and negatively affect credit scores. The repossession itself can cause a substantial drop in the cosigner’s credit score. The unpaid deficiency balance, if sent to collections or pursued through legal action, creates additional negative entries on the credit report.

A damaged credit score makes it more challenging to obtain new loans, credit cards, or lines of credit in the future. If approved for new credit, individuals with a repossession on their record often face higher interest rates. A poor credit history can also affect other aspects of life, such as securing housing or certain employment opportunities.

Lender Actions Against the Cosigner

Lenders undertake various steps to collect the deficiency balance from a cosigner. Initial collection efforts involve phone calls, letters, and emails to demand payment. These communications state the amount owed and the consequences of non-payment.

If direct collection attempts are unsuccessful, the lender may sell the debt to a third-party collection agency. This agency will then pursue the cosigner for the debt. Should collection efforts fail, the lender or the collection agency may file a lawsuit against the cosigner to obtain a judgment for the deficiency balance.

A court judgment legally obligates the cosigner to pay the debt. With a judgment, the creditor can pursue more aggressive collection methods, such as wage garnishment, where a portion of the cosigner’s paycheck is directly taken to satisfy the debt. They may also initiate bank levies, allowing them to seize funds from the cosigner’s bank accounts. In some cases, a lien might be placed on the cosigner’s property, such as real estate, which could affect their ability to sell or refinance it.

What a Cosigner Should Know and Do

Upon learning of a repossession, a cosigner should promptly obtain a deficiency notice from the lender. This notice details the exact amount owed, including the remaining loan balance, sale proceeds, and any additional fees.

Direct communication with the lender is advisable to explore potential payment arrangements. Lenders may be open to negotiating a repayment plan or a settlement for a reduced amount, especially if a lump sum payment is offered.

Cosigners have rights under various consumer protection laws. These laws generally prohibit harassing or abusive debt collection practices. Seeking professional guidance from a credit counseling agency or legal counsel can help navigate the complexities of deficiency balances and collection efforts. Regularly checking their credit report for accuracy after a repossession is also a prudent step.