What Happens When You Surrender a Car?

Voluntarily surrendering a car means returning a financed vehicle to the lender because monthly payments have become unmanageable. This action, also known as voluntary repossession, serves as an alternative to an involuntary repossession, where the lender seizes the car without warning. By choosing to surrender, individuals proactively address their inability to meet loan obligations and mitigate further financial strain.

Preparing for Vehicle Surrender

When deciding to surrender a vehicle, the initial step involves contacting the lender to discuss their specific voluntary surrender procedures. This communication allows the borrower to understand any required forms or notifications and to arrange the details of the return. It is important to confirm with the lender what documents or accessories they expect to receive, such as all keys, the owner’s manual, and any service records.

Before the physical handover, remove all personal belongings from the vehicle. Taking photographs or videos of the car’s condition at the time of surrender can provide a record and help avoid potential disputes regarding damage. The vehicle should be in reasonable condition, as excessive damage could influence the final amount owed after the sale.

The physical surrender involves dropping the car off at a designated location, such as a dealership or return center, or arranging for the lender to pick it up. Obtain written documentation confirming the date, time, and the individual to whom the vehicle was surrendered. This record helps establish that the car was returned as agreed and can be useful for future reference.

Lender Actions After Surrender

After a vehicle has been voluntarily surrendered, the lender takes possession and begins a process to recover the outstanding loan balance. The first step involves assessing the vehicle’s condition and determining its market value. This assessment helps the lender decide the most effective method for selling the vehicle.

Lenders sell surrendered vehicles, most often through a wholesale auction, to maximize the recovery of the loan balance. The proceeds from this sale are applied to the borrower’s account. This application first covers the costs incurred by the lender, which can include towing, storage, reconditioning, and auction fees. After these expenses are covered, any remaining proceeds are applied to the principal and interest of the outstanding loan balance.

A legal step for the lender involves notifying the borrower about the impending sale of the vehicle. This “Notice of Sale” includes details such as whether the sale will be public or private, and for public auctions, the date, time, and location. This notice allows the borrower to potentially bid on the vehicle or arrange for others to do so. If the lender fails to provide proper or timely notice, it could impact their ability to collect any remaining debt from the borrower.

Financial Outcomes for the Borrower

Even after surrendering a vehicle, the borrower remains responsible for any outstanding amount not covered by the sale proceeds, known as a deficiency balance. This balance arises because the sale price at auction often does not cover the full loan amount plus the costs associated with the repossession and sale. For example, if $10,000 was owed and the car sold for $7,000, the borrower would still owe the $3,000 difference, in addition to fees.

A voluntary surrender is reported to credit bureaus and negatively impacts the borrower’s credit score. It is still considered a derogatory mark. This negative mark can remain on a credit report for up to seven years from the original date of delinquency, making it challenging to obtain new credit or loans.

Lenders will pursue collection of the deficiency balance. This can involve sending the account to a collection agency, which may result in frequent collection calls. If collection efforts are unsuccessful, the lender or collection agency may initiate a lawsuit to obtain a judgment against the borrower for the unpaid amount. A judgment can lead to wage garnishment or liens on other property, depending on state laws.

There can also be tax implications if a portion of the debt is forgiven. If the lender cancels $600 or more of the deficiency balance, they may issue a Form 1099-C, Cancellation of Debt, to the borrower and the IRS. Canceled debt is considered taxable income, meaning the borrower may need to report it on their federal tax return for the year the cancellation occurred. However, certain exclusions, such as insolvency or bankruptcy, may apply, and consulting a tax professional is advisable to understand specific circumstances.