What Happens With a Voluntary Repossession?

Voluntary repossession occurs when a borrower proactively returns an asset, such as a vehicle, to a lender because they are no longer able to meet the financial obligations of the loan agreement. This action is distinct from an involuntary repossession, where the lender initiates the seizure of the collateral due to a loan default. A voluntary repossession allows the borrower to maintain some control over the process. It is a decision made when continued payments become unsustainable.

Steps for Voluntary Repossession

Initiating a voluntary repossession involves direct communication with the lender to express the intent to surrender the asset. Borrowers should contact their lender to discuss their financial situation and state their desire to return the vehicle. This formalizes the surrender process.

The lender will request specific account details and information about the asset, such as the vehicle identification number (VIN) and current mileage. They will then provide instructions on how and where to return the asset. This might involve dropping the vehicle off at a designated location, such as a dealership or a specific lot, or the lender may arrange for a repossession company to pick it up at an agreed-upon time and place.

Before surrendering the vehicle, remove all personal belongings, as the lender is only entitled to the collateral itself. The borrower may also be required to sign specific documentation, such as a surrender agreement, to formalize the return. Obtain confirmation from the lender that the vehicle has been received, noting the date, location, and the person with whom it was left.

Addressing the Remaining Balance

Even after a voluntary repossession, the borrower remains responsible for any outstanding debt. The lender will sell the repossessed asset at auction to recover as much of the loan balance as possible. These sales, often at public or dealer auctions, sell vehicles “as is” and may not fetch their full market value due to depreciation or condition.

The proceeds from the sale are applied to the outstanding loan balance, which includes the principal amount, accrued interest, and any fees related to the repossession and sale, such as towing, storage, and auction costs. If the sale price does not cover the total amount owed, the difference is known as a “deficiency balance.” For example, if a borrower owes $10,000 on a loan and the vehicle sells for $7,000, the deficiency balance would be $3,000, plus any additional fees.

The borrower is legally obligated to pay this deficiency balance. Lenders pursue collection of this amount through various means, including sending collection letters and making phone calls. If the borrower does not pay the deficiency, the lender may turn the account over to a collection agency or pursue legal action, which could result in a deficiency judgment. A deficiency judgment is a court order allowing the lender to collect the remaining debt, potentially through wage garnishment, bank account levies, or liens on other assets.

Credit Impact

A voluntary repossession will have a negative impact on a borrower’s credit report and credit score. This event is reported to major credit bureaus, including Experian, Equifax, and TransUnion. It is reported as “voluntary repossession” and signifies a failure to meet loan obligations.

Credit reports show the account status as “voluntarily repossessed.” If a deficiency balance remains unpaid, the account may also be listed as “charged off.” Payment history, including any missed payments, will also be reflected. This derogatory mark remains on a credit report for up to seven years from the original delinquency date, the date the account first became past due and was never brought current.

The immediate consequence is a reduction in credit scores, which can range from 50 to 150 points depending on the borrower’s credit history. This significant drop can make it more challenging to secure new loans or lines of credit in the future. Lenders may view a borrower with a voluntary repossession on their report as a higher risk, leading to difficulties in obtaining new financing or being offered loans at substantially higher interest rates and less favorable terms.