If you fail to make timely payments on your car, the lender may try to recoup their financial loss by physically taking the vehicle in a process known as repossession. While repossession is often an involuntary procedure, there is also an alternative called voluntary repossession, or voluntary surrender. How does voluntary repossession work? And could it damage your credit? Our bankruptcy attorneys weigh in.
There is no way to hide an inability to pay off your loans, and in fact, dodging your creditors can make the situation worse. If you think you are at risk of repossession, you should notify your lender immediately and try to explain your financial situation. Some creditors will be understanding and will work with you to negotiate a late payment — but unfortunately, not all are so flexible.
If your creditor is unwilling to accept a late payment and insists on repossession, you may be able to convince them to settle (i.e. reduce) your debt in exchange for offering a voluntary repossession. However, whether a repossession is voluntary or not, you will still have to pay off whatever balance remains after the creditor sells the car and applies the sale proceeds to the loan, known as the deficiency balance. Furthermore, volunteering to surrender your vehicle will not necessarily prevent the creditor from noting the late payment — or the repossession — on your credit report.
This brings up an important question…
On one hand, voluntary surrender is slightly preferable to involuntary repossession in that it demonstrates a willingness to work with your creditors. It can also save you the worry of having your car unexpectedly repossessed in front of your friends or family, which is a major emotional benefit.
But unfortunately, the difference to the negative impact on your credit score is minimal.
Yes, you returned the vehicle willingly; but from a lender’s perspective, the bottom line is the same. Voluntary or not, a repossession is a repossession — and ultimately, an indicator that a debtor failed to keep up with their payments.
As one Experian spokesperson explains, “You will be viewed as high risk and will likely pay a much higher interest rate if you can get approved for a new loan at all.” Experian also cautions, “It is considered very negative and would almost certainly have a substantial impact on your credit report and credit scores. A voluntary surrender should be your last resort.”
If you’re struggling financially, there may be a better plan than giving your car up for voluntary repossession: filing for bankruptcy. In fact, bankruptcy may even help you keep your car.
Whether you file for Chapter 7 or Chapter 13, you’re still entitled to the protections of something called the automatic stay. Taking effect as soon as you file, the automatic stay protects you from collection actions like wage garnishment, foreclosure… and, you guessed it, auto repossession. Not only does the automatic stay freeze collection actions, it also gives you additional time to negotiate a possible solution with your creditors.
However, the strength of the stay depends partially on what comes beforehand.
When you file for Chapter 7, you must submit a form called your Statement of Intention (Form 8). True to its name, this form outlines how you intend to approach your debts, including whether various pieces of property will be surrendered or retained. If you indicate on your Statement of Intention that you plan to surrender the car, your creditors may file a motion requesting that the bankruptcy judge lift the stay which protects your car, since you were going to give it up anyway. (On the positive side, you will not be liable for the deficiency balance, which is included in the Chapter 7 discharge.)
If you do not wish to surrender the car, you have two other options: redemption, and reaffirmation.
If you redeem, you will have to pay off the vehicle’s present-day market value in a single-sitting lump sum. If the market value doesn’t cover the price you originally paid, the difference can be discharged.
If you reaffirm, you and your creditor will sign a contract stating you can keep the vehicle, on two conditions: you must continue to make your payments, and you accept full liability for the debt. In other words, you waive your right to discharge, which means you must be able to convince the court you will actually be able to pay. If the court thinks you don’t have sufficient funds to realistically cover the car, the judge may allow for a repossession to proceed, so it’s very important to be represented by an experienced bankruptcy lawyer.
Chapter 13 does not include a Statement of Intention, because it utilizes a three- to five-year repayment plan instead. However, you can use the repayment plan to pay off your auto loans, including missed payments, provided you continue to meet the terms of your plan.
Bankruptcy can be an effective tool against repossession, and may be able to help get your finances back on track. To set up a free and private legal consultation, call Young, Marr & Associates at (609) 755 3115 in New Jersey or (215) 701 6519 in Pennsylvania or contact our law offices online.