Deciding Between Voluntary Repossession or Continued Payments

Falling behind on your car payments can be scary. You may be wondering whether to continue making payments, even if they’re late, or to voluntarily surrender the car back to the lender through a process called voluntary repossession. There are pros and cons to each option that depend on your specific situation.

This article will walk through the key things to consider when deciding between voluntary repossession and continuing payments on a car you’re struggling to afford. We’ll look at how each option could impact your credit, finances, transportation and more. Our goal is to provide information to help you make the best choice for your personal situation.

What is Voluntary Repossession?

With voluntary repossession, you voluntarily return the car to the lender when you can no longer afford the payments. Basically, you call up the lender and say you need to surrender the car because you can’t make the monthly payments anymore. Then you’ll work with the lender on the details of dropping the car off.

The lender will sell the car and put the money towards your remaining loan balance. However, you may still owe additional money if the car sells for less than what you owed on the loan.

Pros of Voluntary Repossession

There are some potential advantages to choosing voluntary repossession:

• Avoids a forced repossession – With voluntary repossession, you get to return the car on your own terms instead of having it forcibly repossessed by the lender.
• No costs for forced repossession – You avoid repossession fees and storage fees that can add hundreds or thousands of dollars to your loan balance.
• Possibility of negotiating deficiency balance – You may be able to negotiate with the lender to waive some of the deficiency balance you owe after the car is sold.
• Stops further late fees – Returning the car stops additional late fees from accumulating each month you can’t make a payment.
• Allows closure – Ending the loan gives you closure instead of stressing every month about making late payments.

Cons of Voluntary Repossession

There are also some potential downsides to voluntary repossession:

• Credit damage – Like with forced repossession, voluntary repossession can significantly hurt your credit score.
• Owing a deficiency balance – If the car sells for less than you owe, you’ll likely still owe the lender money.
• No car – You’ll be without a vehicle unless you can buy another car or borrow one from family or friends.
• Tax implications – Any amount forgiven by the lender may count as taxable income.

Alternatives to Voluntary Repossession

Instead of voluntary repossession, you may want to consider these other options:

• Reinstatement – If you can come up with the money, you may be able to reinstate the loan by paying the total amount you owe in arrears. This would let you keep the car.
• Forbearance – Asking the lender for forbearance allows you to temporarily pause or reduce payments for a set period of time.
• Modification – The lender may agree to modify the loan terms to reduce your monthly payment to an affordable amount.
• Refinancing – You may be able to get a lower monthly payment by refinancing the loan.
• Selling the car – Selling the car yourself and using the money to pay down the loan balance avoids repossession.

If you’re considering these alternatives, be sure to discuss them with your lender. They may be willing to work with you, but are not required to do so.

Impact on Credit Score

Both voluntary repossession and forced repossession can severely damage your credit score. The repossession will show up on your credit reports, lowering your score by 100 points or more in many cases. And your credit score will be impacted for years after the repossession.

An alternative like refinancing or modification will also hurt your credit if it requires you to reset the loan terms. But the impact is usually less than repossession. Selling the car yourself would avoid credit damage as long as you keep making payments until the car is sold.

Do You Still Owe Money After Repossession?

With voluntary repossession, the lender will sell the vehicle and apply the sale amount to your remaining loan balance. However, you will likely still owe money if the car sells for less than you owed on the loan.

This remaining balance is called a deficiency balance. Unless your state prohibits it, the lender can come after you legally for this amount. And they often sell the debt to aggressive collectors.

Can Bankruptcy Help With Repossession?

Filing Chapter 7 or Chapter 13 bankruptcy after a repossession may provide some help:

• Chapter 7 bankruptcy can eliminate any deficiency balance you owe after the repossession. This wipes the slate clean and prevents further collection efforts.
• Chapter 13 bankruptcy allows you to repay a portion of the deficiency over 3-5 years through a repayment plan. This can make it more affordable.
• Bankruptcy stops collections activity while your case is pending. Creditors must cease contact after you file.
• Both chapters allow you to keep other assets like your home, retirement funds, and in some cases, a vehicle.

However, bankruptcy also damages your credit. And you normally have to wait several years before filing again. It’s a last resort when debt becomes completely unmanageable.

Talk to a bankruptcy attorney to discuss whether bankruptcy could help with your repossession issues.

Transportation Options After Repossession

Losing your car to repossession also leaves you without transportation. Here are some options to consider if you can no longer keep the repossessed car:

• Buy an inexpensive used car with cash or financing – Just be wary of dealers selling “repo specials” that may also break down quickly.
• Borrow a car from family or friends temporarily.
• Use public transportation where available – Buses, trains, and subways.
• Carpool with coworkers or neighbors.
• Use a bike or electric scooter for shorter local trips.
• Use rideshare services like Uber or Lyft when needed.

Losing your car can be challenging, especially if public transportation options are limited in your area. Create a transportation plan before surrendering your car to avoid being completely stranded.

Should You Sign Anything When Voluntarily Surrendering?

The lender may ask you to sign a voluntary repossession agreement or other documents when you surrender the car. This paperwork is usually not required, but read everything closely before signing.

The agreement may state that you promise to pay any deficiency balance still owed after the sale. While you are still legally obligated for this amount in most states, signing such an agreement just makes it easier for the lender to collect from you.

Consider crossing out sections that acknowledge you are responsible for the remaining balance. Or simply refuse to sign the agreement and instead provide a signed letter saying you are voluntarily surrendering the vehicle due to inability to pay.

Other Steps to Take

Here are a few other things to do when voluntarily repossessing your car:

• Remove all personal belongings – Take out any items left in the car before surrendering it.
• Cancel insurance – End your auto insurance policy on the car once you have surrendered it.
• Notify DMV – Contact your state DMV to cancel registration and transfer the title to the lender.
• Get gap insurance refund – If you had gap insurance, request any refund of unused premiums.
• Review loan details – Check your loan agreement and state laws to understand what you still owe and what rights you have.

Questions to Ask Your Lender

Be sure to communicate with your lender before and during the repossession process. Here are some important questions to ask:

• – Will there be any fees for voluntary repossession?
• – Where should I drop the car off when I surrender it?
• – How long until the car is sold at auction?
• – How much do you estimate I will still owe after the sale?
• – Is there any way to negotiate forgiveness of some of the remaining balance?
• – When will you send me the final accounting of what I owe after the sale?
• – Will you work with me at all on options to avoid repossession like reinstatement or modification?

Get as much information as possible from the lender to make the best decision on surrendering your car.

Consult an Attorney if Needed

Remember you are not required to sign anything admitting liability for a deficiency balance after repossession. If the lender pressures you, it may be wise to consult a consumer protection attorney before agreeing to sign anything.

An attorney can review the paperwork and ensure you understand your rights and obligations. They can also provide alternatives that may allow you to keep the car if possible.

Act Soon to Avoid Forced Repossession

Once you miss payments, the lender can forcibly repossess the car at any time without warning. Act soon if you decide voluntary repossession is your best option. This allows you to return the car on your schedule rather than face a sudden repossession.

Waiting until the lender takes action also risks additional fees for forced repossession and storage expenses. Take control of the situation as soon as possible if you can no longer afford the payments.

Weigh Your Options Carefully

Voluntary repossession is a big decision that can impact your finances, credit and transportation. Weigh the pros and cons carefully for your situation before choosing voluntary surrender.

Explore alternatives like refinancing that may allow you to keep the car. And understand the consequences before signing anything the lender gives you.

Falling behind on payments is stressful. But taking strategic action can help you move forward.