How to Voluntarily Repossess Your Car to Settle the Debt

So, you’ve fallen behind on your car payments. It happens – life can throw us some curveballs financially. But now you’re facing the possibility of your car being involuntarily repossessed by the lender. That can be stressful, embarassing, and end up costing you more in fees. But there is another option – voluntarily repossessing your car. This article will walk you through everything you need to know about voluntary repossession, including how it works, the pros and cons, and what steps to take.

What is Voluntary Repossession?

Voluntary repossession – also known as voluntary surrender – is when you proactively return your car to the lender rather than having it forcibly repossessed. You arrange a time and place to meet the lender and hand over the keys and the vehicle. It’s literally you saying “Here, take the car back.”

Some key things to know:

• You initiate voluntary repossession, not the lender. You contact them and say you want to voluntarily surrender the vehicle.
• You arrange the time and place to return the car. Often you’ll meet at a neutral location like the lender’s office.
• You may still owe money after voluntary repossession. More on this later.
• Your credit will still take a hit, but maybe not as bad as involuntary repossession.

So in a nutshell, voluntary repossession is you returning the car proactively before the repo man comes knocking. Let’s look at some pros and cons.

Pros of Voluntary Repossession

Voluntary repossession does have some advantages over having your car forcibly repossessed:

1. Avoid repossession fees

With involuntary repossession, the lender has to pay to have your car tracked down, towed, stored, etc. And they will bill you for those costs! With voluntary surrender, you’re bringing the car to them on a silver platter so there are no repossession costs.

2. Less credit damage

Having your car involuntarily repossessed is one of the worst dings your credit can take. Voluntary repossession shows you’re taking responsibility, so it may hurt your credit a little less. Don’t expect a huge difference, but every little bit helps.

3. More control

By voluntarily surrendering the car, you control the time and place of the hand-off. No worrying about the repo man coming at an embarrassing time. You also have time to remove all personal items from the car.

4. Potential goodwill

If you communicate proactively and work positively with the lender, they may look upon you more favorably down the road. No guarantees of course! But it can’t hurt.

So in summary – avoiding fees, potential credit impact reduction, more control, and maybe some goodwill down the road. Not bad! But voluntary repossession isn’t all sunshine and rainbows…

Cons of Voluntary Repossession

While voluntary repossession has some advantages over involuntary repossession, it still carries many downsides:

1. Major credit damage

Even if it’s slightly less than involuntary repossession, voluntary repossession will still devastate your credit. We’re talking a 100+ point hit. It will stay on your credit report for 7 years. Other lenders will see you surrendered a car – not good!

2. Still owe money

Don’t think you can just return the car and walk away. The lender will sell the car and apply the proceeds to your loan. But if you owe more than the car sells for, you are on the hook for the difference, known as a deficiency balance. And with the lender having all the leverage, don’t expect them to negotiate much on what you still owe.

3. Loss of transportation

Unless you can quickly line up other transportation, voluntarily repossessing your car means you’ll be without wheels. That can severely impact your ability to get to work, school, childcare, etc. Lack of transportation is a huge problem for many.

4. Tax implications

If your car is sold for less than what you owe, the lender will issue you a 1099-C form reporting the amount of debt forgiven. Depending on your state, you may have to pay taxes on that amount! Ouch, salt in the wound.

So in summary – trashed credit, still owing money, losing your ride, and potential tax headaches. Not fun! But even with all those downsides, voluntary repossession may still be your best option if you just can’t afford the car anymore.

Alternatives to Voluntary Repossession

Before you voluntarily surrender your car, be sure to explore all alternatives:

• Refinancing: If you got your loan through a shady “buy here, pay here” lot, refinancing may dramatically lower your payment. Check local credit unions and banks.
• Payment Plan: Ask the lender if they will let you go on an extended payment plan to catch up. Offer whatever you can afford.
• Defer Payments: See if the lender will let you defer 1-2 payments until you get back on your feet financially.
• Sell the Car: Selling the car yourself and paying off the loan may be better than repossession. List it online everywhere.
• Trade it In: Trading the car in when you buy another one transfers the loan. Monthly payments don’t go down but it resets the clock.
• Loan Modification Program: Some lenders have programs to modify loans for hardship cases. Call and politely ask if any assistance programs exist.
• Bankruptcy: Filing for Chapter 7 bankruptcy stops repossession and discharges remaining balances. But bankruptcy has serious long term credit impacts.

If the lender won’t work with you on options like these, then voluntary repossession may be your only way forward.

How Does Voluntary Repossession Work?

If you’ve determined voluntary surrender is your only option, here is how it works:

1. Review your loan agreement

Before doing anything, review your loan agreement to understand the lender’s rights and the voluntary repossession process. Know what you’re getting into.

2. Contact the lender

Call the lender and explain you are unable to continue making payments and would like to voluntarily surrender the vehicle. Be calm and polite. Ask what documentation or forms are required.

3. Complete the paperwork

The lender will likely require you to sign a Voluntary Surrender or Repossession Agreement. This outlines the terms – date to surrender the car, location, condition of car, balance owed, etc. Read it thoroughly before signing.

4. Remove your belongings

Empty out the car – don’t leave any personal belongings behind! The lender will sell the car, so take everything.

5. Return the car

On the agreed date, return the car to the lender along with sets of keys, title, etc. Take pictures and get receipt for documentation. Keep records of the condition of the car at surrender.

6. Wait for sale

The lender will sell the car at auction or to a dealer. This may take a few weeks or months.

7. Pay deficiency

If the car sells for less than you owe, expect a letter demanding payment of the remaining deficiency balance. Work out a payment plan if needed.

And that’s the voluntary repossession process. Not fun, but organized and controlled.

How Much Will Voluntary Repossession Hurt My Credit?

We briefly touched on this earlier, but let’s dive into the credit impact of voluntary repossession a bit more:

• Major Hit: Expect your credit score to drop 100 points or more. Some report drops of 150+ points. It’s a huge ding.
• Long Impact: A voluntary repossession will stay on your credit report for 7 years from the date you surrendered the car. The impact lessens over time, but it’s still a major negative mark for years.
• Difficulty Qualifying: With a recent voluntary repossession, you’ll have a very hard time qualifying for any type of credit – car loans, mortgages, credit cards, etc. Expect very high interest rates if you do qualify.
• Rates Improve Over Time: If you keep all other accounts in good standing, your credit can recover in a few years. Many can qualify for normal rates after 2 years of good payment history.
• Get Your Reports: Review your credit reports from Equifax, Experian, and TransUnion to understand exactly how the voluntary repossession is being reported. Dispute any errors.

So expect a huge hit, but know your credit can recover with time. Now let’s look at how voluntary repossession could impact your taxes…

Tax Implications of Voluntary Repossession

If your car sells at auction for less than you owe the lender, here is how voluntary repossession could create a tax headache:

• 1099-C: The lender will issue you a 1099-C form reporting the amount of debt forgiven if you owe more than the car sells for.
• Taxable Income: The IRS often views forgiven debt as taxable income. So you may have to pay income tax on the amount forgiven!
• State Taxes: Some states like California also tax forgiven debt. So you could get hit with state and federal taxes.
• Negotiate: Politely ask the lender NOT to issue a 1099-C form. No guarantees, but they may agree if you stay calm and reasonable.
• Insolvency: If you can prove insolvency via IRS form 982, forgiven debt is not taxable. Consult a tax pro on this.
• Consult a Tax Pro: Every situation is different. Talk to a tax professional to understand how voluntary repossession could impact your taxes.

No one wants a tax bill on top of the credit damage! With some finesse, you may be able to avoid taxes on the forgiven debt.

Alternatives to Voluntary Repossession – Recap

We covered this earlier, but it’s so important it’s worth recapping your alternatives to voluntary surrender:

• Refinance the loan
• Payment plan
• Defer payments
• Sell the car
• Trade it in
• Loan modification program
• Bankruptcy

Voluntary repossession should be an absolute last resort if the lender won’t work with you on any alternative solutions. Don’t give up your car without exploring all options first!

Final Thoughts

Voluntarily surrendering your car is often a “least worst” option if you default on an auto loan. It hurts, but may hurt less than the alternatives in some cases.

Other Potential Options

Before voluntarily repossessing, be sure to explore all other options. Here are some additional strategies to consider:

• Borrow money from friends/family to catch up on payments
• Take out a personal loan to pay off the auto loan
• Negotiate with the lender for temporary hardship program
• List the car for sale yourself and use proceeds to pay loan

If you’ve exhausted all options, voluntary repossession may be the least worst path forward. But avoid it if at all possible.

The Emotional Toll

Beyond the financial implications, voluntarily surrendering your car can take an emotional toll. The loss of independence, embarrassment, and sense of failure can be difficult to handle.

Be kind to yourself throughout the process. Seek support from loved ones. Know that this doesn’t define you – it’s one setback as you work toward a healthier financial future.

Rebuild Your Credit

After repossession, rebuilding your credit should become a top priority. Here are some tips:

• Get secured credit cards and use responsibly
• Become an authorized user on someone else’s account
• Limit credit checks by only applying when needed
• Review credit reports and dispute errors
• Set up payment reminders to avoid future missed payments

With time and diligent effort, you can recover from the credit impacts. Don’t get discouraged – take it one step at a time.

Move Forward Carefully

If you do voluntarily surrender your vehicle, proceed with caution when acquiring replacement transportation. High interest loans or leases can quickly dig you into another hole.

If possible, save up and pay cash for a used car you can afford. Or use public transportation until your credit recovers. The last thing you need is another unaffordable car payment.

Stay strong, be patient, and make wise decisions as you move forward after voluntary repossession. You’ve got this!