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Are There Any Advantages to a Voluntary Repossession?

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In a Nutshell

Voluntary repossession is when you give your car back to the car dealership instead of waiting for the lender or collection agency to repossess it. It can be a decent option if you’re having trouble with monthly payments on your car, if you're only able to make late payments, or if you’re going into bankruptcy. Deciding if it’s the right move depends on your personal situation and goals. This article will explain voluntary repossession, how it can affect your credit history, and how bankruptcy may or may not help with repossession issues.

Written by Attorney Thomas J. Pearson
Updated July 12, 2023

Voluntary repossession is when you give your car back to the car dealership instead of waiting for the lender or collection agency to repossess it. It can be a decent option if you’re having trouble with monthly payments on your car, if you're only able to make late payments, or if you’re going into bankruptcy. Deciding if it’s the right move depends on your personal situation and goals. This article will explain voluntary repossession, how it can affect your credit history, and how bankruptcy may or may not help with repossession issues.

What Happens After My Car Is Repossessed?

After your car is repossessed, the lender will probably decide to sell the car in an auction. At most repo auctions, the car is sold for less than what you still owe on it. This is a problem because you're responsible for the remaining balance of money that the car sale does not pay off. That includes any unpaid balance on the loan, leftover interest, and any money that the lender spent on towing, storing, and selling the car. 

If the car auction price isn’t enough to cover those costs, the lender can sue you for the money still owed, known as the deficiency balance, and receive a judgment for the deficiency. If you don't pay off the deficiency judgment, your wages can be garnished by a collection agency. You should seek legal advice if your wages are being garnished.

Missed car loan payments and vehicle repossession negatively affect your credit score. Late or missed payments will show up on your credit report and hurt your credit score. The repossession itself will be reported separately and hurt your credit score as well. These dings on your credit report look very bad to future lenders for several reasons. 

For one, having a history of late or missed payments tells lenders that you might not be good at paying money back. Similarly, when lenders see a record of repossession, they know you can be sued for the deficiency and have your wages garnished, which can make it harder for you to make payments on new loans. For those reasons, they’ll be hesitant to lend to you if you’ve had a car repossessed or if you have a judgment against you. Also, if lenders do approve you for a loan, they'll probably charge higher interest rates.

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Why Volunteer To Have Your Car Repossessed?

Sometimes, voluntary repossession can be better than waiting for repossession agents to take your car on their own. If you don't voluntarily give back the car, repo teams will take it without giving you any notice, whenever it’s convenient for them. Often, they will seize your car in the middle of the night because that’s the easiest time for them to find it. They also prefer taking cars at night because people are less likely to be awake and get in the way of repossession.

In addition to having control over the timing, voluntary repossession can also help you avoid unwanted attention. Nobody wants to be humiliated by having their car repossessed in front of other people. If the repo team comes without warning, your neighbors might notice your car being towed away. You can avoid this embarrassing experience by voluntarily giving your car back.

There are also some financial reasons to consider voluntary repossession. Doing so might decrease how much you owe to the lender. If you voluntarily surrender your car, then you won’t be charged for the lender’s repossession costs. Generally, this means that the deficiency judgment against you will be lower if you voluntarily give the car back.

Another reason to choose voluntary repossession is that it might look better on your credit report. But this is not guaranteed. Both the lender and credit bureaus can decide if they want to report the repossession or not. If you’re considering voluntary repossession, you should first communicate with your lender to see if they’ll agree not to report the repossession if you do it voluntarily. Unfortunately, even if the lender agrees not to report the repossession or your missed payments, credit bureaus can still demand that information from the lender. If that happens, the repossession will still hurt your credit score.

Credit repair is a good option for people with poor credit histories. If your credit score isn't as high as you want it to be, you can explore credit repair options.

Call Your Lender To Ask How They Treat Voluntary Repos

For many people, car payments end up being too expensive. There are several options to reduce your car payment if it’s too high. If you’re having trouble making payments and you’re thinking about voluntary repossession, your first step should be calling the lender, dealership, or financial institution that manages your loan. Explain that you’re concerned about making payments and you want to explore all available options. 

Sometimes lenders will agree to a more affordable payment plan to avoid repossession. You can also discuss how they handle voluntary repossessions and credit reporting. Knowing how your lender handles voluntary repossessions will help you decide whether it's worth doing.

It’s also a good idea to call other auto lenders to see if you can get a better payment plan by refinancing the loan. Loan refinancing is a serious decision so you should educate yourself and read any refinance agreements carefully.

Bankruptcy Could Help You With Voluntary Repossession

You may also want to consider bankruptcy if you’re worried about your car payments. Bankruptcy wipes out certain debts and may help you with your car payment situation. The two sections below explain how two different types of bankruptcy can affect your auto loan debts.

How A Chapter 7 Bankruptcy Can Help With A Voluntary Repossession

In Chapter 7 bankruptcy, giving your car back is called voluntary surrender. When you’re in Chapter 7 bankruptcy, you can surrender your car and the car loan will be eliminated. After the voluntary surrender, any money you still owe on the loan becomes an unsecured debt. Unsecured debt is a type of debt that is not tied to, or secured by, a physical asset. This means that a lender can't seize your property if you're behind on loan payments. 

A common example of unsecured debt is credit card debt. If you don't pay your credit card bills, the credit card company can sue you and get a judgment against you, but they can't just take your property. So, a borrower who enters Chapter 7 bankruptcy and voluntarily surrenders their car should have their unsecured car loan wiped out.

By surrendering the car while in Chapter 7, you won’t owe the lender for the car loan and the lender can’t sue you for a deficiency. Filing for bankruptcy is a serious decision, so you should consider its benefits and disadvantages before filing.

How A Chapter 13 Bankruptcy Can Help With A Voluntary Repossession

Regarding car repossession, Chapter 13 bankruptcy has several important advantages and disadvantages when compared to Chapter 7. One major disadvantage is that surrendering your car doesn’t automatically wipe out the money you owe. In fact, surrendering during Chapter 13 will only pay off a small portion of the amount you owe to the lender. The car loan debt won’t be discharged until you’ve completed the 3-5 year repayment plan.

One advantage to Chapter 13 is that you might be able to keep your car. You might also be able to make your payment plan more affordable by getting a lower interest rate or spreading payments out to lower them.

Another advantage of Chapter 13 is something called a cramdown. A cramdown allows you to pay only the actual value of the car and not the entire loan. Paying only the actual car value is cheaper because you don't have to pay for any interest or fees tacked onto the loan. After successfully paying the cramdown payment plan, you receive full ownership of the car. But a cramdown doesn’t simply wipe away the loan debt. Instead, the loan becomes an unsecured debt that is discharged only after you complete the repayment plan.

Chapter 13 can be fairly complex, so it’s a good idea to consult with an attorney before filing.

Let’s Summarize…

Voluntary repossession might help you if you’re unable to keep up with car payments and your auto lender agrees not to report the repo. Unfortunately, you can’t count on the auto lender’s promise because credit bureaus can still demand them to report information. In some cases, bankruptcy might be your best option for dealing with both voluntary and involuntary repossession. This will all depend upon your individual circumstances; you should take time to understand all of your options.

Written By:

Attorney Thomas J. Pearson


Thomas “TJ” Pearson is a Staff Attorney at the Metropolitan St. Louis Equal Housing and Opportunity Council (EHOC). He represents tenants in eviction cases and related landlord-tenant disputes. TJ is from Belleville, Illinois and currently lives in St. Louis, Missouri. He receive... read more about Attorney Thomas J. Pearson

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