Repossession: The Basics

If you’re behind on your car loan payments, you could suddenly lose your car, boat, appliances, or furniture without warning through repossession. This can be stressful since it happens on the lender’s timeline, not yours. On top of that, having a repossession on your credit report will hurt your credit score. Keep reading to learn more about the repossession process and how you can get back on track.

What Is Repossession?

Repossession is when a lender takes back property that was used as collateral for a loan. When you take out a loan for a car or house, you promise the lender that you’ll make payments on time and agree that they can take your car or house if you don’t. This type of loan is called a secured loan. 

Auto loans, real estate loans, mortgages, and loans (not leases) for furniture and appliances are all types of secured loans. The property you promised in exchange for the loan is called collateral. Property is usually repossessed for nonpayment of a loan, but it can be repossessed for not keeping other promises made in a loan contract. One example is not keeping insurance on a vehicle with an auto loan. When a borrower stops paying on a loan or doesn’t follow the terms in their loan contract, they are in default. In this case, lenders usually do not need to get a court order to proceed with repossessing your car. 

Once a borrower is in default, the lender can take legal action and repossess the property. Defaulting on a loan means you broke the loan agreement. This varies by lender. The timing of legal action depends on the lender, the specific contract, and state and federal laws. Mortgages are usually considered in default after 120 days of no payments. A car repossession could happen as fast as 30 days after a missed payment. 

When you take out a loan using collateral, the lender will put a lien on the property used as collateral. That lien is their security interest, which is their proof that they have a legal claim to the property. Unsecured debt, such as credit cards, medical bills, and personal loans, aren’t backed by collateral.

What Can Be Repossessed?

Any property that you promised as collateral for a secured loan can be repossessed. This includes cars, houses, land, ATVs, RVs, boats, trucks, jewelry, artwork, furniture, electronics, appliances, and other types of personal property. When a house or land is repossessed, it’s called a foreclosure. A foreclosure can happen with (judicial foreclosure) or without a lawsuit (nonjudicial foreclosure) once the mortgage payments are late, depending on the contract and state and federal laws.

Car repossession is a lot faster than the home foreclosure process, and it’s one of the most common forms of repossession.

How Does Repossession Affect Your Credit Score?

Repossessions and foreclosures both hurt your credit score and stay on your credit report for seven years. After they are reported to the credit bureaus, your credit score could drop by 100 points. But the repo isn’t the only thing that hurts your credit score. Late payments, collection activity, and judgments all also hurt your credit score. The exact amount your credit score will change will depend on your credit history and current financial circumstances.

If you’re struggling to make payments on a secured loan, contact your lender to see if you can resolve the overdue amount before you face repossession. This will help protect your credit score and save you stress. 

What Means Can Be Used To Repossess Property?

Repo agents may follow you and use electronic surveillance like GPS to track you, but there are limits to what means they can use to repossess your car. Your car or other property can be repossessed from a public area or your driveway, but it can’t be repossessed if it’s in a locked building or a gated area. Repo agents can’t make a ruckus, breach the peace, or violate any laws in their effort to repossess your car. Physical force is also forbidden under the law.

Vehicle Repossession

Each state has different repossession laws, regulations, and processes. In some states, vehicle repossession can take days. In others, it can take months. Many lenders won’t take action until payments are 60 days overdue. But in states like California, Texas, and Florida, lenders can order the tow truck to go after the first missed payment. Legally, repossession can be triggered after missing only one payment.

Lenders are often willing to work with a borrower to prevent repossession, particularly if the car isn’t worth much. There are also special protections for active military members. If you’re having difficulty making payments, the first thing you should do is contact the lender and ask about repayment arrangements and hardship programs. The options they give you will depend on your circumstances, company policy, and your past payment history.

Some lenders will notify you that your car is going to be repossessed, but others won’t. Again, this varies by state law and company policy. You can always seek the advice of a consumer attorney to discuss your options and the laws in your state. There are cases of illegal repossessions and collection activity, and your attorney can investigate an auto lender's actions to see if they are complying with all of the laws.

Once your car is repossessed, it’s sold at an auction to pay off your debt. If it is sold for less than the amount you owe, you are still going to be responsible for the remaining amount (plus any fees), even though you don’t have your car. This is called a deficiency balance. You can lower the deficiency balance with a voluntary repossession.

Voluntary & Involuntary Repossession

If you’re struggling to make payments, you can consider voluntary repossession. This is when you voluntarily return your car to the lender. Voluntary repossession has some advantages: It happens on your timeline, and it helps you avoid the expenses of involuntary repossession, which can reduce your deficiency balance. When your car is repossessed against your will in an involuntary repossession, you’re responsible for the tow bill, repossession expenses, and extra fees.

Voluntary and involuntary repossession both hurt your credit score. But because voluntary repossession is marked differently on your credit report, it’s slightly less harmful. Lenders reading your report will see that you worked with your previous lender and willingly gave up your car. That could work in your favor. Also, your total debt will be lower since you avoided the towing and repossession fees.

How To Avoid Repossession

You can avoid repossession by refinancing your loan, negotiating a new payment, or taking advantage of hardship programs or military programs. If possible, you can also simply catch up on your late payments. These actions will help you keep your property and protect your credit score.

Filing bankruptcy is another way you can avoid auto repossession. When you file bankruptcy, the court immediately grants you an automatic stay. This means collection activity, including repossession, must stop until the bankruptcy case is closed (with some exceptions). This can give you time to catch up on missed payments or find another solution.

If you have a lot of debt and are more than a few months behind on your car payment, you may want to consider a Chapter 7 or Chapter 13 bankruptcy. You can file Chapter 7 with Upsolve’s free filing tool, or you can talk to a bankruptcy attorney. Bankruptcy will give you time to deal with your car debt and help resolve your other debts.

Let's Summarize...

Car repossession can happen fast, so it’s best to take time now to decide how you’re going to handle your auto loan debt. Repossessions will affect your credit score, but you can take steps to stop the repossession or at least reduce your debt and have control of your schedule. Consider a repayment plan, a voluntary repossession, or bankruptcy. Whatever you decide, Upsolve is here to help you explore your options and get back on track after repossession.