Are There Any Advantages to a Voluntary Repossession?

What Is Voluntary Repossession?

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 filing 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 During a Voluntary Repossession?

If voluntary repossession sounds like the right choice for you, start by contacting your lender. Let them know you can no longer make payments and want to surrender the car. 

The lender will give you instructions on where and how to return the vehicle. They may ask you to deliver it to a dealership or a specific location. Confirm with them what they’d like you to bring in addition to the car. They usually want the car keys, the vehicle title (if you have it), and any accessories or manuals that came with the car. 

Be sure to remove any personal items from the vehicle before you give it back.

Your lender may also ask you to sign a surrender agreement, which outlines the details of the repossession and confirms that you’ve returned the car. It’s also a good idea to ask your lender how they’ll report the repossession on your credit and whether they’re willing to waive any repossession fees or reduce the remaining balance on your loan. 

What Happens After the Repossession?

After repossession, most lenders sell the car at a public auction. It’s common for the auction price to be less than the remaining balance on the car loan. 

This is a problem because you're responsible for the difference (called a deficiency balance). This amount 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 auction price isn’t enough to cover those costs, the lender can sue you for the deficiency balance. If they win, the court will issue a judgment in their favor. This can allow lenders to pursue wage garnishment or freeze your bank account.

How Does a Repo Affect Your Credit?

Missed car loan payments and vehicle repossession have a negative impact on 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 bad to future lenders for several reasons. (Remember though, if your credit score isn't as high as you want it to be, you have several ways to increase your score.) 

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, lenders may be hesitant to lend to you if you’ve had a recent car repossession or if you have a judgment against you. Also, if lenders do approve you for a loan, they may charge higher interest rates.

Should You Volunteer To Have Your Car Repossessed?

Sometimes, voluntary repossession can be better than waiting for repossession agents to take your car on their own. There are two kinds of benefits you may experience from a voluntary repossession: financial benefits and emotional benefits.

Financial Benefits of Voluntary Repossession

Voluntary repossession can reduce the overall financial burden you face compared to waiting for the lender to repossess the car on their own. One major benefit is that you avoid being charged for the lender’s repossession costs, such as towing and storage fees. These costs are typically added to your loan balance during an involuntary repossession, which means you’ll owe even more money. By voluntarily surrendering the car, you may owe less overall, which can make a deficiency balance smaller and more manageable.

Another potential financial benefit is that a voluntary repo might help you negotiate with your lender. Some lenders may agree to waive certain fees or reduce the remaining balance if you’re proactive and work with them during the surrender process. While there’s no guarantee, this can lead to better financial outcomes than waiting for an involuntary repossession.

Emotional Benefits of Voluntary Repossession

The emotional relief of voluntary repossession is another reason some people choose this option. 

If you wait for the lender to repossess your car, they’ll send a repossession team that can take your car without notice — often at inconvenient times, like in the middle of the night. 

This can cause significant stress and embarrassment, especially if the car is taken in front of neighbors, coworkers, or family members. Voluntary repossession allows you to control the timing, get your personal items out of your car, and avoid the humiliation of a surprise repossession.

By surrendering the car yourself, you have more control over the process, which can make it feel less overwhelming. Instead of waiting anxiously for the repo team to show up, you can plan and prepare for the surrender. This added control can give you some peace of mind and decrease your financial stress.

What Are the Alternatives to Voluntary Repossession?

If you’re struggling to keep up with car payments, voluntary repossession isn’t your only option. Here are some alternatives to consider before giving up your vehicle:

• Negotiate with your lender

• Refinance your auto loan

• Sell the car yourself

• Explore your bankruptcy options

Negotiate With Your Lender

Many lenders are willing to work with borrowers to avoid repossession. You can ask for a payment extension, a temporary reduction in your monthly payments, or a loan modification. Open communication with your lender can sometimes result in more affordable loan terms that help you keep your car.

Refinance Your Auto Loan

Refinancing might be a good option if you qualify for a lower interest rate or a longer repayment term. This could lower your monthly payment, making it more manageable. 

Refinancing works best if you’re current on your payments or only slightly behind. If you’ve already missed several payments, creditors may be less likely to approve a refinance.

If you choose to refinance, read the new loan agreement carefully. Refinancing can sometimes increase the overall cost of the loan in the long run. This is especially true if you increase the length of the loan.

Sell the Car Yourself

If you owe less on the loan than the car is worth, selling the car on your own can help you pay off the loan in full. Even if the car’s value is less than the loan balance, selling it yourself may yield a higher price than the lender would get at an auction, which can reduce the deficiency balance.

Explore Bankruptcy Options

Bankruptcy can provide relief if you’re dealing with multiple debts, including a car loan you can’t afford. 

Chapter 7 bankruptcy may allow you to surrender the car and wipe out the remaining loan balance, while Chapter 13 bankruptcy can help you catch up on payments or restructure the loan to make it more affordable. 

Filing for bankruptcy is a serious decision, so you should consider the pros and cons before filing.

How a Chapter 7 Bankruptcy Can Help With a Voluntary Repossession

In Chapter 7 bankruptcy, giving your car back is called voluntary surrender. If you surrender the car, you won’t owe the lender for the car loan or any deficiency balance.

When you surrender the car, the remaining balance on the loan becomes unsecured debt. This means it’s no longer tied to the car, so the lender can’t take any other property to collect the debt. Unsecured debts, like credit card debt, are typically wiped out in Chapter 7 bankruptcy. So, if you surrender your car, the remaining loan balance should be discharged as part of the bankruptcy process.

How Chapter 13 Bankruptcy Can Help With a Voluntary Repossession

If you file for Chapter 13 bankruptcy, you can still voluntarily surrender your car, but the process is different from Chapter 7. 

In Chapter 13, surrendering your car doesn’t immediately eliminate the remaining loan balance. Instead, the deficiency balance is treated as unsecured debt and included in your repayment plan. 

You’ll pay a portion of that balance, along with your other debts, over the 3–5-year repayment period. Any remaining balance is discharged once you successfully complete the plan.

Chapter 13 also gives you the option to keep your car if it’s important to your financial situation. Through your repayment plan, you may be able to catch up on missed payments, negotiate a lower interest rate, or reduce what you owe on the car.

Chapter 13 cases are complex, so they rarely succeed without the help of a lawyer. Upsolve can connect you with a local bankruptcy attorney for a free consultation so you can get legal advice tailored to your situation.

Let’s Summarize…

Voluntary repossession is when you return your car to the lender because you can’t afford the payments anymore. This option may help you avoid some of the financial and emotional stress of having your car repossessed by surprise. It could save you from paying repossession fees and allow you to negotiate with your lender, but it will still negatively affect your credit. You may also have to pay any remaining loan balance after the car is sold.

Voluntary repossession isn’t your only option if you’re struggling with car payments. You could negotiate with your lender, refinance your loan, sell the car, or explore bankruptcy options. Each solution has pros and cons, and the right choice depends on your financial situation.