Updated on 10 October 2024
Voluntary Repossession: Pros and Cons
When dealing with financial difficulties and unmanageable car payments, one of the options you might consider is voluntary repossession. However, it is essential to weigh the pros and cons before making such a decision, and consulting a bankruptcy attorney can ensure you are making the best decision for your situation.
What is voluntary repossession?
Voluntary repossession is a process where a borrower who is unable to continue making loan payments decides to return the asset—usually a vehicle—to the lender. This decision is voluntary, hence the term, and it is typically made to avoid the unpleasant circumstances associated with involuntary repossession.
How does voluntary repossession work?
If you realize that you can no longer afford the payments on your vehicle, you may choose voluntary repossession instead of waiting for the lender to repossess your vehicle.
To initiate a voluntary repossession, it is advisable to contact the lender or creditor to inform them of the situation. Discussing the intention to voluntarily surrender the property demonstrates cooperation and may potentially help mitigate some of the costs associated with repossession.
After informing the lender, you can typically arrange a time and place for the creditor or a repossession company to retrieve the property. When the agreed-upon time arrives, you then give the collateral to the creditor or the repossession company. They take possession of the vehicle, and you sign over the necessary documents acknowledging the voluntary surrender.
After repossession, the creditor typically auctions the item to recover some of the outstanding debt. The amount obtained from the sale is applied toward the loan balance, but you may still be responsible for any remaining deficiency.
Voluntary repossession might seem like a preferable option compared to involuntary repossession, but it is essential to carefully consider the long-term consequences and explore other potential solutions, such as negotiating with the lender or seeking alternative repayment arrangements, before opting for voluntary repossession.
Pros of voluntary repossession
Voluntary repossession is a proactive approach if you find yourself unable to continue with your loan repayments. It is an opportunity to negotiate with your creditor, possibly reaching a settlement that could alleviate some of the financial burden. By choosing voluntary repossession, you may avoid a surprise involuntary repossession, which can happen at inconvenient or even dangerous times.
Additionally, this path allows you to prepare for the return of the car in an orderly manner. You will have time to remove your personal items and understand the process better. For many, there is also an emotional benefit – it's often less distressing to give up an asset willingly rather than have it taken away forcibly.
Moreover, voluntary repossession might help you avoid additional costs associated with involuntary repossession, such as towing and storage fees.
Cons of voluntary repossession
However, voluntary repossession isn't without its downsides.
Doesn’t completely remove your loan
One major drawback is that it doesn't necessarily erase your debt. If the lender sells the car but doesn't make enough to cover the outstanding loan balance, you could still be liable for the difference—known as a deficiency balance.
It could affect your future loans
Voluntary repossession can make obtaining future loans more difficult. There is no difference on your credit between a voluntary repossession and an involuntary one. Future lenders may see this action as a risk factor, making them more reluctant to lend to you or offer you higher interest rates.
Has a negative impact on your credit score
Voluntary repossession can have a significant negative impact on your credit score. This record will stay on your credit report for seven years, potentially making it harder for you to get approved for new credit during this period.
How to Prepare for a Voluntary Repossession: Essential Steps to Take?
Several essential steps should be taken to prepare for a voluntary repossession. Before committing to a voluntary repossession, explore alternatives like loan modification, deferment, or seeking help from a professional who might help negotiate better terms with your lender. If you’re unsure about any part of the voluntary repossession process or the potential legal and financial implications, consider consulting with an attorney for guidance.
Ensure you review your loan agreement and understand your obligations, including any fees associated with repossession, how the lender will handle the sale, and your responsibility for any deficiency balance after the sale.
If you decide to move forward with the voluntary repossession, you should notify your lender of your intention to voluntarily surrender the vehicle. Be honest about your financial difficulties and express your willingness to work with them to resolve the situation. Ask the lender to explain the voluntary repossession process, including where to return the vehicle, any documents you need to sign, and how they will handle the sale of the vehicle.
You can also ask the lender how the voluntary repossession will be reported to the credit bureaus. It will still negatively impact your credit score, but the lender may note that the vehicle was voluntarily surrendered, which could be viewed slightly more favorably than involuntary repossession.
Next, prepare the vehicle for return by cleaning out the vehicle and removing all personal belongings. Gather all keys and any accessories that came with the vehicle, such as the owner’s manual, spare tire, and floor mats. If possible, provide the vehicle’s service records and documentation, which can help with the vehicle’s resale value.
Before returning the vehicle, take photos of its exterior and interior to document its condition. This can protect you from being held responsible for any damages that occur after the vehicle is surrendered. Keep copies of all correspondence with the lender regarding the voluntary repossession, including emails, letters, and any agreements made during the process.
Finally, arrange for the return. Confirm with the lender where and how to return the vehicle. This might involve dropping it off at a designated location or arranging for the lender to pick it up. If possible, ask the lender to perform a final inspection of the vehicle at the time of return and provide you with a written statement of the vehicle’s condition.
Voluntary repossession will appear on your credit report and negatively affect your credit score, typically for seven years. Be prepared for this impact when planning your future financial steps.
Impact of Voluntary Repossession on Your Insurance and Vehicle Registration
Voluntary repossession can affect your insurance and vehicle registration. Once you surrender the vehicle, you should cancel your auto insurance policy to avoid paying for coverage you no longer need. Be sure to notify your insurance company of the repossession and provide any required documentation, such as a letter from the lender confirming the repossession.
If you’ve paid your insurance premiums in advance, you may be eligible for a refund of the unused portion. Check with your insurance provider about how refunds are handled and any potential cancellation fees. If you had GAP insurance (Guaranteed Asset Protection) to cover the difference between the car’s value and the loan balance, review the policy terms to see if it provides any coverage after repossession. Some GAP insurance policies cover deficiency balances after a vehicle is surrendered and sold.
Although a repossession doesn’t directly impact your insurance rates, it can indirectly affect them because insurers may consider credit scores when setting premiums. Since a voluntary repossession negatively affects your credit score, you might face higher premiums when obtaining new insurance for another vehicle.
Depending on your state, you may be required to return your license plates to the DMV after the vehicle is repossessed. Check your state’s DMV requirements for handling plates after repossession to avoid fines or penalties. Some states require you to cancel the vehicle’s registration once it is no longer in your possession. This helps prevent future liability, such as toll violations or parking tickets, that could occur if the vehicle is still registered in your name.
In you paid property taxes or fees based on vehicle registration, you may need to notify the appropriate tax authority or DMV to stop future charges. You might be eligible for a refund or prorated adjustment if you’ve already paid for the year.
If the lender has taken full possession of the vehicle, they are responsible for handling the title transfer. Ask your lender for documentation confirming the vehicle was surrendered and that they have taken over responsibility for the vehicle. Keep copies of all communications, including the official date of repossession, which can be useful for insurance and registration purposes.
What other options do you have?
While voluntary repossession is an option, it's not your only option. Another alternative is to file for bankruptcy. A Chapter 7 bankruptcy allows you to give up the car and discharge the car loan along with other unsecured debts like credit cards, medical bills, personal loans, judgments, collections, older taxes, and many other debts.
If you wish to keep the car but find the payments unmanageable, filing a Chapter 13 bankruptcy could be a good solution. This option allows you to rewrite the loan terms, potentially reducing the interest rate and extending the payment period. If you've had the car for more than 2.5 years, you might be eligible to cram down the loan to the current value of the car, resulting in substantial savings.
If you are struggling with a car loan and want relief, you should talk to a bankruptcy attorney before taking any action. They can help you explore all your options and choose the best route for the quickest possible financial recovery. It is always better to seek expert advice to make well-informed decisions during these challenging times. You’re not alone!
Finding the best lawyer
Seeking professional advice from an experienced lawyer can help you better understand your options.
To find the best lawyer, you should begin by seeking recommendations from trusted sources, such as friends, family, or colleagues who have previously dealt with similar situations or legal matters. They might refer you to an attorney they found effective.
Additionally, online legal directories can provide a list of attorneys specializing in these types of cases. Alternatively, you can check reviews and testimonials online from previous clients. Online reviews should be considered alongside other factors but they can offer insights into an attorney's professionalism, communication style, and success in handling similar cases.
You can also explore online attorney directories that can provide information about attorneys' backgrounds, experience, client reviews, and ratings, which can help you assess their expertise. You can also contact the State Bar Association, which can provide referral services or directories of attorneys specializing in various practice areas.
Ultimately, you should look for attorneys with specific experience in bankruptcy and/or repossessions. Review their websites, profiles, or biographies to understand their track record, years of experience, and successful outcomes in handling repossession cases.
Once you have narrowed down your list of potential attorneys, you can schedule consultations. During these meetings, discuss your case, and ask relevant questions about their experience, approach, fees, and how they plan to handle your situation. During the consultation assess your comfort level and choose an attorney with whom you feel comfortable discussing your case and who communicates effectively and transparently.
It’s also important to understand the attorney's fee structure upfront. Some may charge hourly rates, while others may work on a contingency basis or offer flat fees. You should clarify all fees and payment terms before hiring an attorney.
By conducting thorough research, evaluating experience, checking references, and meeting potential attorneys, you can find a repossession attorney who is best suited to handle your legal needs effectively.
