A voluntary repossession is when you agree to return your car to the lender. This can often be the last option you have when you are unable to make car payments or if you’re going into bankruptcy.
Of course, parting with your vehicle is never an easy choice, and it’s important to consider the pros and cons of voluntary repossession before making this decision. It’s also important to consult with the best credit repair companies out there, like The Phenix Group, before choosing voluntary repossession.
What Is Voluntary Repossession?
A repossession is when a creditor seizes an asset because you’ve defaulted on a secured debt. The collateral can be a motor vehicle, equipment, furniture, or other personal property.
Voluntary repossession is slightly different–this is when you agree to surrender your vehicle yourself instead of waiting for the lender to file a lawsuit asking the court to seize your vehicle, or hiring a repo company to take your car. Typically, lenders do not repossess collateral until the person has failed to make several payments. They may send you reminder letters and phone calls, which can go on for a few months.
However, it’s important to remember that if you are in default, a creditor can repossess your car or property even if you miss a single payment. Lenders usually have different internal policies to determine when to schedule a repossession.
Pros of Voluntary Repossession
Voluntary repossession can be a proactive approach if you cannot continue making your loan repayments. It is a good opportunity to negotiate with your creditor and hopefully reach an agreement to alleviate some of your financial burdens.
Plus, choosing a voluntary repossession is always better than being unpleasantly surprised by an involuntary one, which could happen at a potentially inconvenient and difficult time. It can also help you avoid additional costs that come with involuntary repossession, such as storage or towing fees. If you’re already in a financial fix, saving this money could be essential.
Additionally, opting for voluntary repossession gives you some degree of autonomy over the process. You will have the time to prepare to return your car or other possessions in an orderly manner. This allows you time to understand the process better, and often has an emotional benefit–giving your car up willingly is less distressing than having someone forcibly take it away.
Cons of Voluntary Repossession
Even when voluntary repossession may seem like your only option, it’s important to be aware of the downsides so you know what you’re signing up for. There are three main cons of opting for a voluntary repossession:
It Hurts Your Credit
The greatest drawback is that voluntary repossession can hurt your credit score. It is reflected in your credit report for up to seven years, making it harder to get approval for new credit during this period. Additionally, if you missed car payments in the time leading up to the voluntary repossession, this will negatively impact your score and credit history.
Plus, if you still owe money after the lender sells the vehicle, you will need to pay off the deficient balance as quickly as possible. Otherwise, this debt will go to collections, which will hurt your score further.
It Can Affect Future Loans
Voluntary repossession can make obtaining loans more difficult in the future. This is because there is no difference between the impact of voluntary and involuntary repossession on your credit. Future lenders can see this as a risk factor and may refuse to give you loans.
It Doesn’t Completely Eliminate Your Loan
Voluntary repossession doesn’t necessarily erase your debt. For instance, if the lender sells the car and the price isn’t enough to cover the outstanding loan balance, you may still be responsible for the remaining amount, which is known as a ‘deficiency balance.’
What Are the Alternatives to Voluntary Repossession?
While voluntary repossession is always an option, it may not be best for your situation. One alternative is to file for bankruptcy. There are two types: a Chapter 7 bankruptcy and a Chapter 13 bankruptcy.
A Chapter 7 bankruptcy allows you to give up your car and discharge the loan and other debts like older taxes, medical bills, credit cards, collections, and judgments.
On the other hand, a Chapter 13 bankruptcy can be a good option if you wish to keep your impressive GM car but find the payments unmanageable. Filing a Chapter 13 bankruptcy will allow you to rewrite the loan terms and potentially reduce the interest rate or extend the payment period. You may also reduce the loan down to your car’s current value, which can save you substantial money.
Final Thoughts
If you are struggling with a car loan and want relief, we recommend consulting with reliable credit repair experts from The Phenix Group before making big financial decisions. We’ll help you explore your options and determine the best path for the quickest possible financial recovery.
For more helpful financial advice, check out these tips for repairing credit and our guide on how to remove collections from a credit report!