Does Repossession Cure Debt?

May 25, 2020 by

car being towed

Uh-oh. Guess I missed a car payment.

Let’s say you’ve been laid off or suffered other bad luck, and you can no longer afford to make two car payments. Would turning over a car to its lienholder and walking away cure the debt you owe for the car?

Short Term vs. Long Term Challenges

If you stop making payments on a car loan, the car likely will be repossessed sooner or later. You agreed to this recourse for the lender when you signed the loan agreement.

If you simply cannot meet the payments on the car loan, you may have no option except repossession. If you turn the car over to the lienholder, you may feel relief in the short term, but understand you likely haven’t fully solved your challenge—a debt you can’t afford to pay—in the long term.

How Repossessions Work

First, when the lien holder repossesses your vehicle, fees are going to be assessed. By defaulting on your car loan, you’re costing the lienholder money, and recovering those costs is a right you granted to the lender when you signed the loan agreement. (However, by voluntarily surrendering the car, these fees may be less compared to a “repo-man” scenario.)

Second, the lienholder will most likely sell your car at auction. Unless you made a large down payment when you bought the car, the auction price will be less than your loan balance. The difference—called a “deficiency”—becomes an unsecured debt you still owe, and the lienholder may sue you for collection.

Third, repossession may be on your credit report for seven years. Be prepared to pay cash for your next car.

Are There Alternatives to Repossession?

Before missing a car payment, think through whether any of these steps might be a better solution:

  • Discuss your situation with the lender. If, for example, you expect to be able to resume payments by a date certain and would then be able to catch up on a missed payment or two, the lender may delay repossession.
  • Take a second, third, and fourth look at your household spending. Is there nothing you can cut—or stop paying for a while with less severe consequences—to make room for the car payment?
  • What about selling the car yourself? Unless your selling skills are comparable to mine, you’ll almost certainly get more for the car than the lienholder would get at a post-repossession auction. To make this work, you’d need the cash to make up any difference between the price you get and the loan balance so the lienholder would release the lien and the new owner could assume title.

What Might You Do?

On what might you stop spending or skip payments before missing a car loan payment? Would you cancel a smartphone contract? Terminate cable service? Skip a utility bill? Miss a credit card payment?

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  1. Cancel the smartphone!  I was appalled the other day because I was watching this Oprah show with Lisa Ling with my wife.  They were profiling this guy who has been out of work for over 2 years, and can’t get a job.  The guy was talking about how hard it is…etc…and then in the background, there is his teenage daughter texting away on an iPhone!  That would save you $100 per month right there!  

  2. In most cases you’ll be able to get a car loan after a repossession, it just might take a year or so. Saying that, the interest rate you’re going to be charged is outrageous so paying cash would certainly be the better route.

     In a lot of situations you can get on monthly payments to repay the deficit and many lenders will take a lump sum payoff. My brother wasn’t contacted about his repo for 11 months after it happened and by that time he’d saved up some money and was able to settle without any issues.

  3. In this situation the cable service will have to go! It is a want and not a need.  I will keep my smartphone but downgrade the service plan.  There are areas in the budget that could be reduced if drastic measures calls for it.  Preparation is key!   

  4. frugalportland

    Goodness gracious I sincerely hope I don’t need to use this advice! 🙂

  5. Gah! This just happened to my dad. He was sick of car payments, so he stopped making them and let the repo man take it away. I think he may be about break even, but will still have to pay the fess associated. His credit’s jacked, so he doesn’t care, but still a weird move. I would never have a car payment, so I couldn’t imagine this scenario, but it really looks like a bad option. I would sell the car, get a personal loan to cover the difference and be done with it.

    Or just cut down on lifestyle a bit (there’s always room to cut….always)

  6. C.I. — I’m with you. But I think some people would stop eating before they gave up their smartphone. 🙂

    WSL — Thanks much for your useful contribution.

    GFN — Yes, jettison cable first (I think this is the biggest single waste of money in our household), and scale back the phone plan if that would do the trick.

    FP — You could always carshare, transit, and bike in the livable city of Portland!

    IHB — I hope the lienholder doesn’t come after your Dad for the deficiency. Cars can go way cheap at those repo auctions.

  7. Great advice, Kurt. I really like paying cash for depreciating assets like a car. It’s better to drive a reliable used car instead of a new one with a monthly payment. 

  8. I think everyone’s got the expense piece covered, but there’s another solution: income. When I didn’t have any money I took on a second job delivering papers at 4 am. That helped me pay down some debt. It didn’t hurt as bad because I knew I was being proactive about getting out there and getting it done.

  9. Great advice.  I like @209c61862817632de11bd3fe814f571d:disqus comment on the income. If you don’t have the money, get a second job or create another flow of income. Or maybe he could have leases the car to someone else to help pay the car note…just a thought.

  10.  Of the options offered I would skip a credit card payment since I don’t have the other expenses.  Unless it looks like your income is going to change though that is only a temporary solution.  Selling the car seems to be the best alternative in that situation.

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