Does Repossession Cure Debt?

Aug 1, 2012 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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