A reader wants to give up his vehicle but not his credit cards. It might work, but not for the way he thinks.
If I voluntarily repossess my vehicle, is it going to cause my other lenders – like my credit card companies – to close my accounts or change my terms? What if I keep my credit cards in good standing? Will they be happy with that?
– Davin in Texas
Howard Dvorkin, CPA responds…
“Voluntary repossession” sounds like an oxymoron. When you think of a car being repossessed, you probably picture a tow truck showing up in the middle of the night and taking a car without the owner even knowing it – because that owner fell way behind on his auto loan, and now the lender wants the vehicle back so it can be resold.
Some repos aren’t so cloak-and-dagger. The owner of the car knows they just can’t make the payments any longer. Maybe they were laid off, or they’ve suffered a chronic illness. Maybe they’ve been divorced or been hit by a natural disaster. There are many reasons why someone might surrender their vehicle rather than wait for the inevitable. Let’s look at the pros and cons…
Why voluntary repossession can help you
When you surrender your vehicle and save your lender the time and trouble, some of those savings get passed onto you. For example, you’re not charged for the towing fees. Your lender will likely charge other fees that you might not have to pay if you voluntarily give back your vehicle. (Check the fine print on your loan papers for details.)
Then there’s your credit score. Make no mistake, even a voluntary repossession is a big hit, but it’s a little less than an involuntary one.
As Experian, one of the Big Three credit bureaus, explains it, “It will be listed as a voluntary surrender. If the bank has to come take the vehicle, they will report the account as a repossession.” That means any future lender will see that notation, and they may take that into account.
How voluntary repossession can hurt you
The biggest drawback is what happens afterward.
Your lender wants your vehicle because it wants to sell it – to recoup the money it lost when you could no longer make your payments. Typically, a repossessed car sells for less than what you owe. This is called a “deficiency balance.”
Quoting Experian again: “The sale may not cover the full amount you owe, including any new fees you may have incurred. When the sale of your property falls short of covering your full balance, the remaining debt becomes a deficiency balance.”
That balance is reported on your credit, and you must pay it. If you don’t, it goes to collections – which is not where you want to be, trust me.
Of course, these days, any hunk of metal with wheels is fetching a hefty sum. So if you surrender your vehicle today, it’s quite likely your lender will get top dollar for it. If your lender actually profits from the sale, you won’t owe that lender anything – but you will owe the IRS. When a lender forgives a remaining balance, the IRS considers that income. You have to pay taxes on it just like what you earn at work.
How voluntary repossession affects your other credit
Now that we’ve explained how repossession works, you can see how it affects your lenders. Credit card issuers have the right to cancel your card at any time. They usually do this for very reasons that are only about the card itself: You stopped using it, you stopped making payments, or they’re getting rid of the card entirely.
However, they can also cancel your card because your credit score plummeted. A repossession – voluntary or otherwise – can drop your score by 100 points. That’s enough for some credit card companies to worry that you’re no longer a good risk for them. It won’t necessarily matter that you’ve been making payments on time.
If you know you’re going to surrender your vehicle, you should call the numbers on the back of your credit cards and explain your situation. Each card has different rules, so expect to hear a variety of answers.
Of course, you might not have to do this at all. Not if you take some other steps first.
Alternatives to any kind of repossession
So, I’ve painted a fairly bleak picture of both kinds of repossession. Thankfully, you might never need to go there.
First, call your lender and have an honest conversation. You might get a more favorable repayment schedule. After all, your lender doesn’t want to repo your vehicle. It just wants to get paid.
If those new terms aren’t enough, you can consider debt consolidation. There’s a small chance you could temporarily get zero-percent interest on what you owe. However, if you’re already mired in debt, you might not be able to take advantage of this concept.
The best option is to make another call – this one to Debt.com. If you can’t make payments on what’s typically the second most expensive item you’ll ever own (after a home), then you need professional help. Debt.com has experienced and trained financial counselors who know all the laws and programs that can help you. So start by voluntarily calling .
Published by Debt.com, LLC