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Home Debt Repossession: What It Is and How It Works

Repossession: What It Is and How It Works

Car being repossessed by a grabbing claw

At a glance

When your lender seizes your car or another asset as collateral because you failed to repay a loan, it’s called repossession. Read on to learn more about how repossession works and how to avoid it.

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Written by Samuel Osbourne and Jesslyn Firman

Reviewed by Robert Jellison

Nov 9, 2021

Fresh advice you can trust

We promise to always deliver the best financial advice that we can. Our writers and editors follow strict editorial standards and operate independently from our advertisers and affiliates. Learn more about how we make money.

Table of Contents

  1. What is repossession?
  2. How does repossession work?
  3. How to avoid repossession
  4. How does a repossession affect your credit score?
  5. How do I improve my credit score after a repossession?

What is repossession?

Repossession occurs when your lender seizes your assets because you’ve defaulted on a loan (meaning you missed several payments). Your lender can repossess any property that you put down as “collateral,” which is an asset that acts as security for the loan.

Often, your collateral will be whatever you used the loan to buy. For instance, if you take out an auto loan, your lender will usually use the car you buy as collateral; if you get a mortgage, they’ll use your home, and so on.

Assets that lenders commonly repossess include:

  • Real estate (this type of repossession is known as a foreclosure)
  • Cars or other vehicles
  • Jewelry
  • Furniture
  • Electronics
  • Artwork

You can reclaim any belongings left inside a repossessed car.

Your lender must make any personal belongings you left in your car available to you. If your lender or the repossession company is trying to charge you for your belongings or refusing to let you view them, speak to an attorney.

How does repossession work?

If you default on a secured loan (one that’s backed by collateral), your lender can immediately send a debt collector to repossess your assets. They’re not required to provide notice before doing this. 1

Conversely, if you default on an unsecured loan (one with no collateral), your lender can only claim your assets if they file a lawsuit and get a court judgment against you.

When debt collectors repossess your assets, they’re allowed to go onto your property to do so. However, they can’t “breach the peace,” meaning they’re not allowed to use force or threaten to use force. For example, a repo man can’t break into your garage to take your car. (Instead, they’ll just take legal action if you withhold your property.)

Once your lender has repossessed your car or another asset, they’ll usually sell it to recover as much of your debt as they can.

Voluntary repossession and involuntary repossession

There are two types of repossession:

  • Voluntary repossession: As the name suggests, voluntary repossession means you willingly surrender your property. Prospective lenders may look more favorably on voluntary surrenders because they save them time and hassle. You also avoid towing and storage fees when you voluntarily give up your property. 2
  • Involuntary repossession: Your lender sends a debt collector to take your property because you defaulted on your loan. They’ll usually charge you additional fees for processing the repossession.

State laws on paying the deficiency balance after car repossession

If your repossessed car (or whatever your collateral was) sells for an amount that’s lower than your outstanding debt, you’ll still owe the difference. This leftover amount is known as the deficiency balance.

In most states, your lender can take you to court to collect the deficiency balance. 3

The inverse is also true: if your car sells for more than you owed on your loan, your lender must give you the surplus.

Consider using the deficiency balance to negotiate pay for delete.

Using the pay for delete strategy, you can offer to pay the deficiency balance if your lender agrees to remove the repossession from your credit report. If you strike a deal, get the agreement in writing so that you have proof.

How to avoid repossession

Of course, the best way to avoid repossession is to pay your bills on time. However, sometimes circumstances make that impossible. If you’re in danger of falling behind on your bills, contact your lender and explain your situation. They might be willing to help—after all, it’s in their best interests to help you so that you don’t default on your loan.

Ask them to consider a new repayment plan with a longer term. This will let you pay your debt back over a longer period of time in smaller installments. You may end up paying more overall (because you’ll be paying interest for longer) but it will be easier to make your monthly payments.

If you’ve already missed a payment, don’t ignore your lender’s efforts to contact you. They may pursue involuntary repossession if they don’t hear back from you, which will almost always be worse for you than voluntary repossession. It’s also not a good idea to hide your car from repossession—doing so is very unlikely to work, and leaves your lender with little choice other than to sue you.

How to get your repossessed property back

It’s sometimes possible to get your car back after a repossession (and the same goes for other types of property). Try these strategies:

  • Reinstate the loan: Catch up on your late payments (plus the repo fees) before your lender sells your property. Visit your state Attorney General’s website to find out how long you have to reinstate your loan.
  • Pay off your debt: You’ll also be able to get your property back if you repay the full remainder of your loan (on top of your missed payments and any additional fees) to completely settle the account.
  • Buy it back at an auction: If your lender chooses to sell your repossessed property at an auction, they have to inform you when and where the auction will take place so that you can buy it back if you want to. 1

How does a repossession affect your credit score?

A repossession will severely affect both your FICO and VantageScore credit scores.

Neither credit scoring company has publicized data specifically about repossessions, but they have said that a foreclosure (which is similar to a repo) can drop your score by up to 140 points. 4 Experian has said that a repo will have “a serious impact on your credit score.” 5

The effect of the repo will depend on several factors. For instance, it will usually cause a larger drop in your credit score if your score was higher to begin with, i.e., if your credit report had relatively few negative marks. 6

A repo will stay on your credit report for seven years (like most other negative items). 7 However, its impact on your score will lessen over time. It’s usually possible to recover your original credit score before the repossession falls off your report. 6

Add a consumer statement to your credit report next to the repo.

Consider adding a brief consumer statement onto your credit reports to provide context for any derogatory marks. This might help to alleviate any concerns prospective lenders have about the risk that you’ll default on a loan, although there’s no guarantee that your lender will actually read your remarks.

How do I improve my credit score after a repossession?

Take the following steps to improve your credit score after a repossession:

  • Always pay your bills on time: Your payment history is the most important factor affecting your credit score, determining 30% of your FICO score and around 40% of your VantageScore. This means that establishing a record of on-time payment is one of the best ways to improve your credit.
  • Lower your credit card balances: Your credit utilization rate also has a large impact on your credit score. Ideally, try to spend less than 10% of your available credit. Never let your utilization reach 30%. 8
  • Get a credit builder loan: If you have a bad credit score because of a repossession, you can still qualify for a credit builder loan. Your lender will report your on-time payments to the bureaus every month, which will boost your score.
  • Dispute errors on your credit report: Get copies of your credit reports from AnnualCreditReport.com. You’re legally entitled to one free copy from each bureau per year (currently one per week due to the COVID-19 pandemic). Dispute any errors you find on your credit reports with the bureaus and the lender that reported them.

A repossession can put a serious dent in your credit score. Fortunately, by practicing the credit-building habits listed above, you can minimize the damage and start fixing your credit.

Takeaways: Your lender can repossess your property if you default on your loan.

  • If you default on a secured loan (one backed by collateral), your lender can repossess your assets.
  • Repossessions count as negative marks on your credit report, and seriously hurt your credit score.
  • Lenders often repossess vehicles (such as cars), although any property you put forward as collateral can be repossessed.
  • Lenders can’t “breach the peace” by threatening you or using physical force. However, your lender can take legal action if you withhold your property.
  • You can get your repossessed property back if you reinstate your loan, pay off your entire debt, or buy it back at an auction.
  • Most states require you to pay the deficiency balance if the amount your property is sold for is less than your outstanding balance.

Article Sources

  1. Federal Trade Commission. "Vehicle Repossession" Retrieved November 9, 2021.
  2. Equifax. "What Is Repossession?" Retrieved November 9, 2021.
  3. Consumer Financial Protection Bureau. "My car has been repossessed, and I was told it will be sold. What can I do?" Retrieved November 9, 2021.
  4. FICO. "Research Looks at How Mortgage Delinquencies Affect Scores" Retrieved November 9, 2021.
  5. Experian. "How Does a Repossession Affect Your Credit?" Retrieved November 9, 2021.
  6. VantageScore. "How is this going to impact my credit score?" Retrieved November 9, 2021.
  7. Consumer Financial Protection Bureau. "What happens to my credit report if I am late making payments on my auto loan or my car is repossessed?" Retrieved November 9, 2021.
  8. VantageScore. "Debunking a credit score myth: Forget what you’ve heard. Use much less than 30% of your available credit card limit" Retrieved November 9, 2021.

Samuel Osbourne

Content Writer

View Author

Sam Osbourne is a content writer for FinanceJar. His writing covers credit scores, credit repair, and renters insurance. He’s worked across a mixture of genres, including blogs, essays, and fiction. Sam has a Master’s degree in Creative Writing.

Jesslyn Firman

Credit Analyst

View Author

Jesslyn Firman is a credit analyst for FinanceJar. Her work covers credit repair and credit scores, and in the past she's extensively researched and written about the insurance industry. Jesslyn has a B.S. in Finance and Accounting and an MBA in Management.

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