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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
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.
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
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.