Car Repossession

Watching somebody legally swipe a car can be entertaining in a movie. The downer comes if you leave the theater and find your car isn’t where you left it.

The Repo Man might have just paid you a real-life visit.

Car repossession is a quick ticket to travel misery. Falling behind on payments is a sudden reminder that you need financial help.

It’s not much comfort, but you’re not alone. Approximately 1.5 million vehicles were repossessed in 2023, according to Cox Automotive. That was 300,000 more than 2022, and that trend is not expected to slow down.

If you’re worried you might be next, there are steps you can take to head off the Repo Man. And if he’s already driven away with your car, you don’t have to just shake your fist at the sky.

It will take time, but with the right kind of financial guidance, you get back behind the wheel.

What Is Repossession?

When you buy a car and drive it home, it may feel like it’s yours. But if you got a loan to buy it – and 80% of auto shoppers do – the car is not yours.

It belongs to the bank, credit union or other financial institution that loaned you the money. That means if you fall behind on payments, the lender can take the car from you. In short: Repossessed!

Cars aren’t the only things that can be repossessed. Houses, jewelry, furniture, or anything that is used to secure a loan can be taken back by the lender.

But when most people hear “repossession,” they think cars. That’s not just because the movie “Repo Man” has become a cult classic. It’s partially because when you default on a mortgage, nobody is going to come in the middle of the night and drive off with your house.

Home buyers are also less likely to fall behind on their mortgage payments. In the third quarter of 2023, for instance, one in every 1,389 properties had a foreclosure filing.

That was 0.71%. In the same quarter 2.2% of auto loans were 30 or more days delinquent.

It doesn’t matter if it’s a house or a car or a Rembrandt. If you got a loan to buy it, it’s not yours until the loan is paid off.

And if you fall behind in those payments, the lender can take it back.

How Car Repossession Works

Lenders don’t need a court order to start the repossession process, so they can act as soon as the loan or credit account is delinquent. They can, but they usually don’t.

Generally, cars are repossessed once payments are 90 days in default. Just don’t expect lenders to give you a heads-up when the Repo Man will come calling. They typically contract that work out to towing services that specialize in snatching cars. They can quickly make your car disappear from in front of your house, your driveway, or a parking lot.

That’s not the end of the story, however.

The lender will sell your car at auction. If the sale price is less than the balance you owe on the loan, you will be responsible for paying the difference.

What Lenders Can and Cannot Do When Repossessing a Car

Lenders would prefer not to repossess your car. It usually nets them only 30% of the loan value. But if they decide there’s no other way to resolve the situation, the Repo Man will spring into action.

In general, the Repo Man can’t “breach the peace,” which means:

• They can’t take it from your garage without your consent.
• They can’t disturb neighbors.
• They can’t use physical force or threaten the use of force.

Once the car is seized, it’s almost impossible for the borrower to reverse the situation. Some states allow you to redeem or reinstate your car loan. That means you have a period – usually a few days or a week – to catch up on payments and pay other fees the lender imposes.

You’ll also have to pay the towing company a storage fee, cleaning fee and more.

Repossession Laws and Regulations

Car repossession laws and regulations vary by state, and sometimes even within states. Most of the differences are when a loan is considered in default, where on your property a repo company can go to seize your car, and what steps you can take to get your car back after repossession.

The terms of your loan, your state attorney general (or consumer advocate) webpage or your state’s legal assistance agency should have information on your state’s specifics. It also may help to consult an attorney to help determine what your options are and what it will cost to pursue them.

Despite state differences, the federal Dodd-Frank Act prohibits service providers from committing unfair, deceptive or abusive acts or practices. What that means is you’re protected from the Repo Man if:

• Your loan is current, even if there was a prior delinquency.
• You entered into an agreement to extend the loan to avoid repossession.
• You followed instructions the company said would result in avoiding repossession.
• You have filed for bankruptcy, which brings an automatic stay to the seizure of assets.
• Your payments are being processed in a different order than what you’ve been told, resulting in the appearance of late payments.
• The company charged unlawful fees that pushed your account into default.

If your car is repossessed:

• The company can’t withhold personal property found in the vehicle and cannot charge an upfront fee for you to recover the property (for instance, your purse, laptop, baby seat, AR-15, tuba, French Bulldog, etc.
• The company can’t damage your car or personal property while repossessing the vehicle.
• The company can’t charge for collateral protection insurance after the car is repossessed.

Military members may have added protection. The Servicemembers Civil Relief Act requires a lender to get a court order before repossessing a vehicle belonging to an active-duty service member.

Types of Repossession

There are two types of repossession: voluntary and involuntary. The result is similar in that the lender sells your car at auction and you are responsible for the leftover balance after the sale.

They are different in how the lender acquires your car. Involuntary means you won’t know when the Repo Man will show up. You will be charged fees by the lender and the repossession company.

Voluntary means you’ve let the lender know you can no longer make payments, and you’ve agreed to give the car back. One advantage is you can schedule when the car is turned over and not suddenly be left high and dry. You will also pay less in fees, including the impound lot fee and other potential costs.

How Repossession Affects Your Credit

This is the second part of the repossession double-whammy. First, you lose your car. Second, your credit takes a drive off a cliff. Lenders want to see how good potential borrowers are at paying their bills, and a repossession indicates you’ve failed in at least one big instance.

Late Payments

Your payment history makes up 35% of your credit score. If it shows an inability to pay your bills on time, potential lenders will hold it against you. That would mean you’d pay higher interest rates to get a loan and increase the likelihood you won’t even qualify for one.

The Repossession of the Car Itself

The vehicle is the collateral borrowers use to secure the loan. Hence the term “secured loan,” meaning they can reclaim the asset if you don’t meet payment obligations. Repossession will stay on your credit report for seven years.

Possible Court Judgment

This could make car repossession a triple whammy. As noted earlier, if the lender has to sell the car for less than you owe, you’ll have to pay the difference. If you don’t pay that “deficiency balance,” a collection agency will start hassling you and you may well get sued. That would cast your credit score deeper into the dungeon.

How to Avoid Repossession

It’s not only in your best interest to avoid car repossession, but also what your lender wants. Repossessions cost bank’s money since cars lose value so quickly. The lender would rather that you continue to pay the loan.

Some options that may help you avoid repossession:

• Talk to your lender: Don’t wait until you’ve missed several payments. Make contact as soon as you know you’re in trouble. You may be able to work out a way to catch up. Be upfront about when you think you can pay and whether it’s a long-term or short-term problem. The lender won’t judge you. They want to know and will appreciate the fact that you are not ignoring the problem.
• Debt consolidation loan: You may be able to find a debt consolidation loan at a lower interest rate than what you are paying on the car loan, or with more affordable payments. This is a more likely option for those who still have a good or better credit score, since that means lower interest rates and better loan terms.
• Refinancing: Your lender may agree to refinance your car loan, or you may find another lender that will. Don’t jump at refinancing before making sure it isn’t for more than your car is worth – in other words you have an “upside down car loan.” Since the car is worth less than what you owe, if you sell the vehicle, you won’t get enough money to cover your loan balance. If you total the vehicle in an accident, insurance only pays the value of the car, and you will still owe money on the loan. It’s not a good place to be.
• Talk to a nonprofit credit counselor: If your debt challenges are such that a debt consolidation loan is not a good option, a credit counselor will discuss other options with you after reviewing your finances, free of charge. Options may include a debt management plan, debt settlement, or simply reworking your budget and cutting expenses.
• Bankruptcy: If your financial situation is drastic, bankruptcy will save your car from repossession. Filing bankruptcy puts an automatic hold on all court actions. With Chapter 13 bankruptcy, you can make the car part of the repayment plan you present to the court.

If you file for Chapter 7 bankruptcy, the creditor is prevented from repossessing the car, but could go to court and receive an order that permits repossession. If you talk to a nonprofit credit counselor, they’ll review the pros and cons of bankruptcy as related to your car loan as well as your other debt.

Recovering From Repossession

If your car is repossessed, there’s no way to avoid damage to your credit and finances. That said, there are ways to get your car back or mitigate some of the negative financial effects.

How to Get a Repossessed Car Back

Some states allow you to “reinstate” your loan after repossession, which means that you pay the past due amount and whatever your lender’s repossession expenses were. Those payments bring the loan current, and you get the car back.

It doesn’t remove the repossession from your credit report, but it does get your car back and bring your loan payments up to date.

Some states also allow you to buy back the vehicle by paying the full amount that you owe. This doesn’t mean just catching up on missed payments. You must pay those as well as the remainder of the loan.

You may also be able to buy the vehicle back when the lender auctions it off.

Repairing Your Credit After Repossession

Though repossession stays on your credit report for seven years, the impact lessens each year. There are also ways to strengthen your score during that time:

• Pay off outstanding debt on the car loan. The less you owe, the better your credit score and you won’t have monthly car payments to fall behind on.
• Stay up to date on all of your monthly debt bills, including student loan payments, credit cards, rent and medical bills. On-time payments are a major factor in credit scoring.
• Keep low balances, pay off credit card bills and avoid adding credit card debt. Another major factor in credit scoring is the amount of debt you have vs. the amount of credit you’re allowed. The lower your balances, the better your credit score.

Financial Assistance for Car Repossession

If you are in danger of a car repossession, time is of the essence if you want to avoid losing a valuable asset and crippling your credit score. Consider contacting a nonprofit credit counselor immediately. They are trained in helping people find ways out of financial jams.

Nonprofit credit counselors are required by law to act in your best interest. Credit counseling is also offered free of charge. Counselors will review your finances, including income and expenses; create a budget with you and review financial assistance options.

They’ll go over the pros and cons of debt management plans, debt settlement, debt consolidation, and bankruptcy. You will have the tools to decide what financial assistance option will help you either avoid car repossession, or help your credit and finances recover from it.

More Like This

Cars and debt are often linked, and not in good ways. Here are other articles that can help you avoid running off the financial road.

• How to Avoid Landing in Debt
• 11 Mistakes to Avoid When Paying Off Debt
• 10 Things to Know When Shopping for a Car
• 10 Mistakes to Avoid When Getting Out of Debt