How Does an Auto Repossession Affect Your Credit?


When you become overwhelmed with bills, you find yourself making a choice between buying food, paying the electric bill or making your car payment.  If your immediate needs indicate that it’s time to choose to spend your money on something else other than your auto payment, the repo man may show up at your door fairly quickly.  What happens to your credit when this happens?

When Can A Repossession Happen?

The laws that govern repossession vary from state to state.  However, most of them allow immediate repossession once you breach the terms of the contract, in some cases, this happens when you miss the first payment.  Some states spell out the amount of time you have before a payment is considered late, example: West Virginia specifies a 10-day period.  Another term of a contract that you can violate which will set into motion the wheels of repossession is failing to keep up your car insurance. Should the creditors routinely accept late payments, some states say this is a modification of the terms of the contract, as the creditor accepted late payments without complaint.  If your payment schedule is causing you trouble, you can also negotiate new contract terms in the form of a changed repayment schedule and usually this is given to you in writing.


Once a contract is breached, most likely you will need to pay off the entire balance of the loan; most creditors accelerate a loan when a borrower defaults. The acceleration clause in the time of default is typical in an auto loan contract.


If a repo man shows up to repossess your car, they must do the repossession peacefully.  This means that the people sent to collect the property may not use force against you, enter your home or enclosed structure like a garage, threaten force against you or take the car over your protests.


A creditor does not have to go to court in order to repossess your property if the car is out in the open, like your driveway or a public lot.   The repo man would need a court order, though, to get into a garage, home, or enclosed area.

What Happens After A Repossession?

In most cases the creditor will sell the property and apply the sales proceeds towards the debt.  The creditor must notify you of the date and time of the sale and you will be allowed to bid on the car.  Before the sale of the car, you can try and negotiate with the creditor to pay the back payments and possibly retrieve the car.  However, if the loan has been accelerated, you’ll need to pay back the entire amount of the loan.


If the sale of the property does not net enough money to cover the balance of the loan, what is remaining will be called a deficiency balance.  You will be sent a bill for deficiency balance, and if you cannot pay the bill, it will be sent to collections.  If the collectors have no luck collecting from you, you could find yourself being sued over the balance.

A Repossession Will Sink Your Credit Score

There are four ways that a repossession can tank your credit score, and you may have all of them on your credit report by the time you are done:


Late payments. On the road to a repossession, you must have missed a payment.  While some creditors can start proceedings when you are late by even a few days, most banks will allow you to go 60 days or more before they send the repo man out to collect the car.  This means that you will have a 30-day or 60-day late payment on your credit report, something that can damage your credit score by up to 100 points.


The repossession. A repossession will show up on your credit report under “current manner of payment. ”  It can also show up in the form of codes placed next to your account listing, for example a code 08 means repossession, and 8A means a voluntary repossession on a Transunion credit report.  A repossession can tank your credit score by as much as 100 points.


Collections.  If you have a deficiency balance after the sale of your vehicle, as we mentioned, you could wind up with a collections account. A collection on its own can be very negative, but if you already have a repossession on your credit report, having this additional collection will probably not sink your score much lower – though it will drag your score down further.


Judgments.  If you are sued and lose in court over the deficiency balance (which is very likely), you will wind up with a judgment against you.  Judgments are very damaging to your credit, and even with a repossession on your credit report, can be a significant additional hit to your credit score.

How to Avoid a Repossession

No one likes repossessions, not even the bank and they will usually do what they can to help you avoid a repossession.


Ask Them If You Can Skip a Payment.  It’s not as crazy as it sounds – banks will often allow you to skip a car payment if you’re not already late on the loan.  Know that Interest will continue to accrue and you will be paying extra over the original payback total on the loan.  Banks will often allow you to skip up to 2 payments and this could make all the difference in your being able to keep the car and catch up on other bills.


Refinance the Loan.  If your credit is not already bad (meaning you’re current on this and your other loans), you may be able to refinance the car and stretch out the payments so you can lower them.  Refinancing has the added benefit that you may be able to skip a payment on the loan while you’re in between being financed on the loans.


Sell the Car Yourself.  If you have heard stories of cars being sold cheaply at auction, believe them.  Repossessed cars typically get sold at auctions for a fraction of what they’re worth.  If you’re close to being upside down, or if you are upside down and you don’t want to face a big deficiency balance, you can always get more for the car in a private sale.   However, if you are upside down, you will need to come up with the difference in the sales price and loan balance in order to get the bank to release the title on the car so you can give it to the new owner.


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