Voluntary Repossession: Pros and Cons
When dealing with financial difficulties and unmanageable car payments, one of the options you might consider is voluntary repossession. However, it's essential to weigh the pros and cons before making such a decision, and consulting a bankruptcy attorney can ensure you are making the best decision for your situation.
What is voluntary repossession?
Voluntary repossession is a process where a borrower who is unable to continue making loan payments decides to return the asset—usually a vehicle—to the lender. This decision is voluntary, hence the term, and it’s typically made to avoid the unpleasant circumstances associated with involuntary repossession.
Pros of voluntary repossession
Voluntary repossession can be seen as a proactive approach if you find yourself unable to continue with your loan repayments. It's an opportunity to negotiate with your creditor, possibly reaching a settlement that could alleviate some of the financial burden. By choosing voluntary repossession, you may avoid a surprise involuntary repossession, which can happen at inconvenient or even dangerous times.
Additionally, this path allows you to prepare for the return of the car in an orderly manner. You'll have time to remove your personal items and understand the process better. For many, there's an emotional benefit too—it's often less distressing to give up an asset willingly rather than have it taken away forcibly.
Moreover, voluntary repossession might help you dodge additional costs associated with involuntary repossession, such as towing and storage fees.
Cons of voluntary repossession
However, voluntary repossession isn't without its downsides.
Doesn’t completely remove your loan
One major drawback is that it doesn't necessarily erase your debt. If the lender sells the car but doesn't make enough to cover the outstanding loan balance, you could still be liable for the difference—known as a deficiency balance.
It could affect your future loans
Voluntary repossession can make obtaining future loans more difficult. There is no difference on your credit between a voluntary repossession and an involuntary one. Future lenders may see this action as a risk factor, making them more reluctant to lend to you or offer you higher interest rates.
Has a negative impact on your credit score
Voluntary repossession can have a significant negative impact on your credit score. This record will stay on your credit report for seven years, potentially making it harder for you to get approved for new credit during this period.
What other options do you have?
While voluntary repossession is an option, it's not the only one, and it might not be the best one for your situation. One alternative is to file for bankruptcy. A Chapter 7 bankruptcy allows you to give up the car and discharge the car loan along with other unsecured debts like credit cards, medical bills, personal loans, judgments, collections, older taxes, and many other debts.
If you wish to keep the car but find the payments unmanageable, filing a Chapter 13 bankruptcy could be a solution. This option allows you to rewrite the loan terms, potentially reducing the interest rate and extending the payment period. If you've had the car for more than 2.5 years, you might be eligible to cram down the loan to the current value of the car, resulting in substantial savings.
The bottom line is, if you're struggling with a car loan and want relief, you should talk to a bankruptcy attorney before taking any actions. They can help you explore all your options and choose the best route for the quickest possible financial recovery. It's always better to seek expert advice to make well-informed decisions during these challenging times. You’re not alone!