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Ask Dr. Don

Voluntary repossession

Dear Dr. Don,
I've been unemployed for three months. I don't have any credit card debt, but I have a high interest car loan. If I know that I can't make the next payment, should I voluntarily surrender the vehicle to the lender?

Will I be responsible for paying the difference of the cost if they auction or sell the vehicle? What would it say on my credit report? Please help
Juliette Jalopy

Dear Juliette,
When a lender repossesses your car, regardless of whether it's a voluntary repossession or the repo man comes and gets it, you are responsible for the lender's loss on the car and their costs in recovering that loss. A voluntary repossession keeps down the cost because the lender doesn't have to pay anyone to seize the car.

Most states require that the lender notify you of its plans to sell the car. The lender will usually sell the car at auction. That means that the car will sell at its wholesale value.

The lender will meet the standard required in your state to get a commercially reasonable price for the vehicle, but there won't be any Herculean effort to get top dollar for the car. If the sales price is less than the loan balance, then you owe the difference along with any costs the dealer incurs in selling the car. The shortfall plus expenses is due immediately, but the lender may be willing to accept a payment plan.

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With enough money at risk the lender is likely to sue for a deficiency judgment against you for any shortfall on the loan plus expenses if you can't meet their repayment terms. (Some states don't allow the lender to sue for a deficiency judgment on an auto loan.) A judgment will show on your credit report along with the repossession.

Your credit report will reflect that the car was repossessed. The credit reporting agencies differentiate between a voluntary and involuntary repossession on their credit reports, but it won't make much of a difference when you apply for new credit. The repossession stays on your credit report for seven years.

Selling the car on your own may allow you to realize a higher price for the car, but the lender has to be willing to release title on the car for you to transfer ownership. That could be a problem, so check with the lender before trying to sell it yourself. While talking to the lender you should explain your situation and ask if they have a solution other than voluntary repossession.

Sorry the news wasn't better. Good luck finding your next job. Remember that bad credit doesn't last forever and that you can and will rebuild your credit history.

-- Posted: Oct. 29, 2002

Read more Dr. Don columns
See Also
Escaping from an auto loan or lease
7 steps to surviving a personal financial meltdown
Financial advice glossary
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