By Michael Osakwe, NextAdvisor.com
Losing your vehicle or property to repossession is not an ideal situation, but while you might understand what it means to have something repossessed – essentially, a lender or creditor takes away someone’s possessions for a debt that was defaulted on – you might be left wondering exactly how repossession can affect your credit. In this post, we’ll cover the nuances of repossession, explain exactly how it’ll impact your credit score and your finances as well as detail what to do if your credit has been impacted by repossession.
What exactly is repossession?
Before we get into how it affects your credit, it might be useful to get an understanding of just what repossession is. A repossession happens when a lender or creditor takes away something that was purchased with the money they lent. Essentially, the borrowed money is “secured” by whatever item or asset it was used to purchase. Homes and vehicles used to secure mortgages and auto loans are the most common examples of this, but basically, any time you offer up something as collateral for a loan, it can be taken from you if you default.
Keep in mind that a lender or creditor cannot arbitrarily repossess any item they wish for a debt; the terms for what can be claimed in a repossession are usually spelled out in the contract and lenders cannot repossess items that were not offered up as collateral. Additionally, not all loans are secured, and therefore won’t result in repossession of property if you go into default. The ultimate purpose of repossession is for the lender to recuperate their funds by selling off the asset secured by the loan. If that isn’t possible, then you might become responsible for a deficiency balance, which consists of any amount of the debt that is still outstanding after the repossessed item is sold.
Are there different kinds of repossession?
Repossession is multifaceted, and there are multiple different terms used to reflect specific types of repossession that you might come across. For example, foreclosure is essentially repossession applied to mortgage payments. The rules and length of time surrounding foreclosure are a bit different than those of something like car repossession, but the basic concept is the same – property that serves as collateral for a secured debt is reclaimed by the lender as a result of missed payments. You may have also heard the term lien used in tangent with repossession or debt; a lien is the legal right for a creditor or some other entity to claim an asset – a house, a vehicle or something else of high value – as a result of an unpaid debt. Liens essentially legally authorize repossessions, as they are what allows an asset to change hands from the original owner to the entity that is owed money. Besides property liens, other types of liens include tax liens, which occur when you owe back taxes, and judgment liens, which can happen if you lose a court case.
In some instances, people facing repossession may opt for voluntary surrender. When you voluntarily surrender something, you’re proactively reaching out to your lender or creditor and telling them you can no longer afford payments on your debt and offering your property up to them. Voluntary surrender doesn’t necessarily provide more benefits than repossession when it comes to the impact on your credit, but your initiative could be rewarded with a negotiation for slightly lower payments. At the very least, it could get you off the hook for any fees that might be associated with the repossession process.
How does repossession affect your credit?
Repossession has a significant, negative effect on your credit, as it’s a derogatory item. Even voluntary surrender, which reduces a few of the harsher consequences of repossessions, will not help in reducing a repossession’s effect on your credit scores. In addition to the repossession affecting your credit, any unpaid deficiency balance can result in a civil judgement, as well as an additional derogatory mark on your credit. These derogatory marks will remain on your credit reports for seven years, which can have a huge impact on your credit scores and many different areas of your life. Your life plans may be derailed or delayed, as obtaining new credit or refinancing existing loans could become difficult to downright impossible. This could even impact your relationships, so if you can take steps to prevent a repossession, it’s wise to take them.
What can you do to protect yourself and your credit?
While you can’t protect your credit from the fallout of a repossession after the fact, you can likely reduce the severity of its other consequences if you take action quickly. Aside from voluntary surrender, there are some other options you can consider. Depending on your state’s laws, you may be able to reclaim or repurchase your repossessed item, reinstate your contract if you can afford to continue making timely payments or renegotiate/refinance your loan. State laws vary on these matters, and it’s important to know your rights when it comes to repossession. In many cases, lenders or creditors can legally seize collateral without taking you to court, given that you have a contract with them (this is especially true in the case of auto loans as well as rent-to-own items). Still, despite what popular shows like “Operation Repo” and other similar reality programs illustrate, repo people who retrieve assets on behalf of lenders and creditors cannot do “whatever it takes” to claim your property. The FTC provides some great information on what does and does not violate your rights when it comes to repossession. If you believe that your rights have been violated, you can submit a report with the Consumer Finance Protection Bureau or the FTC.
It’s important to also take heart that bad credit doesn’t have to be forever. One of the reasons there is a statute of limitations for how long derogatory items can remain on your credit reports is to help people be able to rebuild and get back to good standing. A repossession, and other similar derogatory items, will definitely have a significant negative impact on your credit reports and scores. That said, there’s no reason why you can’t repair your credit in the years to come with dedication and diligence.
For more information about what influences your credit scores and how to improve your credit, keep reading our credit monitoring and credit repair blogs.
This blog post originally appeared on NextAdvisor.com.