Voluntary car repossession is treated the same as an involuntary repossession, any deficiency balance can end up on your credit reports.
Question: Hi, I had a car that I did a Voluntary Repossession. I now have a new debt on my credit report opened 11 months ago after the debt was sold to a debt collection agency. Is that legal? When I filed the dispute on line I was told that it was a legal account. What can I do?
Response: Unless you made an agreement with the lender to waive the deficiency plus requested the lender forgo putting the repossession on your credit report, yes it’s legal.
The unpaid balance on a car loan can be sold to a collection agency even when you prearrange to voluntarily surrender your vehicle. There’s very little difference in how a voluntary repossession is treated as opposed to an involuntary repossession.
Both types of repossession boil down to the same problem – you failed to pay back your auto loan according to the terms of your original agreement. The negative effects to your credit report as a result of voluntary car repossession is just as damaging.
Americans are facing the highest Inflation in 40 years and repossessions among prime borrowers has doubled from 2% to 4% while subprime repossessions are up 11% since 2020, according to the auto-news site Jalopnik.
Voluntary repossession in a nutshell
- You may choose to surrender your car voluntarily instead of the lender performing the repossession procedure
- Your car will be sold at auction and you’ll be liable for the deficiency
- A lawsuit may ensue to collect the deficiency
- A voluntary repossession will count as a repossession on your credit reports
- If possible, it’s better to sell the car on your own
Voluntary repossession can remain on credit reports for 7 years
Both the voluntary and the involuntary repossession are allowed to remain on your credit reports for the same amount of time. According to the Fair Credit Reporting Act, repossessions are permitted to remain on your credit reports for up to 7 years.
Voluntarily surrendering your car does not prevent you from being pursued for any unpaid deficiency balance caused by surrendering your car. Surrendering your vehicle and repossession are fundamentally the same thing in financial terms.
Process in a voluntary repossession
Once you voluntarily surrender your car to a lender, they will begin the process to sell it at auction. After the car is sold at auction the lender will take the amount they received and subtract the cost of the auction, administrative and storage fees. The remaining balance after those costs are covered is the net amount which gets applied toward the remainder of your car loan.
Any difference between what you owe on your car loan (plus certain expenses) and what your creditor gets for reselling the vehicle is called a “deficiency.” You’re on the hook for any deficiency balance. The lender can legally sell or transfer the deficiency balance to a collection agency.
The collection agency has the authority to pursue you for the debt which includes placing the debt on your credit reports. If the collection agency fails in getting you to pay, they may pursue legal action if the debt is within the statute of limitations.
Voluntary repossession is essentially the same
About the only difference in a voluntary car repossession vs. an involuntary repossession is you may save on the cost of the repo agent. As the borrower, you’re still responsible for the costs of auction, storage and administrative fees plus any deficiency balance based on the car’s value.
The good news is that since the two types of repos are essentially the same, the lender must follow the same laws which include your state laws regarding vehicle repossessions and federal laws such as the:
- Uniform Commercial Code
- Retail Installment Sales Act
- Truth in Lending Act
- Consumer Fraud Act
Strategies to remove car repo from credit reports
When the lender sells the car, they must send you proper written notice about the sale.
1. Dispute with the lender or collection agency based on the following:
- Did you get proper notification, if so, did the notice contain incorrect information.
- Did the the original car loan documents have any defects.
- Correct calculation of the deficiency balance, including a description of fees and charges.
- Did the lender take reasonable steps to find buyers for the car? Or just sell it for a lesser amount at a wholesale auction.
- Have your state’s laws along with federal laws regarding consumer lending been properly adhered to.
- Your state may even prohibit deficiency judgments on car loans. If the creditor violated consumer laws, then it may be prohibited from collecting the deficiency from you. (You may need to seek legal advice on this one.)
Any procedure not followed correctly, according to your state’s laws and with federal laws along with any inaccurate information (amounts or dates) reported on your credit reports; is leverage to request the debt be removed from your credit reports.
You’ve got some research to do with your original contract, any letters sent to you by the lender after you surrendered the car, look at your state’s laws concerning voluntary repossession and deficiency balance.
Once you’ve completed your research send a debt validation letter to the collection agency. This is a sample of information you can request:
- Legal notices and proof of the commercially reasonable manner of the notification and resale of the car
- How they calculated the amount owed.
Send the letter certified and request they provide the proof within 15 days from the receipt of the letter. Let them know if you don’t receive the requested information the alleged deficiency claim will be considered invalid, and any continued collection activities, or continued reporting of this invalid claim on your credit reports is a violation of the Fair Debt Collection Practices Act and the Fair Credit Reporting Act.
Make sure you include in the letter that the means of contact they are to use is through US mail. No phone calls to you or your family members.
2. Once you send the debt validation request to the collection agency wait the 15 days to see if they respond with the requested information. If so, consider a pay for delete. If not, send a dispute letter direct to the credit bureaus reporting the debt. Let the credit bureaus know you the debt was disputed with the collection agency and is being illegally reported.
Once the credit bureaus open a dispute they will have 30 days to verify it with the collection agency. If they verify it as accurate then you must send a Method of Verification request to see how they verified the debt as accurate.
3. Keep good records all correspondence and U.S. Mail return receipts. If the credit bureaus don’t delete then it’s time to make a complaint with the Consumer Financial Protection Bureau, your state’s Attorney General and the Better Business Bureau. You want to put as much pressure to delete as possible on the collection agency before you seek legal action.
4. Offer a pay for delete in order to get rid of the debt. If you have some extra cash and can make a settlement offer, you may be able to get the collection agency to take the money and delete the listing. If you take this route make sure you get an agreement in writing.
5. I realize it’s a lot of work, but repos are complicated with a lot of moving parts. You may be able to get free legal advice from a consumer law attorney at naca.net. Or, a credit repair firm like CreditRepair has experience in removing charge-offs and car repos from consumer credit reports for a fee.
And, keep in mind as long as the debt is still within your state’s statute of limitations, the collection agency can pursue legal action against you. But even if that’s the case, an attorney may still be able to assist you in getting the deficiency balance declared null and void as long as you don’t ignore any legal action.
