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Voluntary Surrender vs. Repossession

Financial crisis can strike at anyone at any time. A divorce, job loss, or unexpected medical condition may make it impossible for you to meet some of your debt obligations. Recently on our legal forum a user asked, “I recently bought a new Lexus. Unfortunately, six months later I received a severe cancer diagnosis. I am no longer able to make my car payments. Is it better to voluntarily surrender the vehicle back to the creditor or should I just wait for them to repossess the car?”

What is a car repossession?

If you are unable to make payments for your car per your loan agreement the lender has the legal right to come and repossess or take the car. Although states have differing laws about what a lender can and cannot do, they generally have the right to repossess the car without notice if you do not pay your car loan.

After the car is repossessed, the lender will generally sell the car. State laws vary, but generally, they must sell it in a “commercially reasonable manner.” In many cases you will be notified prior to the sale and may have the right to either redeem the car prior to auction or attempt to bid on the car at auction.

What is a voluntary surrender?

While the end result may be the same- you will lose the car- voluntary surrender allows you to take a more proactive approach to your legal issues. It also allows the lender to avoid the hassle and expense of collecting your car, including the agent’s fee, towing expenses, and possibly storage costs (which you could be responsible for paying).

A voluntary surrender, like repossession, will remain on your credit report for seven years and will negatively affect your credit score, but it will allow you to agree to the time and place where you can surrender your car.

Repossession vs. Voluntary Surrender will I have to pay the deficiency balance?

Neither voluntary surrender nor repossession will eliminate the balance of your loan. Regardless of which option you choose, the lender will most likely take your car and sell it at auction. If the auction price is less than the loan balance, you will have what is called a deficiency.

In most states, the lender is allowed to file a suit against you to collect the deficiency. If the court issues a deficiency judgment the creditor can use all means available under state law to force payment. Not all methods are allowed in all states for all types of debts, but general judgment options may include:

  • Wage garnishments (not allowed for unsecured debts in all states)
  • Property repossessions
  • Bank account levies

If a lender does file suit against you, you can talk to a lawyer about ways to defend yourself against the case. Common defenses include arguing that the lender waited too long to file suit, they repossessed your car in an unlawful manner, or they sold the car but failed to sell it in a commercial viable way, creating a deficiency judgment.

Bottom Line: Voluntary surrender is a proactive way to deal with a financial problem. It will not, however, eliminate a potential deficiency judgment or keep the surrender off your credit report.

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