You might think that a car repossessed is not common.

However, that’s not really the case. In the US alone, there are over 5,000 repossessions daily. That’s over 2 million repossessions each year.

In the case of repossession, you can either do it voluntarily or have it occur against your will. Whether you surrender it voluntarily or not can drastically change the effects of the event on your credit and debts.

In this article, we will cover everything you need to know about your car being repossessed. We’ll also tell you how you can voluntarily surrender it to improve your financial situation.

So if you’re interested in learning more about this topic, keep reading.

Why Can a Lender Repossess?

When you lease or finance a car, you give the lender an interest of security in the vehicle. Each state has its own laws regarding repossession, but having an interest in security means the lender can repossess the vehicle without notice (if you default on the loan).

Many circumstances can constitute a default. Most commonly this happens if you miss a loan payment or don’t have car insurance. You can learn about these notices by searching your local state law.

How Do Repossessions Work?

In most states, a lender will seize your car without notice if you’ve defaulted. However, they are not allowed to breach peace when doing so. This means they cannot use threats or physical force to take the car.

For instance, a simple repossession from a closed garage could be considered a breach of peace. If the lender does breach the peace, you can claim damages and start a settlement lawsuit.

What Happens to a Car Repossessed?

The owner can choose to sell or keep the car. Either is applicable, but one of them can help your loan obligation. Each state has its own rules on notice requirements and sale procedures.


However, you usually hold the right to know where and when the sale will occur. The lender must sell the car in a reasonable commercial manner. This means the lender must follow sales practices, but it is not required to acquire the best possible price.

You can claim for damages if the sale was deficient and not commercially reasonable.

Deficiency Balance: What Is It?

Repossession is one of the many remedies that a lender can employ if you’ve defaulted. Having the car repossessed does not free you from your loan obligations. If the proceeds from the sale are not enough to cover your entire balance, the remaining amount is the deficiency balance.

In most states, a lender can choose to sue you to collect the money. But as mentioned earlier, there are certain defenses to deficiency action.

For instance:

1. They have breached the peace
2. They did not sell the car in a reasonable commercial manner
3. They lost their right to sue by waiting exceptionally long and the statute of limitations expired

Even one of these offenses is enough to defend yourself in the court of law. And that’s about it for the clause of your car being repossessed. However, you can also choose to voluntarily surrender your vehicle, and there are certain benefits to doing so.

Voluntary Surrender

Voluntary surrender of your vehicle is in some ways better than repossession. In this case, if you cannot make payments, you can choose to hand your vehicle over to the lender, who will then sell it to make your debt smaller. Voluntary surrender also shows that you are responsible.

The proceeds from the sale will go to balance. If there is a huge balance left and you cannot pay it off, the lender might serve the debt to a collection agency. Because of this, you might see a collection account on your credit report.

In case the balance is minimal after the sale, it’s up to the discretion of the lender to forgo balance. In this case, the amount will be counted as additional income, so you will have to pay tax on it.

In the event you surrender your vehicle, your credit report will show that. And that’s much better then repossession when it comes to impact.

Surrendering Process

You will begin by contacting the court and letting them know of your decision when you fill out a bankruptcy form. In this case, it’s a Chapter 7 bankruptcy.

The creditor will obtain permission from the court to repossess by filing a motion for an automatic stay or to get your agreement. Otherwise, the credit has to wait until the case is completed and the automatic stay is disabled.


Once the court lifts the clause, the creditor can repossess or you can choose to voluntarily surrender it to an agreed-upon location. The creditor will sell the car at auction, but if don’t sell it for the amount you owe, you won’t be responsible for the remaining amount. It will be wiped out via bankruptcy.

For instance, you have a luxury sports car that you cannot afford because you cannot work. Your payment is $600 each month. When you file for bankruptcy, you surrender the car and are no longer responsible for the payment.

Your Car, Your Choice

Now that you know under what circumstances you might have your car repossessed, you are well on your way to determining if you would like to do it voluntarily or not.

In any case, it’s your car and your choice. Whatever you think is right, it will be right for you.

Did you find this article helpful? If you’re interested in similar articles, check out the rest of our legal and lifestyle articles on the sidebar.