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Autotrader: One missed payment can lead to repossession of your car. Here’s a guide on what to do if you’re facing repo—or if it happens.

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A few quick facts about repossessed cars

Repossession laws vary from state to state.

Lenders don’t want to repossess cars.

One missed payment can trigger repossession.

A repossession affects your credit for seven years.

We are receiving mixed messages regarding trends in repossessed cars. Some experts see the recent spike in repos as the market sorting itself out after record-low repossession rates the past couple of years. Consequently, there’s no reason to worry — yet. Others are sounding an alarm that the current repossession increases will persist into the future as inflation rises, the economy worsens, and the bottom falls out of used car prices.

This difference of opinion makes for a fascinating debate in the abstract. However, as the past-due payments begin stacking up with the possibility of repossession looming on the horizon, it becomes much more than a thought exercise. An auto repossession is a significant life event with negative repercussions lasting for years.

It’s never too early to put a plan in place if things go wrong and repossession becomes possible. Here are some facts you should know and a few steps you can take if the unthinkable happens. Our advice here primarily applies to repossessions caused by defaulting on a loan. Defaulting on a lease is a different can of worms.

Tip: Regulations governing the repossession of cars vary from state to state. We’re providing a broad, general explanation of the regulations and processes repossession involves. Refer to your state attorney general’s website for the definitive rules in your area.

What is repossession of a car?

The repossession of a car is the act of the lender (the creditor) recovering it when the borrower falls behind on the agreed-upon loan payments. Failing to make even one payment is a breach of the loan agreement and sufficient cause for the creditor (the car’s legal owner) to take back the vehicle.

How does car repossession work?

There are two types of repossession: voluntary and involuntary. They both reach the same end, although the borrower is often slightly better off when the repossession is voluntary.

Involuntary car repossession

When you fall behind on your payments, you leave yourself open to the creditor seizing your car. All the creditor needs is a valid lien on your vehicle. The timing of car repossession is entirely at the whim of the creditor. Furthermore, in many states, the creditor has no obligation to warn you, nor is there any legal proceeding the creditor must initiate. The repo agent will suddenly show up one day and seize the car. From there, the creditor will sell or auction off the vehicle. If the sale price doesn’t cover the outstanding loan balance, you will still be on the hook for whatever the difference is. Moreover, you will also owe any costs generated by the repossession, such as towing fees, storage fees, and so on.

What are your rights?

Although the creditor is well within its rights to seize your car if you don’t live up to the terms of the loan, you do have rights. In a few states, the creditor does have to provide some degree of warning a repossession is coming. Moreover, according to the Federal Trade Commission (FTC), in repossessing your car, the creditor (or its agent) can’t “breach the peace.”

In most states breaching the peace includes:

Using physical force

Threatening to use force

Causing property damage during the repossession

Removing a car from a closed garage

Additionally, you have a right to any personal property inside the car when repossessed, and the creditor is legally obligated to arrange for the retrieval of that property.

Voluntary car repossession

Although you will still not have a car when it’s over, voluntary repossession removes some of the stress and financial penalties from the repo process. In this scenario, you advise the creditor you can no longer make the loan payments and that you want to surrender the car voluntarily. Here, you have some control over when, where, and how the repossession will occur.

This scenario allows you to make provisions for transportation, remove any valuables, and avoid the shock of waking up one morning to a missing car. You will also avoid some of the expenses generated by the creditor enlisting a repo agent to execute an involuntary repossession.

Car repossession laws and regulations

For the most part, the federal government and the individual states generally agree regarding car repossession. However, some states may diverge in a detail or two. That’s why you should verify your rights with your state attorney general’s office if repossession of any type is on your radar.

Also see: CFPB’s allegations against Wells Fargo: illegal fees, wrongful car repos and misapplied payments

Can I stop a car repossession?

Fact: Repossessing your vehicle is a losing proposition for you and the lender.

Yep, you read that correctly. Under most circumstances, your lender will lose money if forced to repossess your car. Ultimately, the lender may lose less money by repossessing it than by allowing you to keep it if you default. However, the lender makes money on the loan and not on repossessing. Not only does the lender lose the interest on the unpaid loan, but it also must bear the time and expense of selling the vehicle — perhaps at a loss. Lenders aren’t in the vehicle-selling business.

If the lender can see a way to keep you in the car and still make money, you may well be able to work something out. Here are some things you can do to hold off or even escape a repossession.

Communicate with the lender

Most of us don’t enter into a loan of any kind with the idea we aren’t going to pay it. Circumstances, though, do change. Job loss, divorce, unforeseen medical expenses, and so on can impact our ability to fulfill car-loan obligations. When you realize that such an event will cause you to miss that first payment, it’s time to reach out to the lender. Depending on your particular situation, the lender can often suggest temporary solutions:

Interest payments—This allows you to submit only the interest portion of your payment for several months. There won’t be any advantage to the borrower with a newer loan because installment loans, such as car loans, pack most of the interest in the first couple of years of payments. However, it will save you some money. If you are more than halfway through the loan term (for example, two years into a four-year loan), only paying the interest will lessen the monthly burden significantly. The lender will then extend the payments on the back end to make up for the lost money on the principal.

Loan restructure—The lender may be willing to modify the loan to reduce the payments by extending the terms beyond those originally agreed to. Perhaps this would include allowing you to miss a payment or two now and then making up those missed payments at the end of the loan.

Sell the car

It’s true; you don’t own the car on which you are making payments. Nonetheless, you can legally sell it as long as you pay out the creditor with the proceeds of the sale. You pay the outstanding loan balance and any late-payment fees or other money owed to the creditor. With the elevated used car values of the past 18 months, there is a chance the outstanding loan balance is less than the car is worth. In other words, there would be money left over. However, used car prices have been falling since the first quarter of 2022, so that ship may have sailed already.

Refinance the loan

Depending on the circumstances and the future of your financial health, you may be able to find a lender to pay off the current loan and refinance the balance. This outcome is only viable if you have resolved the financial issues that put you in default in the first place. The lender may require a down payment. However, starting the refinancing process may buy you a couple of months without paying a monthly installment.

See: ‘The biggest threat to payday lenders’: A growing list of big banks offer small-dollar loans

The nuclear solution

There are worse options than repossession. However, if all other avenues to avert repossession fail, the last resort is either Chapter 13 or Chapter 7 bankruptcy. These are drastic solutions that may create more future issues than they solve. On the other hand, filing for bankruptcy stops all collection efforts in their tracks, including efforts to collect past-due payments on your car and its repossession. However, bankruptcy isn’t a get-out-of-jail-free card.

Chapter 13 requires the filer to have a source of income and a plan for making steady payments in the future as a condition for keeping the car. Chapter 7 allows the filer to retain some assets while allowing other assets to revert to creditors. A vehicle can be among the retained assets. Still, the borrower must make the new monthly payments on time going forward. Filing either type of bankruptcy will protect the borrower from creditors for 60 days or so until the court approves or disapproves the borrower’s application.

Bankruptcy costs are a significant hurdle for someone already dealing with a strained budget and a lack of cash. Unless you can find an attorney to file for free, you will probably have to pay the attorney costs upfront. There will be filing fees, as well.

Tip: Whether you file for bankruptcy or the creditor repossesses your car, it will be a massive drag on your credit score for at least seven years.

How many missed payments will trigger a car repossession?

No hard and fast rules exist regarding how many missed payments will cause a creditor to initiate a repossession. Missing one payment is enough for the lender to repossess your car. As previously noted, most lenders try to avoid repossessing vehicles because they almost always lose money. The more a struggling borrower communicates with the creditor, the better the chances a workable solution can be found, averting repossession. Although, at some point, communication alone won’t be enough.

Creditors categorize delinquencies as 30, 60, 90, and 120 days past due. The numbers continue in 30-day increments from there. If it hasn’t happened yet, you can assume that repossession is imminent once your loan reaches the 90-day delinquent stack. Very few lenders will allow it to go beyond 120 days late. Some will send out a repo agent at 60 days.

See: If you’re struggling to pay off debt, take these 3 steps to help make it happen

How to get a repossessed car back

Under certain circumstances, you can get a repossessed car back. However, once a creditor sells your repossessed car, there is no getting it back. It’s gone. Most states provide the borrower with avenues to recover a repossessed vehicle, but the options are limited.

In most states, once a creditor executes the repossession, it must provide you with a timely written notice of your options to redeem the car. Such notice should also include the legal timetable for executing those options.

The ticking clock

When a creditor repossesses a car, the clock begins ticking toward the end of the period in which you can act to recover it. Typically, this period is 10 to 30 days, but it varies by state. For example, it’s 10 days in Texas, 21 days in Hawaii, and 15 days in New Jersey.

Options for saving a repossessed car

It’s likely in your state that among the options you have for redeeming a repossessed car, include some of those actions listed above to avoid repossession in the first place. Even bankruptcy is on the table if you can get it filed in that 10- to 30-day period before the lender sells the car. However, whichever option you pick will still cost money.

At the very least, you must pay any past-due payments and any fees and expenses related to the repossession. In the worst case, you will have to pay the balance due plus repossession expenses.

After a car repossession

Although car repossession is a traumatic experience with long-lasting effects, there is a road back. However, credit bureaus will brand you as a high-risk borrower. Consequently, financing another car — or anything else, for that matter — will be more challenging and expensive with higher interest rates.

Car repossession and your credit

If you fall behind with car payments, you’ll likely have more than just the repossessed car weighing down your credit score. However, the effects of the repo on your credit report will last up to seven years. According to Capitol One, having a car repossessed deducts approximately 100 points from your credit score. Any score below 600 is considered subprime, say the credit experts at Experian. That makes it tough sledding to get approved for any credit. Filing for bankruptcy can lower your credit score by as much as 150 points, and it stays on your credit for seven to 10 years.

Financing another car

A repossession on your credit record isn’t the end of the world. It’s not good, but you may be able to overcome it. Our rule of thumb is that anyone employed with a credit score of 660 or higher should be able to find financing for a car. Experian reported that roughly 15% of all financing in the first half of 2022 went to borrowers with credit scores between 500 and 600. That includes new, used, and leased vehicles.

Read: ‘Auto makers are building more expensive vehicles’: Why you should not buy a new car in 2023

With a credit score like that, you can expect to pay a much higher interest rate than someone with bulletproof credit, but the lenders are out there.

Steps to make yourself more attractive to lenders

Financing is all about risk. The more risk a lender believes you pose, the less your odds of getting financed and the higher the interest rate if you do. To secure another car loan, you must present as a lower risk. In other words, the lender must believe you will make the monthly payments on time every month.

Here are a few often-stated but necessary steps to help convince a lender you are an acceptable risk. Before launching into any of these suggestions, get a copy of your credit report from each of the three big credit-reporting agencies. They are Experian 
EXPGY,
-1.95%
,
 TransUnion 
TRU,
-1.44%
,
and Equifax 
EFX,
-1.23%
.
The law entitles you to one free credit report from each agency annually.

Don’t use your credit cards or open any new credit accounts. In other words, stop charging!

Pay the outstanding balance on the car loan of the repossessed car.

Pay off any balances on accounts in collection.

Bring any past-due accounts up-to-date.

Make every monthly credit payment on time.

None of these are magic pills that, in and of themselves, will overcome a repossession. Together, however, they will contribute to righting your credit ship. Your credit score is a snapshot of your creditworthiness at any moment, and your number will improve as you work to solidify your credit.

Also on MarketWatch: This 28-year-old grew her pay to $500,000 and found work-life balance

Beware of credit repair scams

Tip: Ultimately, no one can repair your credit but you, and there are no quick fixes.

As your sea of debt increases and you fall farther behind in your bills, you will face the temptation to grab any lifeline tossed in your direction. They include those offered by scammers who may promise, for a fee, to work with your creditors to reduce your monthly payments and prevent your accounts from going into collection or repossession. Before putting your credit into the hands of a credit management company, do your research. Some are legit, and some aren’t.

According to Bankrate, most legitimate debt management companies are nonprofit. They provide debt counselors who will work with you to establish a 3- to 5-year debt management plan. Typically, such plans consolidate all your monthly credit payments into one smaller lump payment, which the credit management company dispenses to your creditors.

Two of the debt management companies Bankrate recommends are:

American Consumer Credit Counseling, Inc. (ACCC)

Cambridge Credit Counseling

This story originally ran on Autotrader.com.

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