Recovering From a “Recovery”

You were doing fine. The monthly payment was affordable and the bills were being paid on your car (or house, furniture, whatever). Then life happens and you are forced to choose: Food, or Ford?

Here comes the tow-truck, and off goes the car.

What do you do if you think you think that you may suffer a repossession soon?

What should you do when finances improve?

This situation is very familiar for families everywhere. Your bills are affordable until they’re not. Although it may feel like a massive task, you CAN recover from a repossession.

Before we begin, I want to clear up one thing real quick. Your lender loaned you cash to buy the car. They don’t want your car, they want their money.

What happens when something is repossessed?

You can often make late payments with a fee (and an ugly scar on your credit report), but you can keep the car as long as money keeps coming in. However, when you stop making payments altogether… you’re going to start getting collection phone calls.

You don’t have the money to pay them, I understand that. Think of it this way… if your friend borrowed $500 from you and stopped paying you back…wouldn’t you want to know why? Wouldn’t you expect your money back? So does the bank.

The lender will start calling and mailing letters because they want to see what is going on, and work things out with you. If you continue to miss payments and do not reach an agreement with them, they will repossess your vehicle so they can sell it and recoup their loss.

Once the car is repossessed, it is usually sold through an auction (often at a fraction of the retail value. People want to make a profit, you know). The bank is in the business of money, not car sales, so auctions are the fastest way for them to recoup some of the money that they lost. If your car sells for less than the loan balance, you will still owe the lender the difference.

Can I just “give it back” to the bank?

Yes and no. Mostly No. As I said above, the lender loaned you MONEY, not a car. There are no “Givesies-backsies” and no return policies. If you decide to surrender the vehicle yourself, this is called a Voluntarily Repossession. It affects your credit report in nearly the same way that an Involuntary Repossession (tow truck outside your house style) will.

Can I just “give it back” to the dealership?

No. You borrowed cash from the bank. That cash paid for the car in-full as far as the dealership is concerned. They may offer to buy the car back from you (at trade-in value), but technically their business with you was completed the moment that you drove off the lot. If you surrender your car to a dealership, and they can’t find your finance company to report that your car was abandoned on their lot, they will have the car towed. You will be charged towing fees and storage fees by the towing company. Long story short, it’s super expensive and adds $$$ to your situation. Just don’t do this.

What can I do if I am behind on payments, but still have my car?

If you figure out that you’re struggling to afford your payment, considering refinancing your car. You could easily lower your interest rate and monthly payment (saving you money). You also may want to consider selling your vehicle and buying a cheaper car, preferably in cash.

How much does a repossession hurt my credit?

A lot. A repossession will damage your credit score by easily 100 points. Late payments, collections (repo’s, charge-offs, foreclosures) and public records (judgments) generally all stay on your credit report for about 7 years from the time it happens.

How do I recover from this?

Okay, your finances have improved and you’re ready to rebuild. That’s great! You may read many articles that say to get another loan and pay it back. That’s not what my article says.

There is a chance that you got into this mess due to a serious situation (chronic job loss, medical issue), but there is a much bigger chance that you simply bit off more debt than you could chew.

Let’s rebuild things the right way…so you never have to rebuild them again.

Don’t make the same mistakes.

Ask yourself some tough questions. What happened that you couldn’t make the payments the first time? Can this situation happen again in the future? Is there something you can do to prevent it?

Did you deplete your Emergency Fund? Did you just ask yourself what an emergency fund even is? It’s THIS. Go read it. This is Step One.

Also if you haven’t, MAKE A DANG BUDGET people. A budget will spell out how every single dollar is going to be saved and spent. You can’t run a company with a list of ideas, you need a plan. Your household is a company. Don’t know how to make one? I’ve got you covered HERE.

Doing the same thing and expecting different results is insanity. Changing the way you think about money is a crucial step towards being better prepared next time.

Acknowledge the damage.

If you plan to rebuild your credit, you have to understand how it affected you. As I said above, the repossession is going to appear on your credit report for 7 years, and you may still owe a lender for part of your balance. This WILL impact your ability to finance another car (or anything, for that matter) for a long time, and you will have to prove to others that you are worth the risk of borrowing money again.

Look at it this way. You friend borrowed $500, paid back $160, and disappeared with the rest of your hard-earned money. Would you jump to forgive them? Would you expect your money back? Would you be willing to loan them $500 more? The same way that your friend has to prove themselves to you…you will need to do to lenders.

Pay cash, and take other steps to rebuild.

This is the option that I endorse. If you can bear to wait a bit, save up and buy a car in CASH. Nothing fancy, just something that runs. If you don’t finance it, you will never have to worry about paying it back. Be sure to have a “pre-purchase inspection” done on the vehicle so you know you’re getting something you can depend on. Then, take the following steps to rebuild your credit.

Get a secured credit card
Find a credit re-builder loan
Read THIS article on other ways to rebuild your credit.

Consider Repossession Friendly Lenders.

The consumer advocate in me cringes to type this, but this might be a good solution for you. Although most dealerships don’t have access, there are several lenders that offer financing to people who have recently had a repo. If you are going to look at this option…keep the following in mind

You may have an interest rate of 18% or higher.
You may need a cosigner.
Newer vehicles with low mileage will require even larger down payments.

Note: Paying an auto loan with a high interest rate may make you feel like you are in a never-ending cycle of car payments, and it can easily place you into bad financial situation. The end goal is to get a positive mark on your credit report. This says “I made a mistake in the past, but I have put my past to rest and done better in the present”.

Other resources.

If you are staring repossession in the face, read this FTC article on repossession.
If you are dealing with debt collectors. Know your rights on Fair Debt Collection Practices by reading this FTC article.