Voluntary Car Repossession: What to Expect & Credit Impact

If you can't make the payments on a vehicle you're financing, the lender can repossess the car. Although repossessions generally are involuntary, you can opt to return the car on your own as well. When you agree to give up the car, it's referred to as a voluntary repossession, and is reported to credit bureaus as a voluntary surrender. You generally can negotiate a settlement offer in exchange for surrendering, but it's still viewed as a repossession and will negatively affect your credit report.

Reporting to Bureaus

While the lender reports the activity to the credit bureaus as a voluntary surrender instead of a repossession, the credit impact is similar, according to Experian. It will appear as an account you failed to pay as agreed. Your payment history counts for 35 percent of your FICO credit score, as lenders value a track record of paying your bills on time. If you missed payments before surrendering the car, your score likely took a hit from that activity as well. The voluntary surrender can remain on your credit report for seven years from the date of the first missed payment.

The Sale and Deficiency

After the car is returned, the lender sells it at an auction to recoup the amount owed. If there's a deficiency, you'll be responsible for paying it. The lender may agree to a payment schedule to help you repay the debt rather than requiring a lump sum. If you don't pay the balance, the lender can sell the account to a collection agency. The account then appears on your credit report as a debt in collections.

Forgiving the Debt

If the creditor doesn't go after you to collect the difference between the sale price and the loan balance, it may report the debt as forgiven for tax purposes. If the debt is forgiven or cancelled, you may receive a Form 1099 C, Cancellation of Debt. According to the IRS, you must report any taxable amount of a canceled debt you are liable for as ordinary income, and are taxed on that amount accordingly.