What Is Repossession and How Does It Work?


Falling behind on payments, falling into debt, or defaulting on a loan all have the potential to result in repossession. But how does repossession work? It can be a complicated process, and there are different types of repossession to consider. 

Repossession often means that some authority — like a bank or debt collectors — gains the right to seize your possessions to satisfy a debt. It also has the potential to negatively impact your credit score, making it harder to borrow money again in the future. 

If you’re worried about repossession, or simply curious about what it is and how it works, read through for a full explanation. 

We’ll start with an explanation of the meaning of repossession. 

What is repossession?

Repossession occurs when a bank or other authority claims ownership of some asset, usually to repay an outstanding debt. Assets that can be repossessed include cars, real estate, jewelry, or any other tangible object that can be used to reduce the amount owed. 

How Repossession Works

Repossession is used to help lenders ensure that their debt is paid — or as close to paid as is possible. The exact policies that decide when a lender is permitted to repossess your property can depend on the company that you worked with, your state’s local laws, and the specific contracts that you signed when taking out the loan or financing the asset. 

In a typical case, repossession is used when it becomes clear that the borrower will be unable to continue to make payments on their loan. In many states, even missing a single payment is sufficient to give lenders the rights to repossess your asset, though some lenders may be more lenient than this. 

Let’s say you financed the purchase of a car, but have stopped making payments. At this point, you are in default, meaning that you have failed to live up to your financial responsibility to repay the loan at the rate and for the amount specified when you signed the contract. At that point, your lender (if they are more lenient), may hit you with a fee and require that you make up missed payments. 

If you still do not complete your payments (or your lender is not lenient), they may act on their right to repossession of your vehicle. At that point, they may send repossession agents to collect the vehicle or other assets to satisfy your debt. 

Not only does repossession mean you no longer have a claim to the asset being repossessed, it can also have harmful effects on your ability to borrow money in the future — discussed more in a later section. But first, let’s review the different kinds of repossession. 

Types of Repossession

There are two big types of repossession that happen to consumers who fall behind on debt repayment. 

Voluntary repossession

Voluntary repossession occurs when a borrower willingly turns over their asset to the lender as a means of lowering or resolving their debt. 

Involuntary repossession

Involuntary repossession is much more difficult. This occurs when a borrower is unwilling to turn over their asset or assets, so the lender sends repossession agents to forcibly take the assets they have a claim to. 

Note that many states have laws preventing lenders from violently repossessing your assets. They also typically cannot break into your home to retrieve the asset, or otherwise disturb the peace. However, they are permitted to reclaim the asset without express permission — hence, involuntary repossession.

  • Note: If repossession agents attempt to use threats, violence, or damage to your property as a means to seize your assets, you should call the police. It’s illegal to breach the peace while repossessing assets, and state law protects borrowers from violent repossession (though the exact laws vary by state). In that case, you may be eligible to sue. 

Both voluntary and involuntary repossession can wreak havoc on your personal finances. Just because your asset has been repossessed does not mean your debt is resolved (unless otherwise stated by the lender). You may still owe the balance that remains after the repossession of your property has been accounted for. 

Plus, on top of depriving you of your asset (usually it’s something large and important — like your car), repossession also harms your credit score.

How Does Repossession Impact Your Credit

Once repossession has happened, and you’ve lost your asset, the trouble is far from over, unfortunately. Lenders can report the fact that you’ve had an asset repossessed to the credit bureaus responsible for determining your credit score. 

Why does this matter? Your credit score is essentially a measure of how trustworthy lenders consider you. The higher the score, the more trustworthy — and the easier it is to get a loan with a low-interest rate. If you have a low credit score, it can be difficult to secure financing in the future, and if you do, rates are likely to be high. 

According to Debt.org, repossession stays on your credit score for about 7 years. While the amount of harm it does to your score diminishes over time — especially if you practice healthy lending habits following the repossession — the ding to your credit won’t be completely removed for 7 full years following the date you were first delinquent on your loan payments. 

The good news is that poor credit is not permanent. There are steps you can take to raise your credit score. However, this can take time, making it important to avoid repossession in the first place if that’s possible.

How to Avoid Repossession

Once you’ve already become delinquent or defaulted on a loan, avoiding repossession can be difficult. After all, depending on the terms of the contract you signed, your lender might be perfectly within their rights to repossess your asset once you have been delinquent for a certain amount of time. 

That’s why the best way to avoid repossession is to practice healthy financial habits before it becomes an issue. Here’s what to focus on:

  • Budget for your loan payments

Budgeting can be a challenge if you’ve never really done it before. Mint makes it easier. Instead of wondering where all your money goes at the end of each month, you can cleverly plan your spending, track purchases, and ensure that you’re on track. 

This can help you with paying off debt, so you don’t risk becoming delinquent on a loan, falling into default, or risk repossession. Sometimes, all it takes is a little careful financial planning to stay on top of your various responsibilities. 

  • Plan ahead before purchasing

Of course, all the planning in the world won’t help if you just don’t have the cash to make your payments. Before choosing to finance a large purchase — like a car or home — it’s important to plan carefully ahead of time. 

When discussing financing with possible lenders, be sure to get an estimate for how much your monthly payment will be, as well as whether that payment is fixed or variable. Then, when you get a sense of what you’ll be responsible for, factor it into your monthly budget to see whether completing payments will be a strain on your finances. 

Of course, if you lose your job, or suddenly have other unavoidable expenses come up, having a backup plan is essential. Most experts recommend saving about 3 to 6 months’ worth of your income in an emergency savings account, just in case something goes wrong. That way, even if you lose your job, you’ll still have cash on hand to prevent repossession and other financial disasters. 

  • Work with trusted lenders

Lastly, not all lenders are the same. Some may jump to repossess your assets as soon as you miss a payment. Others are more lenient, and may allow you a grace period before pursuing more serious and aggressive ways to collect on your debt. Carefully research and review lenders before committing, that way, if there is a problem and you miss a payment, you know you don’t have to immediately panic. 

Note: Certain military service members are also protected from repossession by current laws. If you are in the military, you may have other options to avoid repossession. 

Key takeaways

Be sure to keep this information in mind before you go:

  • Repossession occurs when a lending agency or bank seizes assets in order to satisfy (or partly satisfy) an outstanding, unpaid debt. 
  • Repossession can be voluntary or involuntary. If it’s involuntary, it’s good to know your rights. For example, repossession agents can not use violence or threats to reclaim your things. 
  • Repossession can also damage your credit, and may take as long as 7 years to be completely removed from your credit history. However, by practicing careful finances in the meantime, you can improve your credit score. 
  • The best way to avoid repossession is to budget carefully, plan your large expenses, build up an emergency savings, and work with trusted lenders. 

Repossession may seem like a nightmare, but it can be avoided with the right steps. Be sure to know your rights, work on your financial wellbeing, and plan ahead to avoid the worst of repossession. 

Sources

FTC | Car and Driver | ConsumerFinance.gov | Debt.org

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