Does Bankruptcy Clear Auto Deficiencies from Repossessions?

Yes, both a Chapter 7 and Chapter 13 bankruptcy may be able to clear auto deficiencies from a repossession, but you may also be wondering how to keep your car after filing bankruptcy for the car that you currently own.

It can be exciting to purchase a new vehicle! But sometimes that excitement can lead to making a financial commitment that you may not be able to uphold. If you realize that you cannot keep up with the payments required to keep your new vehicle, it’s likely that it will soon be possessed. But what are the ramifications of repossession? 

And is there anything you can do to prevent repossession? How long does a repo stay on your credit? We will answer all of this and more. Just keep reading!

What is Bankruptcy?

Bankruptcy is a legal debt relief option that allows debtors who can no longer afford their debt get access to debt relief.

The common bankruptcies that people choose are Chapter 7 or Chapter 13 bankruptcy.

What is Repossession?

Car repossession is when something you bought with a loan is taken back. Most often this is experienced with automobiles. It is also common with extraneous vehicles like boats, four-wheelers, and golf carts.

This is typically due to a lack of repayments on the loan used to purchase the possession. For instance, if you took out a $20,000 loan to purchase a new car, you would have a payment of around $400 per month. If you fell behind on these payments, you would likely receive a grace period of a few weeks or even months. You will likely receive many notices that demand payment at the risk of repossession. After a certain period of time, the loan originator will be able to repossess the item. 

What Can Be Repossessed? 

In reality, almost anything that has been purchased from a business using a loan can be repossessed. One notable exception can be found with homes. While homes are almost exclusively bought with loans, the norm is not for a house to be repossessed. Instead, homes with defaulted loans are typically foreclosed on. 

How Long Will A Repo Stay On Your Credit Report?

Repossessions are unfortunate in almost all circumstances, but how long will the event follow you around? In most cases, a reposession will stay on your credit report for up to 7 years. Once those 7 years are up, the repossession will be automatically removed. 

How Will This Affect My Credit?

Unfortunately, a repossession can have a major impact on your credit score. In fact, 35% of your FICO credit score is determined by your payment history. So, if you had a repossession, that indicates multiple missed payments. 

This can dramatically affect your credit score. If you have something repossessed, you can expect your credit score to fall around 100 points, depending on where your credit score began. It might be more if you have a relatively high score, but it might be lower if your score was not great to begin with. Keep in mind that a credit score of 669 or below is an indication of a less-than-prime borrower. Anything over 800 is considered excellent. 

During the 7 years that the repossession is on your credit, you can expect your credit score to suffer. 

How Can I Avoid A Repossession?

If you suspect that a repossession is looming in your future, there are a couple of things you can do. Here are a few of the options you have when facing a repossession:

1. Catch up on your payments.

Sometimes we fall behind on payments simply because we are unaware the payments aren’t being made. When this is the case, you can make up the missed payments to stop any consequences. If you are able, catching up on payments can ensure that your vehicle is not repossessed. While this might be difficult, it can stop the repossession in its tracks. However, if this isn’t available to you, there are other options.

2. Sell the vehicle

If your ultimate goal is to stay out of debt and not take a hit on your credit, consider selling your vehicle! It’s important to take into account whether or not you can sell the vehicle for the same amount (or more) as what you currently owe on the vehicle. If you do not, you will be upside down on the loan and still owe money without having the vehicle. 

3. Ask for leniency

If you are going through a rough patch, consider reaching out to your loan originator and asking for a grace period. For instance, if you are transitioning between jobs and see a two-month employment gap, consider preemptively reaching out and explaining your situation. You can ask for a two or even three-month break from payments that will resume once your employment resumes. 

4. Voluntary Repossession

Sometimes, you can also return the car to the originator of the loan in exchange for forgiveness of the loan. Consider calling your creditor to see if this is an option.

Can I Dispute a Repossession?

Has a repossession suddenly appeared on your credit without any validity? Or was there the threat of repossession that was ultimately resolved without repossession? Then yes, you definitely can dispute the reported repossession. You can do this by contacting one (or all) of the credit reporting bureaus. You will be able to ask them to investigate the incorrect information. Generally, a credit bureau should have 30 days to investigate the report and ensure the error is corrected.

However, if you actually did have something repossessed, and it was a warranted repossession, then there is not much that you can do to dispute the action. 

Can I Have a Repossession Removed From My Credit Report?

Again, this depends on whether or not the repossession was warranted. If the repossession is an error, then a dispute should have the item removed from your report. However, if the report is correct, you might still have a couple of options. 

First, you could request to pay off the balance of the loan in exchange for the removal of the report. You would have to contact the loan originator to discuss this, and ultimately, the decision is theirs to make. Secondly, if you have recently experienced a hardship that caused the missed payments, you could ask the loan originator for an “act of goodwill.” If they agree, they may consider removing the report without anything in response. 

Finally, if you are desperate to have the repo removed, then consider hiring a professional credit repair company. They may be able to do a deep investigation to find any inconsistencies that might lead to the repo being removed. 

Conclusion

Bankruptcy can remove auto deficiencies that are the result from a car repossession. That said, you want to understand how long a repossession will stay on your credit report and how it will affect you before filing bankruptcy.

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