Can I Give My Car Back to the Creditor?

Giving your car back to the creditor is known as repossession. Repossession significantly damages your credit and should be avoided. Other options exist that may prevent you from having to return your car. Learn about the process, effects and other options before you decide if you should give your car back.

Types

The two types or repossession are voluntary and involuntary. An involuntary repossession occurs when the bank hires a towing company to come and collect your car for return when payments are late or behind. A voluntary repossession occurs when you decide you will no longer pay for the car as stated in your contract and you make arrangements to return the car to the creditor.

Significance

A voluntary and involuntary repossession have the same impact on your credit report. Your credit score will drop significantly and you can expect the repossession to remain on your credit for at least seven years. While you can still secure a loan after enough time has passed with your repossession, expect a higher interest rate while the mark remains on your credit. Rebuilding your credit after a repossession is difficult and can cost you thousands of dollars in interest payments if you do secure a future line of credit.

Warning

A repossession does not mean you can return your vehicle to the bank and go on payment-free. You are responsible for paying the loan amount specified in your contract. Once the vehicle has been resold by the bank, any money lost is due by you at some point. If your bank offers to settle the loan and allows you to pay less than the total amount owed, the canceled part of the debt is reported to the IRS (Internal Revenue Service). The IRS considers the canceled debt a gift of sorts; you will have to pay taxes on the amount. If you ignore attempts by the bank to collect payment or arrange for a payment plan, the bank is within its legal rights to sue you, enforce a judgment against you and garnish your wages.

Other Options

Avoid repossession if you can. Call your lender; it might have programs to help you, such as payment deferment, loan extension or a temporary reduction in payment. You might be able to sell your car on your own. Once your bank knows of payment problems, ask for the vehicle's payoff amount if you want to try to sell it privately. If you make a profit beyond the payoff amount, you can keep it. If you sell for less, you must come up with the remaining money due to satisfy the loan. Explore your options before returning your car to the creditor.

Process

Once your vehicle is returned to the creditor, you'll get a letter within a few weeks that states the amount due to get your car back before it is sold by the bank. The amount includes any past due payments, bank fees and tow fees if your vehicle was repossessed by a tow company. You don't have to answer the letter. Once the vehicle is sold at auction, you'll receive another letter that states the selling price and whether or not a profit was made. The profit will be returned to you, but you are responsible for any money due. The bank will contact you soon after the auction to discuss payment arrangements. The bank may take you to court at any time after bank efforts for payment have been ignored.