In today’s unpredictable times, repossession happens. You may have purchased a car a few years back and the payment was totally feasible. No one could have predicted the coronavirus pandemic in the U.S. and now your vehicle has been repossessed.
It will be challenging but you can recover from a repossession. With patience, hard work, and a little advice from this article you can take the first steps to improve your credit after a repossession.
How Repossession Affects Your Credit
How does repossession work? Having a vehicle repossessed is very damaging to your credit. Your credit score could drop up to 100 points after a repossession.
Your vehicle can only be repossessed after you default on the loan. Specifics of what a loan default looks like will be made clear in the contract you signed when you bought the vehicle.
By the time your car is repossessed late payments have also been reported to the credit bureaus. Your payment history accounts for 35% of your FICO score. The later the payment the worse shape your score will be in.
The repossession will show up on your credit report as “current manner of payment”. If you agree to a voluntary repossession a code 8A will be assigned to that line. If the repossession was not voluntary it is a code 08.
A voluntary repossession is where you hand over the vehicle to the lender. Both a voluntary repossession and an involuntary repossession will damage your credit score.
After the vehicle is repossessed the lender will sell it at an auction to try to recoup some of the money owed on the loan. In most cases, the amount that the vehicle sells for is less than what you owe. The amount of the loan left over after the repossession sales is called the deficiency balance.
The lender could tack on other fees to this amount for expenses like towing. Then the lender usually requests the deficiency balance as a lump sum. If you are unable to pay the lender sends the bill to collections.
Once in collections, it can show up on your credit report as an account in collections. This will also negatively impact your credit. The more recent the collection, the more it will hurt your score.
Paying the Deficiency Balance
If you still owe money on your vehicle after it is repossessed you do have a few options. The first option is to pay the full deficiency amount and the associated fees. You may even beagle to reinstate your loan and catch up on the payments.
Sometimes people ask a family member for help or sell things that they own. You may be able to get a part-time job on the weekends to cover the costs.
If this is not an option you may be able to make a payment plan with the lender. This will allow you to pay back the deficiency balance over time instead of all at once. These two options are the best for getting your credit back on track.
Negative accounts from a repossession will remain on your credit for seven years from the date of delicacy. According to repossession laws, a creditor can also sue you to recover the remaining deficiency balance. If this happens it will show up as a judgment on your credit.
Sometimes if you can prove that you are in dire circumstances a lender may settle with you for a percentage of what you owe. However, they usually want this amount all at once instead of overtime.
Declaring Bankruptcy
If you absolutely cannot pay any amount that is owned you may have to file for bankruptcy. If you file for bankruptcy after your car is repossessed but before the car is sold you may be able to get the vehicle back.
However, filing for bankruptcy should only be used as a last resort because bankruptcy can affect your credit score for years. Filing for bankruptcy can help your and lender work out lower payments that you will be able to afford.
Rebuilding Your Credit
So how do you rebuild your credit after a repossession? It’s going to take a lot of persistence and patience. Here are some things you can do to rebuild your credit after a repossession.
Always keep your balances low on existing credit cards. Ideally, you don’t want to use more than 30% of your credit line at any time. The lower the balance you keep the better outlook it has for your credit score.
Make all payments on time. Also do not close any existing credit accounts that you already have. Having a long-standing line of credit with a lender look positive on your credit score.
If you don’t have any credit cards or lines of credit it may be difficult to open one after a repossession. Try to get a secured credit card and pay the payments on time every month. Be careful not to charge for than 30% of the maximum amount to the card. Over time this will help you build up positive credit and it will affect your score.
You can also ask someone close to you to become an authorized user on your card. By adding them to your account you get to share some of the halo of their positive credit and boost your score.
Work with repossession-friendly lenders if you need a loan. Some lenders will lend to you after a repossession if you are in a pinch to get another vehicle. Make sure you read the full agreement and feel comfortable with the interest rate and payment before signing.
Learn From Your Repossession
Paying an auto loan or deficiency balance can feel like a never-ending cycle. If you follow the tips above you will see a boost in your credit. Let this be a lesson to communicate with the lender next time and never take the repossession route again.
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