Repossessions and Credit Scores
What is Repossession?
Repossession is the process of taking property that was used as collateral for a loan or line of credit. Specifically, repossession refers to situations where the property that is functioning as collateral is the property that you obtained the loan to purchase. Some examples can help clarify this.
If you take out a loan to buy a car, one of the conditions of the loan is that the car will be held as collateral until you repay the loan. Collateral is something of value that a lender can take and sell to recoup losses if you default on your loan. So, for the example above, if you fall behind on your car loan payments, then the bank or dealership that lent you the money to buy the car can seize it and sell it to someone else to make back the money they loaned to you.
It’s important to realize that a lender can only repossess or take control of property that has been specifically flagged as collateral at the time they gave you the loan. If you’re falling behind on your credit card payments, then the credit card company is not able to seize your car and sell it to pay your bill. All to often people assume that, because they owe a company money, any and all of their property is up for grabs. As a result, people frequently avoid seeking loans, credit, and other financial products which may help them improve their finances or lifestyle or save them money over the long-term.
How Does a Repossession Affect Credit Scores?
A repossession can cause a huge negative impact on your credit score. You should keep in mind that the rules governing debts, repossessions, and other financial matters can change from state to state or even from city to city. If you’re having problems with your bills, you should talk to a lawyer or debt specialist to find out what the rules for repossession are where you live.
The first way that a repossession affects your credit score is that a repossession is the result of a series of late or missed payments. Most lenders aren’t going to repossess your car if you’re a bit late on a payment, as they’d rather have your money (with the late fee) than go through the trouble of re-selling the property that’s serving as collateral. However, you should read your loan contract carefully, as a company may have the legal power to seize your property if you’re even one day late in paying.
The series of late payments which result in property repossession will have already done significant damage to your score. After all, a credit score is a measurement of how likely you are to default on a loan or line of credit. A series of late payments tells creditors and lenders that you are exceedingly likely to have problems paying on time.
Another way that a repossession can cause problems for your credit score is if you wind up with a deficiency balance. A deficiency balance happens when the sale of the repossessed property doesn’t generate enough money to cover the balance you owe.
This is a potentially disastrous situation. You’ll still have a debt that you are required to pay, but you’ll no longer have the asset you were paying the debt for. A deficiency balance can hurt your credit score for seven years after you’ve paid off the balance. Furthermore, until you pay off the balance, it will be factored into considerations like your debt to income ratio. It’s also important to note that the repossession stays on your record for seven years after you’ve paid the balance off. Therefore, if it takes you two years to pay off the balance, then the repossession will be on your credit history for a total of nine years.
Credit Repair and Repossessions
If you or someone you love has had property repossessed, then you might be worried that they’ll never be able to get credit or a loan again. However, credit repair can help to minimizes and, in some cases, erase the damage a repossession does to your credit score.
One of the most effective ways for credit repair to help rebuild your credit is by obtaining letters of goodwill from your creditors. If you’ve paid off the balance on the property that has been repossessed, then you can ask the creditor to remove the negative entry they have on your credit report. Lenders and creditors aren’t required to do this, so it’s not a sure-fire way to boost your credit. However, if it works it’s incredibly effective and can be done and minimal to no cost to you.
Another credit repair strategy that can boost your score after a repossession is to file a verification request. Federal law states that if a credit reporting agency isn’t 100% sure a credit report entry is correct, then it must be removed. Frequently companies sell old or bad debts to other financial firms, and there’s a chance that no one will be able to produce the specific paperwork necessary to prove the record of late payments and repossession on your credit report is accurate.
An interesting thing about credit repair is that you have several options for how to go about it. You can attempt to take any of these steps, and more, by yourself. You can also hire a credit repair company like Lexington Law to do it for you. Therefore, you can tailor your credit repair approach to match your time, expertise, and comfort level. It’s important to make sure that you carefully weigh your options and pick the approach that will give you the best chance of success.
Sean brings a decade worth of experience in credit repair to our company. Sean started his career working in an accounting department for a major credit card company. This was a natural fit, given his bachelor’s and master’s degrees in accounting.