Are you worried about how a repossession may be affecting your credit history?
You’re not alone.
A study in 2017 showed that there are 1.8 million vehicles repossessed, and that number does not include home foreclosures.
As millions of people in the US make mortgage payments and car loan payments, there are times when they fall behind.
There are solutions such as credit repair or debt consolidation, but in some cases, lenders can take action to reclaim their collateral property, resulting in repossession.
But what happens next?
How long does a repo stay on your credit report, and can you improve your credit score afterward?
In my experience, repairing your credit after a repossession is always possible, you just need consistency and regularly monitor your credit report using tools such as Credit Karma.
In this article, we’ll explore the answer to these questions so that you can understand the impact of having a repo on your credit score and how to rebound from it.
- It takes 7 years to have a repossession removed from your credit report
- Involuntary repossession is when the lender is forced to take back the collateral when borrowers fail to make payments
- Voluntary repossession is when the borrower decides to return collateral
- Repossession can affect your ability to apply for new credit
- Credit can be rebuilt with good payment history for at least 12-24 months after repossession
- The Fulton decision states that creditors must provide notice to borrowers before they can repossess collateral, providing time to negotiate and avoid repossession
How Long Does A Repo Stay On Your Credit Report?
As part of the Fair Credit Reporting Act, a repossession stays on your credit report for up to 7 years, depending on the information the major credit bureaus provide.
This means that the three major credit bureaus (Equifax, TransUnion, and Experian) are bound by the Fair Credit Reporting Act to keep accurate and timely records of any repo items reported to them.
What Is Repossession?
In simple terms, repossession is when a lender legally takes back the collateral that the borrower failed to make payments on.
Take car repo as an example.
When the borrower stops their car payments, lenders can legally take the vehicle away and sell it in an auction to recover the loan balance and fees.
Other types of collateral include real estate, furniture, and even jewelry.
Types Of Repossession
There are two main types of repossession:
1) Involuntary repossession happens when the lender is forced to take back collateral due to non-payment or other breach of contract.
2) Voluntary repossession happens when the borrower decides it’s in their best interest to return the collateral before the lender forces them to do so.
How Does a Repo Work?
The repossession process may vary across different lenders, but they’re generally the same.
Lenders start by hiring a repossession company to retake the collateral if you fail to make your payments for at least three months or longer.
The repo company will locate the collateral and then reclaims it.
Although rare, sometimes the repo company may reclaim it without notice.
Once the collateral is taken out of your hand, the lender will liquidate the collateral by selling it to cover the remaining amount owed.
These conditions usually make up for missed payments or pay off the entire debt.
From our experience, if you can meet lender conditions before repossession takes place, you may be able to get your collateral back while avoiding credit damage.
How Does Repossession Affect Your Credit Score?
From my experience in reviewing credit reports, anytime we see a repossession on the credit bureau, we always treat this as a very serious derogatory (negative mark).
Not only that, it also lowers your credit score by up to 140 points and will remain on your credit history for up to seven years.
So anytime you apply for a new loan or credit, it’s one of the first pieces of information that pops up along with bankruptcies and ongoing collections.
If you’re reading this, we want you to know there is hope to bounce back.
Something that we always tell our readers often is that as long as you consistently rebuild your credit by showing good payment history for over 2 years, then when you apply for new credit, you can explain to most lenders that the previous repossession was an isolated life event.
Removing A Repossession From Your Credit Report
If you’d like to remove repossession from your credit report, there are three options.
Firstly, if the repossession is due to fraud or identity theft, we recommend that you always dispute credit report errors immediately to have the repossession temporarily removed from the credit bureau during the investigation.
This would instantly increase your credit score as late payments and outstanding debts negatively impact your credit report.
Secondly, you can always write a goodwill letter to the lender and explain how it was an isolated life event and that you’re open to negotiating ways to remove it from your credit report.
Lastly, if all else fails, you can consolidate your debt with a loan or use a balance transfer card to pay off the repossession in full.
That way, once your credit report gets updated, it will show that the repossession is already paid in full, and the best part is that you’ve also started to rebuild your credit.
How To Rebuild Your Credit After A Repossession
The best way to rebuild your credit is consistently showing good payment history for at least 12-24 months.
That means paying all your bills on time, even if it’s just the minimum amount due, but we still recommend paying in full as credit utilization also has a big impact on your credit score.
This will show lenders that you are creditable, trustworthy, and financially responsible as a borrower.
You can also apply for the following to rebuild your credit:
- Credit Builder Loans
- Bill Payment
- Rent Payment
- Subscription Payment
- Secured Credit Card
- Line of Credit
- Debit Card
The list above is a summary of the different types of credit-building apps that you can leverage with no credit pull and jump straight into rebuilding your credit history.
How To Proactively Prevent A Repo
The best way to avoid repossession is to stay on top of your payments and always leave some extra funds for rainy days.
If you’re having trouble making payments, contact the creditor immediately.
Most of the time, they may offer payment reductions or pause payments for a month or two in exchange for a fee.
Key Considerations For Repossessions
Having a repossession is no fun, and we recommend practicing the following:
- Always make sure you can afford to pay for the property (home, car, etc.) before making the purchase
- Leave extra funds for rainy days, as you never know the unexpected
- Monitor your credit report for any unusual activities
- Consider negotiating with the creditor if you are falling behind in payments
- Be proactive in rebuilding your credit by paying all of your debts on time
Filing For Bankruptcy And You Have A Repossession On Your Credit History
In the event of bankruptcy, a repossession will remain on your credit history for up to 7 years.
So it is best to avoid filing for bankruptcy since you are not guaranteed to remove the repossession.
Your best bet is to negotiate with the creditor and have the repo removed, although that would take a lot of effort and convincing.
The Fulton Decision and Repossessions
In 2011, The Fulton decision was a landmark legal case that changed how repossessions are handled.
It stated that creditors must provide notice to borrowers before they can repossess property, giving them time to respond and enter into negotiations with the creditor.
This ruling was put in place to protect consumers from unfair practices by creditors and give them more rights.
So make sure your rights and interests are protected during the repossession process.
At the end of the day, there are no guarantees that all lenders will follow the Fulton decision.
We recommend taking advantage of this process to negotiate and explain any financial hardship you may be in so the creditors can provide you with other options to avoid repossession.
Bankruptcies and Repossessions Going Forward
Bankruptcies and repossessions will continue as people face financial uncertainties from our economic conditions.
As a result, staying current on your finances and taking advantage of the Fulton decision to negotiate with your lender to avoid repossession is even more important.
Wrapping Up and My Experience With Repossessions
Having worked with clients who had repossessions, we understand the stress and financial hardship it can cause.
It’s important to stay diligent and work with your lender to find the best solution to avoid repossession.
That said, if you already have a repossession on your credit report, focus on rebuilding your credit by making good payment history or leveraging credit-building apps to rebuild your credit score.
Frequently Asked Questions
What’s on a Credit Report?
A credit report shows the following:
- Personal information
- Credit Score
- FICO Score
- Major derogatory (repossession, bankruptcy, unpaid collections, etc.)
- All credit payment history and balance for each tradeline
How Do I Know If A Repossession is Legal?
If you are being repossessed, the repossession must follow the laws in your state.
Generally speaking, lenders must wait until you are more than three months behind on payments, and then they can give you a repossession notification and timeframe.
We recommend negotiating a plan with the lender to avoid repossession during that time.
How Does A Car Repossession Affect Your Credit?
A car repossession is just like any repossession that affects your credit score negatively.
Late payments and collections related to the repossession will be reported to the major credit bureaus.
Once it gets reported, it will stay on your credit report for up to seven years unless the repossession is disputed.
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