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You cosigned for your brother's auto loan with the best of intentions, and thought everything was going fine until you spotted a tow truck in his driveway. Not long after, he sends you a text saying his car has been repossessed.
You know a repo is bad news for your brother, but what about for you? Unfortunately, as a cosigner, you are equally responsible for the financial burden of the loan even though you didn't own the car and didn't make payments.
Here's what cosigners should expect when a borrower's car is repossessed.
How Does Auto Repossession Work?
When a car is financed, the lender owns the vehicle until the loan is 100% paid off. The vehicle serves as collateral for the debt, and the lender can repossess it if the borrower falls behind on payments.
Though some loan agreements allow repossession as soon as the borrower misses a bill, many lenders will try to collect payment for weeks or months before taking the next step. If that doesn't work—and the borrower fails to respond to notifications or make payments—the lender can, in most states, repossess the car without warning, and from almost anywhere. (A repossessor can't, however, commit a "breach of the peace" while doing so; if it does, the borrower may have legal recourse.)
Repossession is really bad news for both the borrower and the cosigner. Not only will the borrower lose their mode of transportation, but one of you will likely have to pay the remaining balance, and credit scores belonging to both of you will take a hit in the process. Credit scores for both signers are also likely to be damaged by the late payments that lead up to a repossession as well.
Are Cosigners Liable for an Auto Repossession?
As a cosigner, you're essentially agreeing to make payments on the loan if the borrower can't. That means your signature on a loan can help a friend or family member get a loan they otherwise wouldn't be able to. It also means you're equally liable for the debt, which might compel you to step in and help with loan payments if the borrower begins to have trouble.
If the car loan goes into default and results in car repossession, you'll be equally liable for that too, including any deficiency balance.
A deficiency balance is what results after a lender sells a repossessed car at auction but can't get enough for it to make up its financial loss. Unfortunately, auctioned vehicles often sell for less than they're worth, which leaves the borrower and cosigner on the hook to pay the deficiency balance. The amount owed can include any remaining loan balance, combined with fees incurred by the repossession, minus proceeds from the sale.
Let's say the borrower still owes $8,000 on their auto loan. If the lender sells the car for $5,000, there would be a deficiency balance of $3,000—plus any repo- or financing-related fees.
The lender will either try to collect this amount itself, or sell the debt to a third-party collections agency. (Note that, in some states, lenders can't pursue this debt if the original price of the car or the resulting deficiency balance is less than a few thousand dollars.)
As the cosigner, you and the borrower are equally responsible for paying the deficiency balance—and could be taken to court. To avoid this, you could try to negotiate a settlement with the creditor, paying a lump sum less than the total owed to have the entire debt erased. Just be aware that you may owe taxes on the amount forgiven.
Do Cosigners Have Rights When a Car Is Repossessed?
Although you have significant liabilities as a cosigner in an auto repossession, you also have rights.
First off, the creditor must sell the repossessed car in a "commercially reasonable manner." While the definition of this varies by jurisdiction, the Federal Trade Commission says a "resale price that is below fair market value may indicate that the sale was not commercially reasonable." If that occurs, you may be able to hold it against the creditor in court.
Your creditor must also provide certain written notices to you soon after the repossession (usually within five days). Specifically, you should receive information regarding:
- Redemption, wherein you can pay the full balance due, plus fees, to buy back the car.
- Reinstatement, wherein you make all the past-due payments, plus fees, to get current on the loan and get the car back (access to this option depends on your state and contract).
- When and where the car will be sold.
- How the deficiency balance is calculated.
Be sure to keep careful records; if the creditor doesn't follow these rules, you could integrate that into your legal defense.
You can also ask the creditor for permission to sell the car yourself, thereby saving it money on fees—and potentially garnering a much higher price. If the lender refuses, you could potentially use that in court too.
How Can Repossession Affect Your Credit as a Cosigner?
As a cosigner, you are just as responsible for the loan as the main borrower. Cosigned debt shows up on your credit reports, and late payments or defaults can have serious ramifications for your credit scores.
That means your credit is equally liable to damage from a repossession, too. When a car is repossessed, it'll leave a black mark on both the borrower's and cosigner's credit reports for seven years.
Not only that, the events leading up to repossession will also have an impact. Each will generally appear as its own line item on a credit report and have its own timeline for removal. Here are some of the other negative marks that may show up on your credit reports before and after a car is repossessed:
- Late payments
- Loan default
- Loan sent to collections
- Court judgments
Given that payment history accounts for 35% of your FICO® Scores☉ , a car repossession, and the negative marks leading up to it, will likely cause your credit scores to drop significantly—even if you're a cosigner.
How to Build Your Credit After Repossession
While the impact of the repossession will fade with time, it'll take seven years (from the date of the first missed payment) to completely fall off your credit reports.
If you were the cosigner, you probably had strong credit to begin with—so you know what it'll take to build it back up. Besides paying off the car's deficiency balance to show lenders you've made good on the debt, you can also focus on:
- Making on-time payments: Recent payment history is the most important factor in the most common credit scores. So be sure to avoid any late payments—on your loans and on loans you've cosigned—moving forward. If you have any other past-due accounts, get current as soon as you can.
- Paying down debt: The amount of revolving debt you have compared with your limits (credit utilization) is the second most important factor in your scores. Work to pay down your other debts and resist any temptation to build them back up.
- Keep old cards open: If you have a credit card you're not using, cut it up or put it in a drawer. Closing the account could eventually reduce your average age of accounts and available credit, which could negatively impact your scores.
- Regularly monitoring your credit: Review your free FICO® Score and credit report, or sign up for free credit monitoring to see where you can make improvements.
- Signing up for Experian Boost®ø: This service adds certain bills to your credit report, which can potentially help you improve your credit with every on-time payment. Things like utility bills, cellphone payments and your Netflix® subscription don't otherwise appear on your report and won't help you build credit.
Experiencing an auto repossession as a cosigner is an awful stroke of luck. But with some effort and some time, you'll be able to bring your scores back up to where they once were.
Note: In light of the coronavirus pandemic, some lenders and states have softened their rules regarding repossessions. If you're in danger of defaulting on your auto loan, look into your state's laws and contact your lender ASAP.