A repossession could occur if you are delinquent on debt secured by property, such as an auto loan. The mark on your credit report can negatively impact your credit score and can put your repossessed property in jeopardy of being sold or auctioned off. Here's what you need to know about how repossession affects your credit health and how to build your credit back after the fact.
Potential Credit Effects
First, let's talk about what repossession entails. The process isn't universal and the laws and procedures governing repossessions vary from state to state, so if you need specific details on the laws in your state, please check your local state or local resources and reach out to an attorney. In general, a bank or lender may be able to repossess your vehicle or other loan collateral on a secured loan if you are behind on bill payments. Some states might require lenders to provide a final notice and chance to make up payments before repossessing property. The terms and conditions of your contract may also tell you if you get a grace period, so it's wise to check your contract and speak directly to your lender if you're concerned.
If you don't settle the outstanding debt as quickly as possible, you could lose your car or other property in a sale or auction. As we mentioned previously, state laws will govern how the sale has to be conducted and what kind of notice you are entitled to receive about the sale, so we encourage you to visit the website of your State Attorney General or local consumer protection agency for more information. The lender or bank may also have the right to take you to court and obtain a judgment against you, which can also be reported as public record information on your credit report and damage your credit further.
If your car or other property is sold for less than the amount you owe, you may still be responsible for the "deficiency balance," or the remaining difference. This debt amount can remain on your credit report until it is paid. Once you pay the debt in full, the credit bureaus typically continue to report the repossession status on the account on your credit report for seven years from the date of the original delinquency.
Building Credit After Repossession
A repossession is unfavorable to have on your credit report because it suggests to future lenders and banks that you are likely to have a high risk of defaulting in the future. It can also compromise your chances of getting favorable rates and approval on future loans and credit. After a repossession has occurred, the best option for your credit is to pay off the outstanding debt as soon as possible. You can attempt to do so by talking to your lender about a debt settlement or repayment plan. It may also be a good idea to request that the lender or the bureaus report the loan as resolved so that it can be noted as "Paid in Full" or "Satisfied" on your credit report, which could lessen the impact of the repossession on your credit report.
Aside from making that request, the only other way you may be able to build credit after repossession is to practice good credit habits. As time passes, the repossession on your credit report will usually have less and less impact on your credit score until it eventually falls off your credit report seven years after the original delinquency. Good credit habits include paying bills on time consistently, keeping your credit use below 30 percent of your credit utilization rate and other credit-building strategies.
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