You stepped up to cosign on a car loan for someone you cared about, believing you were helping them get on the road to financial stability. Then, the unexpected happens: you see a tow truck taking their car away, followed by a text message confirming your fear – the car has been repossessed. While you know this is a financial blow to the primary borrower, you might be wondering, “what does this mean for me if a car i cosign repoed?”. As a cosigner, the implications are significant, and understanding your responsibilities and rights is crucial.
This article breaks down what you, as a cosigner, need to know when a vehicle you cosigned for is repossessed. We’ll cover your liability, your rights, and how this situation impacts your credit.
Understanding Auto Repossession Basics
When a vehicle is financed, the lender legally owns it until the loan is fully repaid. The car itself acts as collateral for the loan. This means if the borrower fails to keep up with payments, the lender has the right to repossess the vehicle.
While some loan agreements might allow for repossession after just one missed payment, many lenders typically attempt to work with borrowers for a period, trying to arrange payment before resorting to repossession. However, if these attempts fail, and the borrower doesn’t respond to notifications or make payments, the lender can, in most states, repossess the car, often without prior warning and from virtually any location where the car can be accessed legally. It’s important to note that repossession agents must not breach the peace while reclaiming the vehicle.
Car repossession is a serious negative event for everyone involved, especially both the borrower and the cosigner. The borrower loses their transportation, and both parties face potential financial obligations for the remaining loan balance. Critically, both the borrower and cosigner will see significant damage to their credit scores, not only from the repossession itself but also from the preceding late payments that led to it.
Cosigner Liability in a Car Repossession Scenario
When you cosign a car loan, you essentially guarantee the loan. You are legally agreeing to pay the debt if the primary borrower defaults. Your willingness to cosign often helps someone secure a loan they might not qualify for on their own, making car ownership possible for them. However, this also places you in a position of significant financial responsibility. If the borrower encounters financial difficulties and struggles to make payments, the lender will look to you, the cosigner, to fulfill those obligations.
If the loan defaults and the car is repossessed, your liability as a cosigner is the same as the primary borrower’s. This includes responsibility for any deficiency balance that remains after the car is sold at auction.
A deficiency balance arises when the sale price of the repossessed vehicle at auction is less than the outstanding loan amount, plus the costs associated with repossession and the sale itself. Auction prices for repossessed vehicles are frequently lower than their actual market value, creating this gap. Both the borrower and the cosigner become legally obligated to pay this deficiency balance.
For example, imagine the outstanding loan balance is $8,000. If the repossessed car is sold at auction for $5,000, a deficiency balance of $3,000 remains, in addition to any repossession and sale-related fees.
The lender will attempt to recover this deficiency balance, either directly or by selling the debt to a collection agency. It’s worth noting that some states have regulations that may prevent lenders from pursuing deficiency balances under a certain dollar amount.
As a cosigner, you share equal responsibility with the borrower for this deficiency balance. Failure to pay can lead to legal action, including lawsuits. One potential strategy to mitigate this is to negotiate a settlement with the creditor, offering a lump-sum payment that is less than the full deficiency balance in exchange for debt cancellation. However, be aware that any forgiven debt may be considered taxable income.
Cosigner Rights During Car Repossession
Despite the significant liabilities, cosigners also have specific rights when a car they cosigned for is repossessed.
Firstly, the lender is legally required to sell the repossessed vehicle in a “commercially reasonable manner”. While the exact definition can vary by location, the Federal Trade Commission suggests that a sale price significantly below fair market value might indicate that the sale was not commercially reasonable. If the sale is deemed not commercially reasonable, you may have grounds to challenge the lender in court.
Secondly, the lender must provide you with certain written notices promptly after the repossession, typically within five business days. These notices must include information about:
- Redemption: This option allows you to pay the full outstanding loan balance, including all repossession fees, to reclaim ownership of the car.
- Reinstatement: Depending on your state and the loan contract, you might have the right to reinstate the loan by paying all past-due payments and associated fees, thus becoming current on the loan and regaining possession of the vehicle.
- Sale Details: You must be informed about when and where the car will be sold, giving you the opportunity to potentially bid on it or have someone else do so.
- Deficiency Balance Calculation: The lender must provide a clear explanation of how the deficiency balance was calculated, including all charges and credits.
Maintaining meticulous records of all communications and notices from the lender is crucial. If the lender fails to adhere to these procedural rules, it could strengthen your legal position should disputes arise.
Furthermore, as a cosigner, you can proactively request permission from the lender to sell the car yourself. This could potentially result in a higher sale price than an auction, reducing the deficiency balance and associated fees. If the lender denies this request, it could be another point to raise in court if you believe the lender is not acting in a commercially reasonable manner.
Impact of Repossession on a Cosigner’s Credit
As a cosigner, it’s critical to understand that you are equally accountable for the loan as the primary borrower. The cosigned debt appears on your credit report, and any negative actions, such as late payments or default, directly impact your credit score.
Therefore, a car repossession will have a similar negative effect on your credit as it does on the borrower’s. A repossession remains on both credit reports for seven years, marking a significant negative event.
Beyond the repossession itself, the negative payment history leading up to it also damages your credit. Each missed payment typically appears as a separate negative entry on your credit report, each with its own removal timeline. Negative entries that can appear on your credit report related to a car repossession include:
- Late Payments: Each missed payment will be reported.
- Loan Default: When the loan is declared in default, it’s noted on your credit.
- Collection Accounts: If the debt is sent to a collection agency, this creates another negative mark.
- Court Judgments: Lawsuits and judgments related to the debt will also negatively impact your credit.
Payment history is the most significant factor in your FICO Scores, accounting for 35% of the score calculation. A car repossession and the associated negative marks can severely decrease your credit score, even if you were only the cosigner. This can make it harder and more expensive to obtain credit in the future, including for mortgages, future car loans, or even credit cards.
Rebuilding Credit After a Cosigned Car Repossession
While the negative impact of a repossession is long-lasting, it is not permanent. The repossession will automatically be removed from your credit report after seven years from the date of the first missed payment that led to the repossession.
If you were a cosigner, you likely had good credit to begin with. Rebuilding your credit after a repossession requires consistent effort and responsible financial behavior. Besides addressing the deficiency balance to demonstrate responsibility to future lenders, focus on these credit-building strategies:
- Consistent, On-Time Payments: Make every payment on time for all your debts. This demonstrates responsible credit management.
- Maintain Low Credit Utilization: Keep your credit card balances low relative to your credit limits.
- Avoid Opening Unnecessary New Accounts: Focus on managing your existing credit responsibly before taking on more.
- Regular Credit Monitoring: Monitor your credit reports regularly to track your progress and identify any errors.
Experiencing a car repossession as a cosigner is a challenging situation. However, by understanding your responsibilities and rights, taking proactive steps to manage the situation, and focusing on rebuilding your credit, you can navigate this financial setback and regain your financial footing over time.
Note: If you are facing potential auto loan default, it is crucial to contact your lender immediately to explore possible options for assistance and to understand your state-specific regulations regarding repossession.
