Repossession or Bankruptcy, What’s The Better Option?

reposession or bankruptcy Here at YourCreditAttorney, we are often asked questions about what to do about specific circumstances and what are the effects on your credit report and score.  And one of those frequent questions is what to do when you are having problems paying your car payments.

Many times clients ask whether they should just let the lender repossess the vehicle or should they just file bankruptcy and wipe all their debts away.

Unfortunately the answer to this is complex (seems like all the good answers are), but here’s a good framework for making the right decision.

A repossession will show on your credit report for seven years, while a bankruptcy will be on your record for either seven or 10 years depending on the chapter you qualify for and file. A repo will also be more likely to get in your way should you want to purchase and finance another car before the seven years is up rather than a general bankruptcy might. Defaulting on a car debt will make a car lender more nervous than a general default because you might do it again … to him!

If you are managing all your other obligations and the second car loan is the only payment you are unable to make, bankruptcy is most likely an overkill solution — much like nuking the ants in your kitchen to get rid of them. Yes, it works, but the collateral kitchen/home/neighborhood damage is considerable.

Be aware that allowing the lender to repossess your car will not end your obligation to pay. Here’s what will happen: The lender will sell your repossessed car at auction. You will still be responsible for paying the difference between what your vehicle sells for at auction and the balance left on your original car loan. Plus, you’ll owe repossession and other fees that the lender is allowed to by the terms of the loan to add to the debt balance. So, you will still owe on a car you no longer have. A real bummer!

Before you drive down this road, I have a question for you. Would eliminating your second car loan payment really solve your financial problem? Life is not usually that simple. …

Here are some alternatives: Rather than allow a repossession, I suggest that you sell the car yourself. It is likely that you will end up selling the car at a loss, but it will almost certainly be less of a loss than what you would owe after a repossession. In addition, you will have some control over the transaction. You would need to come up with the difference between what is owed on your car loan and the purchase price you agree to, so the lender will release the title to the new vehicle owner. But that may not be a big stretch.

Another possibility would be to trade in both cars on a new (but inexpensive) car and roll the outstanding debts into the new car loan for a longer period of time at a lower rate. This may lower your payment enough to make things work.

…. For a repossession or bankruptcy you can expect your credit score to drop anywhere from 60 to 240 points depending on what your score is now. The higher the score, the greater your point drop will be. No, that’s not unfair! It just recognizes the larger gap between what your score said about you in the past and what reality has shown your true risk profile to be….More at Have Car Repossessed or File for Bankruptcy? – Fox Business

Either way you cut it, this isn’t a great position to be in, but when time’s are tough it’s better to make an informed decision rather than having the decision made for you.

Regardless of which path you take, car reposession or bankruptcy, just know your credit will take a hit.  But also remember that with the help of what you learn here, and through our free Credit Secrets course, you can also mitigate and reduce the effects.

Remember to comment below and let us know if you or someone you know has been in this situation and which path you chose.

Image by meshmar2 via Flickr
About Anthony Candella

Anthony is the founder and Directing Attorney of and has been helping consumers just like you understand and improve your credit and financial situation since 2003.