What is Repossession? How Default Can Lead to Property Loss and Credit Damage

Now, I know those scary movies make repossession sound like something horrifying, but it does not take a priest or spooky rituals to drive out the devil. All you have to do is pay your bills on time, and that will keep the repo agent away from your doorstep.

Repossession is when a lender reclaims property after the borrower defaults (i.e., stops paying) on a loan.

Repossession occurs when you stop paying for something you bought with a loan, typically a car or a house (where it’s called foreclosure). The lender gets tired of waiting for payments, so it decides to take back what’s theirs. 

Repossession is the lender’s way of saying, “If you’re not going to pay for it, I’m taking it back!” 

I’ll walk you through repossession, the types of property that can be taken back, and what it does to your credit score. Spoiler alert: It can really mess up your credit if you let it get that far.

You really ought to know what repossession means and when it happens. Otherwise, you may wake up one day with your car or home snatched out from under you — not the type of surprise anyone wants!

Losing Collateral to Repossession 

Now, let’s talk about the types of things you may lose due to repossession. First of all, there are vehicles. You miss a few car payments, and the next thing you know, the repo agents are loading up your truck or car onto a trailer and hauling it off.

Homes can be taken, too, when you fall behind on mortgage payments, and that is a nightmare you don’t want to go through. Even electronics, such as that fancy flat-screen TV you couldn’t resist, can be dragged off if you borrowed money to buy it.

Lenders like to deal with collateral, which means that the loan is secured by property that the lender can take in lieu of repayment. Property that you finance by taking out a loan becomes its own collateral. Lenders are basically saying, “If you can’t repay your loan, I’m going to grab something valuable from you.” 

Collateral is important because it protects lenders from losing their money. They figure that if you’re struggling to pay, they can at least take back the thing you borrowed money for and sell it to cover their losses.

What Leads to Repossession 

Repossession usually comes knocking after you’ve missed several payments on a collateralized loan. The lender may have been really patient. However, after a few months of empty promises, they’ll send in the repo agent to collect what’s due. Miss enough payments, and that’s when your property starts disappearing.

Repossession can take on different forms depending on what kind of loan is involved. Whether it’s car loans, house loans, or anything else, each type has its way of souring the soup when you fall behind on the loan repayments.

Auto Loans 

Auto loans are generally the big enchilada of repossessions. Miss enough car payments, and that shiny truck or SUV might just roll out of your driveway one night without so much as a goodbye. 

Car repossessions in 2024 were rising faster than a sunflower after a good rain — up 23% from last year — and we’re talking numbers not seen since prior to the pandemic. With folks pinched by interest rates as high as 7.3% on new car loans and a jaw-dropping 11.5% for used, that’s a lot of people staring at empty garages. It’s no wonder repo agents have been busier than a hound dog on a manhunt.

Subprime borrowers — folks with shaky credit — are getting hit hardest, with 5.6% falling behind on their car loans by at least 60 days. If you aren’t careful, you might just see your ride disappear as suddenly as a lightning strike on a mountaintop.

Now, if the repo agent does come for your ride, don’t abandon hope. You can try getting it back by paying off what you owe or making a new deal with the lender. Lenders usually want their money more than your wheels, so if you scrape enough cash together, that car may be back in your driveway quicker than a fast food delivery.

You may owe a deficiency balance if the lender sells your repossessed card for less than the loan amount.

The lender might sue you to collect the balance.

Mortgages

Foreclosure means taking ownership of your house. If you stop paying your mortgage, the lender will eventually swoop in and change the locks. Foreclosure isn’t just about losing a roof over your head; it also means eviction, which is when they send the sheriff to show you the door.

Foreclosure rates in 2024 are rising like a creek after a storm! This past July, about one in every 4,414 homes had a foreclosure filed against it. Some places are feeling the squeeze harder than others: Delaware, Nevada, and Utah are seeing the highest rates, with about one in every 2,200 homes in trouble. 

Cities like Las Vegas and Philadelphia aren’t being spared either, as lenders initiated foreclosures on more than 21,870 properties that month. That represents an 18% jump from June. And if that weren’t enough, lenders in January 2024 repossessed 3,954 homes — that’s a 13% increase from the month before.

Losing your home must be painful, emotionally speaking, like a mule kick to the gut. Just think about it, from having your own place to being out on the streets! Foreclosure also leaves a scar on your credit score, and it may take years to climb out of the financial crater it creates. 

Just remember, when the lender starts circling in, you’ve got to stay sharp and act fast if you want to keep your homestead from disappearing. I will explain the process a little further down.

Personal Property Loans 

When you borrow money to buy personal property — whether a fancy dining-room set, flashy earrings, or the newest electronic gizmos — non-payment means you can also kiss the goods goodbye. 

Aside from vehicles, some of the more common things to be repossessed include furniture, electronics, jewelry, appliances, and musical instruments.

So, if you took out a loan for that new sofa and didn’t pay, well, let’s just say you may be sitting on the floor watching the repo truck drive away. 

Now, don’t go hanging your head in shame when the neighbors see that repo truck pulling up. You aren’t the first person to lose a thing or two, and sure as shootin’ you won’t be the last. Folks might wag their tongues for a bit, but they’ll be on to the next bit of gossip before long.

Repossession isn’t just about some truck rolling up and grabbing your stuff. It follows a strict legal route that both lenders and borrowers must honor. The process is important to understand, as it may help protect your rights and maybe even halt that repo truck in its tracks if something is amiss.

Lender’s Right to Repossess 

Most lenders have the legal right to dive in and grab back any property you use as collateral if you fail to pay on time. It’s all in that loan contract you signed, usually in fine print that’s easy to skim over. Once you stop paying, the lender doesn’t need much more than that contract to process the repo.

Anytime you borrow some money against a car, house, or other valuable property, the lender puts a lien on it.

A lien is a legal claim a lender has on a borrower’s property, which allows them to repossess or sell the asset if the borrower fails to repay the loan.

If you don’t pay up, the lender gets dibs on taking back the property. The title may still be in your name, but that lien gives lenders the power of repossession, even when the property’s sitting on (or attached to) your front porch!

Notice Requirements for Repossession 

The lender is typically compelled to give notice before the repo agent shows up. However, the requirements can differ by location. Some states mandate a certain number of days’ notice, while others may not require much warning.

Notices can arrive at any time, but mostly, you have to first miss several payments. If you receive that unwelcome notice, it’s critical not to ignore it but to work something out with the lender.

Under your state laws, you may be able to catch up on the payments and/or renegotiate the loan terms or even stop the repossession if you act fast enough.

Every state has its own rules about this, so know how things go down in your locale. Some states give more time to respond, while others let the repo agent come knocking a lot sooner than you expect.

How Foreclosures Proceed 

When it comes to homes, repossession takes the form of foreclosure, and that’s a whole other ball of wax. Once you stop paying your mortgage, the court can get involved. That’s when things start to get really serious.

A breakdown of foreclosure steps:

1. Official Communications: The foreclosure dance begins when the lender sends you something called a Notice of Default — a fancy letter that says, in essence, “Hey, you have been a little remiss in your mortgage payments, so we are going to file a lien against your home and attempt to take it in settlement if you do not straighten things out.” Most states require a 30-day notice before the lender can begin legal action against you, though that does vary by location​.

2. Right of Response by the Homeowner: Once notice is given, it isn’t over yet. There is still hope of redeeming your house. You may pay what you owe during this period, perhaps before the foreclosure process kicks in, or you may reach an agreement with your lender over loan modification or refinancing. Some states grant extra time for the official start of foreclosure just to respond fast. This is your chance either to pay up or to work out a deal that lets you stay put​.

3. Judicial vs. Non-Judicial Foreclosure: During a judicial foreclosure, the court is in charge, like a quarterback on game day. Here, the lender needs to go to court first and prove you are behind on payments. After that, the judge can give it permission to foreclose. It’s legal hoopla, but it will take a bit more time. The good part is you will have longer to try to fight it off — if you have a case. Now, in a non-judicial foreclosure, the lender doesn’t need a court to do its bidding. This is where it gets fast and furious. Everything’s done via power of sale — that’s when the lender can sell the property without ever seeing the inside of a courtroom. The process is quicker than a chicken on a Junebug, and if you don’t act fast, your property will be gone before you can mount a defense. State law determines how foreclosures proceed. If you’re facing foreclosure, you’ll want to know what type it is. With judicial, you have more time, but then you’re in for a whole rodeo of legal maneuvers. Non-judicial will be faster and cleaner, but you must move quicker than a jackrabbit to preserve your rights.

4. Title Transfer to the Lender: The home’s title is automatically transferred from you to the lender, and it will become the legal owner of the property. Then, it will decide if it wants to auction the property off to get its money. The auction is just a simple public sale where the highest bidder will walk away with your home. If the amount of money brought in by the auction doesn’t quite cover what you owe, you may still be on the hook for the remaining debt, known as a deficiency balance. In most house auctions, when no one buys the house, it usually goes back to the lender as REO: Real Estate Owned.

5. How Evictions Come About: Once the lender has gone ahead and auctioned off the house, the new owner has a legal right to evict you. The sheriff then comes knocking at your door, carrying an eviction notice in hand, asking you to gather your stuff and leave​. Depending on your state, you may have a few days to a few weeks to vamoose.

Foreclosures are never pretty, but knowing the steps can give you time to make any moves that might save your home before the hammer drops.

The Impact of Repossession on Your Credit 

A repossession or foreclosure can take a wrecking ball to your credit score. On average, after a repo, your score can take a drop of 100 to 150 points, and that’s going to hurt when you’re looking at obtaining loans down the road. 

Once it hits your credit report, a repossession sticks around like a bad stain for seven years. This may mean that, for several more years, getting a loan, renting a house, or even opening a new credit card could be akin to trying to ride a bull bareback. 

Here is a chart that shows how long negative items can stay on your credit report, including defaults and repossessions:

That repossession will be a big old red flag to any future lenders, and that makes it difficult to get back up on your feet. You may be able to secure loans, but at higher interest rates and under much stricter terms. Lenders will try to protect themselves from what they feel is a risky borrower, and really, can you blame them?

When times get tough, knowing how to keep that repo agent at bay is like knowing how to keep bears from invading your campground — a matter of utmost urgency. Even if you’re in a bind, there are ways to dodge repossessions and keep your stuff right where it belongs.

Communicate with Your Lender 

The best thing you can do first is to call your lender. Occasionally, it just takes a bit of talking for you to let it know you’re having trouble.

It may be willing to work out a payment plan that gives you a little breathing room. 

Simply put, lenders don’t want the hassle of repossession if they don’t have to face it, so they’re usually open to renegotiating the terms to make the payments easier for you. 

Communication shows goodwill, and it may well get you onto a hardship plan that allows smaller payments until you’re back on your feet. Many folks miss out by not speaking up in time!

Refinancing or Loan Modifications 

If things are really tight, you may want to consider refinancing the loan or request a loan modification. Refinancing means taking out a new loan with easier terms, such as a lower interest rate or a longer repayment term, so that the monthly bill shrinks to something you can deal with.

Just make sure you qualify, as a bad credit score may make this tricky.

Loan modifications, on the other hand, are when the terms of the original loan are changed in some way. You may be able to increase the term of the loan or decrease your interest rate. Some lenders will offer forbearance, where you are allowed to take a break from making payments, usually with no penalty, for a specified time.

Each lender has different rules, so it may be worth asking what they offer. Whether you’re changing the amount you pay or how long you pay it, a modification may allow you enough time to get things squared away.

Voluntary Repossession

If worse comes to worst and you simply can’t make your payments, you may want to consider voluntary repossession. This is where you return the asset in question — say, your car or fancy furniture — to the lender on your own terms.

It isn’t great for your credit, but it sure beats the lender sending a repo truck and racking up extra fees.

When it comes to your home, you may want to resort to a short sale, whereby you sell the property for less than what you owe, and the lender agrees to receive less than the loan balance. It’s a form of loan forgiveness, and you may owe taxes on the amount you save. 

When the house is worth less than the loan, a short sale relieves you from taking a worse hit on your credit report. It is a way of cutting your losses before things get uglier than a three-eyed toad.

We are humans, and therefore we make mistakes. Repossession is a consequence of a financial mistake in which a borrower was unable to make the payments. 

It can be draining emotionally and economically, but at least it brings closure to an unfortunate chapter in your life. Believe me, there are plenty of worse things!