Repossession vs Bankruptcy

Repossession Laws

Repossession allows creditors to repossess property which is collateral for a loan if you have failed to meet the terms of the loan contract.Repossession laws vary by state, and if a lender is threatening to repossess your property it is important to understand your state’s laws.

Depending on your state’s laws, if the creditor is not able to recover the full sum that is owed, you may owe your creditor the balance of the loan. If there is a deficiency the creditor may be legally allowed to get a court order, asking the court to issue a deficiency judgment against you. Not only will you have to pay the remaining balance of the debt but your credit score may be lowered and it may make it more difficult for you to get credit in the future.

What is Worse: Bankruptcy or Repossession?

Bankruptcy is a serious financial decision which is not right for everyone. Whether bankruptcy or repossession is better will depend on your financial situation.

Avoiding bankruptcy and repossession is always the first choice. If you have missed payments and the lender is willing to work with you, you may be able to get a loan modification with a lower interest rate or ask for a forbearance, which allows the lender to suspend payments until you can pay make debt payments again. If your lender is willing to negotiate with you, you may be able to avoid both repossession and bankruptcy.

If avoiding bankruptcy is not an option, filing bankruptcy may benefit debtors who have unsecured debts that they cannot pay: unsecured personal loans, high medical bills, or high credit card debts. Repossession may be better for some debtors who own one asset, such as a car, that they cannot continue to finance and eliminating this one debt could substantially improve their financial situation.

Keep in mind both bankruptcy and repossession of property will remain on your credit report and significantly lower your credit score. Filing bankruptcy may allow you to keep certain types of property and help you avoid judgments and wage garnishments if the property is sold at a loss by the creditor. Repossession, however, if state law permits, may result in a judgment against you for the remainder of the loan balance and you will also lose the property.

Whether to file bankruptcy vs. repossession should be discussed with a bankruptcy lawyer.