When you stop making payments on financed property, the lending institution that holds the loan can seize the property through foreclosure or repossession. Foreclosure refers to real estate seizures. Repossession applies to any non-real estate item you financed that was subsequently seized. The term, however, is most often used to refer to seized vehicles. Both foreclosure and car repossession are financially and emotionally damaging, but in some situations one is worse than the other.
Credit Damage
The amount of credit damage you suffer depends partially upon how much money you owed when your lender seized your property. Because homes are worth more than vehicles, a typical foreclosure entry will hit your credit report harder than a repossession. In addition, foreclosure is a matter of public record whereas repossession is not. Thus a foreclosure results in not only a damaging report from your lender, but a court record appearing on your credit file noting that a foreclosure took place. The public record noting the foreclosure does additional damage to your credit rating. A foreclosure will cost you anywhere from 85 to 160 points after it hits your credit report.
Lawsuits
Regardless of whether your property is foreclosed upon or repossessed, if the lender cannot recover your debt by selling the property, you still owe the difference. Lenders often sue consumers for the remaining deficiency following a foreclosure or repossession. Foreclosure deficiencies are typically much higher than deficiencies consumers owe following a car repossession -- and debtors can end up paying for these loan deficiencies for many years after losing their homes. The higher the deficiency, the longer you must submit payments to the lender in order to pay it off.
One benefit that foreclosure has over repossession in this scenario is that some states, such as California, do not allow lenders to sue former homeowners after foreclosing on their homes. Thus, if your state's laws prohibit the practice, you may owe a deficiency after a vehicle repossession that you would not owe after foreclosure.
Tax Consequences
If your lender chooses to write off your debt as a business loss rather than file suit against you, you are responsible for paying taxes on the lender's loss. Because foreclosure deficiencies are much higher than repossession deficiencies, foreclosure could leave you facing a more substantial tax debt at the end of the year.
Time Frame
Car repossessions take place relatively quickly. State laws vary but, in general, an individual can come onto your property to repossess your car, provided he does not breach the peace in the process, after only a single missed payment. This does not give you much time to make alternate transportation arrangements. Foreclosures take months and, occasionally, up to a year or more to complete. This provides you with ample time to make alternate living arrangements before the bank evicts you from your home.
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