What Causes Repossession & Foreclosure?

Repossession of a vehicle and foreclosure of a home can haunt a consumer's credit report for many years, hindering his ability to qualify for new credit. Understanding the causes of repossession and foreclosure can help you create a sound financial plan to ensure you never fall victim to either of these.

Definition

Repossessions and foreclosures are similar in that a major asset -- a car or home -- is being taken by the bank or lender. The creditor will move to take these assets when the borrower defaults on her financial obligations (i.e., car loan or mortgage) and takes no steps to get current on payments. Because the car or home is the collateral on the car loan or mortgage, the creditor seizes the collateral to sell off and recoup its investment.

Common Reasons

People value their cars and homes. These are often their biggest assets. They're also their most needed assets; after all, people need transportation to get to and from work and run necessary errands, and they need a roof over their heads. Thus, when cars are repossessed and homes foreclosed on, it's often because the borrowers have fallen on hard financial times and lost the ability to make payments on their cars or homes.

Big Picture Trends

The economic recession that started during President George W. Bush's second term in office and continued into President Barak Obama's presidency has affected many Americans. As unemployment rose, many people lost their paychecks and ability to pay their essential bills, including home and car loans. The housing crash made matters worse. Homes that were previously purchased for a lot of money were not worth, in some instances, even half of what they were purchased for. Struggling homeowners then became unable to sell their homes for enough money to cover what they owed the bank. When job loss or other financial hardship occurred, the banks foreclosed on the homes.

Other Factors That Contribute to Repossession and Foreclosure

In a country where millions of people lack health insurance, illness can saddle people with exorbitant medical bills that they must often pay to continue getting medical care. Thus, money that would have otherwise gone to keep current on home and car payments instead went to paying for medical services and medications. Some people succumb to gambling or drug addiction and feed those habits with money that should have gone to pay for loans on their cars and homes. Still other homeowners, seeing their home values fall, have simply walked away from what they saw as an investment gone bad.