Repossessions and charge offs are both very damaging to credit reports, and either could make it difficult to obtain competitive rates on loans and credit cards for several years. They serve as a red flag to future creditors because they show the debtor did not pay a loan as agreed. Although both are bad for credit, repossession is worst because it leads to at least two major negative entries on credit reports.
Process
A repossession is more harmful for your credit report because it also includes a charge off. For example, a credit agency on an automobile loan may close the loan account after two or three missed payments and list it as a charge off. A charge off is an account the lender considers noncollectable. After the charge off, the lender moves on to repossession. Both entries could appear on credit reports in the same month.
Considerations
A repossession, along with an accompanying charge off, can cause credit scores to tank. People with the highest credit scores have the most to lose. Credit scores range from 300 to 850, with scores of 720 or higher representing the best credit. It is impossible to maintain a 720 credit score with recent charge offs or repossessions appearing on credit reports. The entries will remain on credit reports for seven years, although their impact on scores will diminish as they age. However, someone looking to achieve a 720 or higher credit score may not realize that goal until the charge off or repossession is completely off the credit report.
Effects
A repossession is also worst financially than a charge off. A charge off on a $300 credit card bill is a serious matter, but a debtor can eventually pay the debt and move on without much harm except to credit scores. But a repossession of a $20,000 car can have wide-ranging effects. Auto lenders sell cars at auction after repossession, and a car selling for $20,000 at auction may have an outstanding loan balance of $27,000. That's because cars often depreciate faster than debtors can pay off the loan. Lenders bill former car owners for the difference in the auction sales price and the balance remaining on the loan. That's called a deficiency balance -- a new debt the debtor must pay.
Legal Issues
Auto lenders can file a lawsuit in civil court for a deficiency balance and easily win the case. That could prompt a judge to issue a court judgment requiring full payment of the deficiency balance. If the debtor does not pay, the judge can order garnishment of the debtor's bank account or wages. The entire process makes repossession much worse than a charge off.
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