Repossession or Charge-Off, What Is Worse?

When you buy a car, house or anything of value, you can pay for it with a loan and pay back the loan in installments. If you don’t have enough income to meet your financial obligations, it can be difficult for you to make your loan payments. Your lender might take back or repossess the asset, or might charge off the debt if you don't pay. While both are less than ideal scenarios, repossession can be worse than a charge-off because you also lose the asset.

Sales contracts often include a clause that tells you what happens if you miss payments. Lenders can take back, or repossess, the property, and payments you’ve already made are not refunded. The lender will send you a nonpayment notice and inform the police or sheriff’s department about the repossession. If it’s a movable asset – such as a car – the lender might charge you for storing and transporting it. Many repossessions are involuntary, but you also can voluntarily surrender the property if you can’t make payments. You might be able to negotiate a settlement and save on the costs of the repossession.

Whether voluntary or involuntary, a repossession leaves a negative stain on your credit report for seven years, and will reduce your chances of getting future credit. If you do get credit, you’ll likely pay extremely high interest rates. Lenders often try to sell repossessed properties to recover the cost. However, you’re still liable for the loan. So if the sale price doesn't cover the balance on the account, the lender might come after you for the rest of it.

Sometimes, after trying to get payments and assessing your situation, a lender might write off, or charge off, your balance as bad debt or a loss. Even if the lending company writes off the balance, you’re still liable to pay it. Collection procedures therefore continue, and the lender might look for a court judgment or send your account to a collection agency. The collection agency can either represent the lender or buy the debt. If a collection agency buys your account, you’ll pay the agency directly, and you might pay more than the original debt because the agency levies interest and fees.

Your charged-off account also remains on your credit report for seven years. The clock starts ticking on the date of your first missed installment. If you pay off your debt to the collection agency, the account status on your credit report updates to “paid collection,” whereas if you settle for a reduced amount, the status changes to “settled for less than full balance.” If your lending company takes you to court and you negotiate for a smaller amount of your debt, the civil judgment will show up on your credit record. If the balance is forgiven, the amount you don’t pay becomes income, and you’ll pay taxes on it.

Repossession can feel like the worse of the two because it’s essentially a double whammy: You lose out financially because the lender gets to keep the money you already paid, and the lender also gets the asset. Furthermore, the lender might charge you for repossession and storage costs, as well as any expenses it incurs to prepare the asset for sale. Although, it doesn’t happen frequently, the lender might sell the asset for an amount that is more than you owe plus the additional expenses, in which case that surplus is yours. This means that your debt is paid, and you can move forward. In such an unlikely case, a charge-off would be worse, since you’re still left with an outstanding balance in addition to the ding on your credit report.