Voluntary Surrender

Voluntary surrender allows a borrower to voluntarily give back or surrender to the lender an asset, such as a car, when the borrower can no longer make payments for the loan. 

Voluntary surrender may be preferable to a forced repossession because it allows the borrower to avoid court appearances, repossession fees, and lengthy correspondence between the lender and borrower.

Unfortunately, voluntarily surrendering any type of asset will have a negative impact on the borrower’s credit rating. For example, the voluntary surrender is also treated like repossession after the asset is confiscated, and can potentially create a deficiency balance which may, in some cases, have to be repaid by the borrower.

Deficiency balance and voluntary surrender

Voluntarily surrendering an asset allows the lender to sell the property, potentially at an auction. Unfortunately, the proceeds from the auction may or may not repay the lender the amount the borrower owed for the original loan. If the sale price is lower than the original loan amount a deficiency balance exists. 

State laws vary, but there are certain regulations and laws which must be followed prior to the sale of the property. For example, the lender is generally required to send notice of the sale, including the date, time, and location. They are also required to provide information about the sale, including the amount which is still owed for the property or asset. The sale must also be commercially reasonable, although this standard has been debated and interpreted differently in various courts. 

Unfortunately, as mentioned above, property sold at auction may not sell for the highest possible price, and the borrower may owe the lender for the deficiency balance. Whether or not the borrower will have to pay the deficiency balance, however, will be determined by state law. 

For example, in some states, such as Florida, the deficiency balance does not have to be paid if the unpaid balance at the time of default is less than $2,000. Other states limit the collection of the deficiency balance if the asset was worth $1,000 or less at the time of purchase. Review your state’s laws for more information. 

Voluntary Surrenders and Your Credit Report

Voluntary Surrenders, charge offs, and repossessions will all remain on a borrower’s credit report for seven years from the date of the first missed payment that initiated the action, also referred to as the original delinquency date. After seven years the account will be deleted.

If the lender took legal action to collect the deficiency balance by filing a judgment this action will also remain on the borrower’s credit report for seven years from the date the judgment was filed.