Voluntary Surrender: Handing the Car Back to the Lender

What voluntary surrender means

In a voluntary surrender, sometimes called a voluntary repossession, you tell the lender you cannot keep paying and arrange to drop off the car, or have it picked up, at an agreed time. It often happens after a lender demands the car and you cannot agree on a way to catch up. The legal effect is close to a repossession: the lender takes the car because you are in default, then sells it under the same rules that apply after any repossession.

That means the lender must still send you a notice before the sale, run every part of the sale in a commercially reasonable way, and credit the sale price to your account. If the price does not cover the balance plus allowed costs, you owe the rest. Our guide to the deficiency balance explains how that figure is set and how to check it.

Handing the car over does not end your rights to it. Until the sale you may be able to buy it back by paying everything owed: the past-due payments, the rest of the loan and costs such as storage and preparing the car for sale. You may also be able to bid at the sale, and some states let you reinstate the loan by paying only what is past due plus the lender's costs.

Voluntary surrender compared with repossession

A surrender does not make the sale price higher, and the lender still controls the sale. The savings come from costs you avoid, not from a better result. Experian, one of the three national credit bureaus, says lenders may see a surrender as slightly less negative than a repossession, but both do serious damage to your scores, and any remaining balance keeps being reported. If it goes unpaid, it can be passed to a collection agency and add a collection account to your reports.

Alternatives to consider first

If several debts are piling up, or bankruptcy is a possibility, talk to a legal aid office or a bankruptcy lawyer before you hand the car back. Bankruptcy has its own rules for keeping or returning a car, and a debt discharged in bankruptcy is treated differently for taxes.

How to surrender a car the right way

1. 1 Call the lender and ask about the process. Ask where and when to return the car, and which fees will still apply.
2. 2 Ask whether it will settle the balance. Some lenders agree to accept the car plus a smaller payment, or to waive part of a deficiency. Get any promise in writing before you return the car.
3. 3 Clean out the car. Remove your belongings, garage remotes and toll tags, and erase saved contacts and addresses from the car's screen.
4. 4 Document its condition. Take dated photos of every side, the interior and the odometer, and keep a copy of anything you sign at drop-off.
5. 5 Keep insurance until the handover, then cancel the policy and ask the insurer about any unused premium.
6. 6 Watch the mail. Look for the notice of sale and the later written explanation of any deficiency, and keep both.

Credit and tax effects

The surrender and the missed payments before it can stay on your credit reports for up to seven years. A future car lender will see it and may put you in a higher-rate tier for a while. Our sister site Funditia explains how to rebuild a credit score after a setback.

If the lender later forgives part of a deficiency, the canceled amount is generally taxable income and you may receive Form 1099-C. Exclusions exist, such as insolvency or a discharge in bankruptcy, and you claim them on Form 982. Ask a tax preparer before you file.

After the sale, the lender must give you a written explanation of how it reached any deficiency, at the latest when it first demands payment in writing. If you ask for one in writing, it must answer within 14 days. If the figures look wrong and the lender will not fix them, our complaints guide lists the agencies that take auto loan complaints.

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