When a creditor repossesses your car for defaulting on the loan agreement, it may then attempt to collect the deficiency balance from you. However, there may be circumstances when the creditor cannot go after you for the deficiency. (To learn more about deficiencies in car repos, including when they might occur, see Deficiency Judgments After Car Repossession.)
Some of those reasons include the following:
Defects in Loan Papers
The creditor cannot collect on the deficiency unless they are the legal payee on the note and have a security interest in the car. If a creditor sues you for the deficiency, you can ask that the court dismiss the lawsuit for the following defects:
- the creditor has not produced a written loan or security agreement that shows you owe the debt
- the agreement does not give the creditor a security interest in the car
- the loan agreement does not give the creditor a right to sue you for a deficiency after it has taken the car, or
- the creditor suing you is not the same creditor that is on loan papers and it has not produced an assignment or other legal document that establishes the debt was assigned to it.
For more information on a creditor's obligation to document or verify a debt, see Debt Collection Defense: Requiring That the Collector Document the Debt.
The Creditor Did Not Provide Required Notices
A car loan creditor must provide you with various, timely written notices, as well as give you the opportunity to exercise certain rights. If a creditor fails to give you a required written notice, then you may be able to challenge its claim for a deficiency judgment. Those written notices include:
- your right to redeem the car and when you can do it
- your right to reinstate the loan (in some states) and when you can do it
- if the creditor is selling the car at a private sale, the date of the sale
- if the creditor is selling the car at an auction, the date, time, and location of the sale, and
- a calculation of the deficiency balance (or surplus, if applicable), including a description of fees and charges.
Even if a creditor provides you with the legally required written notices, if it prevents you from exercising your rights related to those notices (such as refusing to accept your payment to reinstate the loan, or preventing you from participating in the auction), then you may still raise that as a defense and even a counterclaim for damages you sustained as a result of any violations.
(For more information on notices that a creditor is supposed to provide you concerning a car repo, see Required Notices in Car Repossessions. Learn about your right to redeem the car or reinstate the loan.)
The Creditor Did Not Sell the Car in a Commercially Reasonable Manner
A creditor must sell the car in a commercially reasonable manner. It must also act in good faith while selling the car, meaning that the creditor must act honestly and fairly. It has to take reasonable steps to find buyers. A creditor must follow standard practices in your area concerning the resale of vehicles. It cannot sell the car to a friend or relative in secret, junk a car that has value or fail to publicly advertise the auction.
For more information on what a creditor must do when selling a repossessed car, see Car Repo Sale: Was It Commercially Reasonable?
The Creditor Did Not Sell the Car At All
If a creditor repossesses your car, but chooses to keep it rather than sell it, it may not sue you for the balance of the loan. Instead, your debt should be canceled. A creditor is required to take steps to minimize losses by selling the car, if it chooses to pursue you for more money. If the creditor keeps the car but then sues you on the balance of the note, this is called a double recovery, and you can raise this as a defense.
You Filed Bankruptcy
If you get a bankruptcy discharge, this will almost always prevent a car loan lender from collecting a deficiency against you. Upon filing for bankruptcy relief, the court immediately issues an automatic stay that orders creditors to stop all collection efforts. If you receive a discharge in bankruptcy, creditors for debts that were included in your bankruptcy are usually permanently barred from collecting those debts from you. (To learn more, see the articles in Your Car in Chapter 7 Bankruptcy and Your Car in Chapter 13 Bankruptcy.)
If the creditor knowingly sues you, continues a pending lawsuit, or demands payment for the deficiency balance after you have filed bankruptcy, it violates the law and is subject to penalties. However, there is an exception to this general rule: If you reaffirmed your car loan in the bankruptcy (sign an agreement renewing the terms of the loan in the bankruptcy), then the lender can pursue a deficiency against you if you later default on that loan. (See Reaffirming a Car Loan in Bankruptcy.)
Aside from repo issues, the creditor may have violated federal or state consumer lending, debt collection, and consumer sales practices laws in its dealings with you. The creditor may have waited too long to pursue the deficiency judgment, violating your state's statute of limitations. Your state may even prohibit deficiency judgments on car loans. If the creditor violated these other laws, then it may be prohibited from collecting the deficiency from you.
Even if the creditor can legally collect the deficiency balance, you may have defenses or counterclaims that would reduce or eliminate the debt. For more information, see Defenses to Car Repo Deficiency Judgments, or contact a local attorney.
To learn more about car repossessions and deficiency balances, see our Repossession of Cars & Personal Property topic area.