When a creditor sues you for a deficiency judgment after it has repossessed your car, you may have defenses to that lawsuit or counterclaims that you can make against the creditor for damages of your own. These defenses or claims can reduce or even eliminate the balance of the debt. What follows is a short description of the various defenses or claims that may be available to you.
(To learn more about car repossessions and deficiency judgments, see the articles in our Repossession of Cars & Personal Property.)
You Were Not in Default on the Car Loan
The loan papers you signed should describe when you are considered to be in default. For example, some loan agreements state that a debtor is not in default if less than 30 days late on a payment. In others, you may be in default if just one day late on a payment. Some agreements require the lender to first send you a notice regarding the late payment and give you time to get current. Read your loan papers carefully.
Notwithstanding what your loan agreement says, if the creditor had a history of accepting late payments from you in the past without declaring a default, or did other things to change the terms of the loan agreement (such as changing the payment due date), you can raise this as a defense.
The Creditor Did Not Follow Proper Procedure in Repossessing the Car
A creditor must comply with the law when repossessing a car. You can challenge a creditor's claim for a deficiency judgment if it failed to legally repossess the car, such as for the following reasons:
Breach of Peace
Creditors cannot breach the peace while repossessing the car. That means it cannot use or threaten to use force or violence. It cannot break locks or destroy or damage property in attempting to reach the car. Nor can it use law enforcement to assist in a repo or engage in a confrontation with you. If the creditor breached the peace, then you can raise that as a defense to a deficiency lawsuit. If the creditor or its repo agent harmed you or your property (or threatened harm or force), you may also be able to seek damages in the form of a counterclaim.
Violation of Military Service Protection
If you are in military service, a creditor must obtain a court order before it may repossess your car. If a creditor takes your car without getting permission from a court, then not only can you raise that as a defense and counterclaim, but the creditor is potentially subject to criminal charges.
For more information on your rights as a service member and protection against car loan collection actions, see Car Repossessions: Special Protections for Military Personnel.
Missing or Damaged Personal Property
The creditor is not allowed to keep or sell personal property that may have been left in the car at the time the creditor repossessed it. The creditor must also use reasonable care to prevent others from causing loss or damage to your personal property. If the creditor has refused to return personal property, or if it is lost or damaged while in the creditor's possession or control, you may raise this as a defense and counterclaim for damages.
For more information on your rights concerning personal property taken during a car repo, see Can I Get My Personal Property After a Car Repo?
Improper Calculation of the Deficiency Balance
Even if you do owe a deficiency balance on the car loan, the creditor may have miscalculated the amount of that deficiency. Here are some issues that you should carefully look for when reviewing the creditor's calculations of what it claims you owe:
- Interest rate. Does it match what the creditor is allowed to charge you under the loan agreement? Even if the creditor is allowed to charge you the agreed-upon interest rate, the rate of interest might be against the law in your state.
- Late charges. Did the creditor charge you late fees for payments you made on time? Do the late fees match what the agreement says the creditor can charge you?
- Credits. Did the creditor apply all of your payments?
- Waiver. If the creditor had a history of accepting your late payments, or agreed to change the payment date, then it may have waived its right to hold you in default and repossess the car.
- Repo and Storage Fees. Does the agreement state that the creditor can charge you repo and storage fees? If so, do those fees match or exceed what is covered in the agreement. Creditors usually can charge for these fees, but they may not exceed a certain amount depending on your state's law. You should research the laws of your state to find out if these fees are capped or even prohibited altogether.
- Attorney fees. Even if your loan agreement permits the creditor to charge you attorney fees as part of the deficiency balance, the laws of your state may prohibit this. Creditors are usually limited in charging attorney fees for collecting consumer debts like personal car loans.
The Creditor is Barred From Collecting the Deficiency
The creditor may be completely barred from collecting the deficiency. For instance, if the creditor failed to provide you with required written notices, did not conduct the sale of the car in a commercially reasonable manner, or refused to allow you to reinstate the loan, the law may prohibit it from going after you for the deficiency.
Similarly, if you filed for bankruptcy and discharged your car loan debt, the lender may be barred from collecting the deficiency. Or you could have other defenses if the creditor violated other federal or state consumer lending, debt collection, or consumer sales practices laws in its dealings with you.
For more information, see Can the Lender Collect a Deficiency After Repo?
You may have additional claims and defenses not already covered here. For more information or assistance, contact your state attorney general office or state consumer protection agency (see State Consumer Protection Offices to find yours), or consult with a local attorney. If you are a service member, you should contact your local AFLAP by going to http://legalassistance.law.af.mil/content/locator.php.