If your car is repossessed and the sale price doesn’t cover your loan balance plus costs and fees, you may owe the lender the difference. This is called a deficiency. In this article you can learn when a deficiency occurs in car repossessions and what the lender must do in order to collect the deficiency from you.
(To learn more about car repossession, see our Repossession of Cars & Property area.)
In most cases, when the lender repossesses your car, it sells the car and uses the proceeds to pay off your loan and certain costs and fees. If the sale proceeds don’t cover these amounts, you owe a deficiency. The costs and fees usually include:
Most states allow the lender to apply the sale proceeds in this order:
Example. Say you owe $8,000 on a car loan before defaulting on payments. The lender repossesses the car and sells it at auction for $1,500. The lender's repo and auction fees are $100. You would owe a deficiency in the amount of $6,400 [($8,000 + $100) - $1,500].
After the repossession sale, most states require the car loan lender to send you a written explanation of how it calculated the deficiency. The creditor may send you something called a deficiency letter, demanding payment. If you do not pay the deficiency or reach some resolution with the creditor, the creditor cannot use other collection methods until it sues you in court and gets a judgment against you, called a deficiency judgment.
The lender starts the lawsuit by filing a complaint. You then have a certain period of time (often at least 28 days) to file an answer to the complaint and raise your own defenses. This gives you an opportunity to contest the creditor's claim for the deficiency. In your answer, you can point out any defects in the way the creditor repossessed and sold the car, or provide evidence as to why the amount it calculated for the deficiency is incorrect.
Some examples of defenses that might apply include:
If the creditor did not comply with legal requirements, the court may refuse to grant it a deficiency judgment.
You may also be able to file a counterclaim against the creditor if it violated your state's consumer laws or federal consumer laws.