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.)
What Is a Car Repossession Deficiency?
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:
- the costs and expenses incurred by the lender in repossessing, storing, and selling the vehicle, and
- the lender's reasonable attorney fees if the loan agreement and/or state law allow it.
Most states allow the lender to apply the sale proceeds in this order:
- first, the reasonable costs and expenses of repossessing, storing and disposing of the vehicle, along with reasonable attorney fees (if the loan agreement allows them), and
- second, the balance of the loan.
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].
Collecting the Deficiency & Deficiency Judgments
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.
Raising Defenses to the 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:
- the creditor breached the peace in attempting to repossess the vehicle
- the creditor did not send you the required notices after the repossession, or
- the creditor did not properly notify you of the vehicle sale.
If the creditor did not comply with legal requirements, the court may refuse to grant it a deficiency judgment.
Raising Counterclaims in the Deficiency Lawsuit
You may also be able to file a counterclaim against the creditor if it violated your state's consumer laws or federal consumer laws.