When you cosign on a car loan and the creditor repossesses the car, the car loan lender may be able to come after you for any deficiency (the amount left on the loan balance after the repo sale). This is true even though you did not own the car and the person you cosigned for was supposed to make the payments. However, if a car you cosigned for is repossessed, you still have rights when it comes to the sale and collection of the deficiency. Read on to learn when you might be able to reduce or avoid liability for the deficiency.
Your Liability as a Cosigner on a Car Loan
Usually, when you cosign a car loan, you agree to be responsible for the debt if the primary debtor does not make payments or otherwise defaults on the loan. If the primary debtor defaults on the loan, then the creditor has the right to repossess the car, sell it and pursue you for the deficiency. If you don't pay up, the creditor may sue you to collect the deficiency.
To learn more about car repossessions and deficiency judgments, see Deficiency Judgments After Car Repossession.
Your Rights as a Cosigner on a Car Loan
While you may be obligated to pay the car loan just like the debtor, you also are entitled to certain rights shared by the debtor. Those rights include:
You have the some of same rights as the debtor concerning matters involving the sale of the car. A car loan creditor must provide you with various, timely written notices, as well as provide you with the opportunity to exercise certain rights. If a creditor fails to give you required written notices, 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 preventing you from redeeming the car), then you may still raise that as a defense and even a counterclaim for damages you sustained as a result of any violations. (To learn more, see Required Notices in Car Repossessions.)
The Repo Sale Must Be Commercially Reasonable
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 and follow standard practices in your area concerning the resale of vehicles. For example, it must take reasonable steps to find buyers, and cannot sell the car to a friend or relative in secret, junk a car that has value, or fail to publicly advertise the auction.
If the creditor fails to sell the car in a commercially reasonable manner, than you have the right as a cosigner to challenge the creditor's claim for a deficiency.
For more information on what a creditor must do when selling a repossessed car, see Car Repo Sale: Was It Commercially Reasonable?
Does a Cosigner Have a Right to a Surplus?
In the rare event that the property sells for more than what's owed, the creditor is usually required to pay the proceeds to the debtor. However, your loan papers may have granted you a first right to the proceeds of the sale. Review the agreement to determine if you are entitled to the surplus.
The Creditor Keeps the Car
If a creditor repossesses the car, but chooses to keep it rather than sell it, it may not sue you for the balance of the loan. The creditor does not need your permission, nor is it required to give you any kind of notice, since you technically don't have an interest in the car. On the other hand, if the creditor keeps the car but then sues you for the balance anyway, then you can raise this as a defense.
Military Service Protection
If you are in military service at the time the creditor attempts to repossess the car or pursues you for the deficiency, you may have some of the same rights as primary debtors under the Servicemembers Civil Relief Act of 2003 (“SCRA”). So, if your spouse takes out a car loan and you cosign for it, and then you are called for active duty, the creditor must follow the procedures outlined under SCRA (which means it cannot repossess the car without first obtaining a court order). The creditor also cannot obtain a default judgment against you while you are in military service.
If you are not in military service, but the primary debtor is, then you may still have some of the same protections that the SCRA grants to the debtor.
For more information on how the SCRA affects a creditor's ability to proceed on a defaulted car loan, see Car Repossession: Special Protections for Military Personnel.
If you file for bankruptcy, the creditor may be barred from collecting the deficiency balance from you. However, if the person you cosigned for files for bankruptcy, you may still be exposed to a deficiency action, depending on the type of bankruptcy that the debtor files. For more information on how cosigners are affected by bankruptcy, see Will Your Cosigner Be Liable for Debt if You File for Bankruptcy?
Aside from repo issues, the creditor may have violated federal or state consumer lending, debt collection and consumer sales practices laws. The creditor may have waited too long to pursue you, violating your state's statute of limitations. Your state may even prohibit deficiency judgments against cosigners on car loans. If the creditor violated these other laws, then it may be prohibited from collecting the deficiency from you.