Repossessed Cars: What Happens to the Cosigner?

Usually, when you cosign a car loan, you agree to be responsible for the debt if the primary debtor doesn't 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 and sell it. After the creditor repossesses and sells the car, the car loan lender might be able to come after you for any "deficiency" (the amount left on the loan balance after the repossession sale). The lender can seek a deficiency judgment against you even though you didn't own the car and the person you cosigned for was supposed to make the payments.

But if a car you cosigned for is repossessed, you still have rights when it comes to the sale and collection of the deficiency.

Your Rights as a Cosigner on a Car Loan

While you might be obligated to pay the car loan just like the debtor, you also are entitled to certain rights the debtor has. Those rights include:

Written Notices

You have some of the 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 specific rights. If a creditor fails to give you required written notices, then you might 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.

The Repossession 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 can't 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, then you have the right as a cosigner to challenge the creditor's claim for a deficiency.

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 doesn't need your permission, nor is it required to give you any kind of notice, because 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're in military service at the time the creditor attempts to repossess the car or pursues you for the deficiency, you might 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're called for active duty, the creditor must follow the procedures outlined under SCRA, which means it can't repossess the car without first getting a court order. The creditor also can't obtain a default judgment against you while you're in military service.

If you're not in military service, but the primary debtor is, then you might still have some of the same protections that the SCRA grants to the debtor.

Bankruptcy

If you file for bankruptcy, the creditor might be barred from collecting the deficiency balance from you. But if the person you cosigned for files for bankruptcy, you could still be exposed to a deficiency action, depending on the type of bankruptcy that the debtor files.

Other Issues

Aside from repossession issues, the creditor might have violated federal or state consumer lending, debt collection, and consumer sales practices laws. The creditor might 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 might be prohibited from collecting the deficiency from you.