When I moved to Los Angeles, California I bought a used car for $15,000. I financed the purchase through a bank loan. Soon after, I lost my job and defaulted on the car payments. I still owed $12,000 when the bank repossessed it. I just received a notice in the mail saying the bank will dispose of the car in 15 days and that I can “reinstate” or “redeem” and that if I don’t, the bank might be able to sue me for a deficiency. What does this all mean? I don’t have any money to pay the bank.
In California, if a car lender repossesses your car, it can sell the car in order to recoup some of the money you owe to it. If the sale proceeds are not enough to cover your unpaid loan balance plus certain of the lender’s costs, you will owe the difference – called the deficiency. If you don’t repay the deficiency, the bank can sue you.
In order to be able to collect a deficiency from you, however, a California car lender must provide you with certain notices prior to selling the car.
What Is a Deficiency After Car Repossession?
If you fall behind in your car loan payments in California, your car lender can arrange to have your car repossessed. When this happens, the car repossession company simply takes your car -- it doesn’t need your permission. (Learn how car repossession work.)
In most cases, the car lender will sell your car either at auction of through a private sale (often to a used car dealer). If the sales price is not enough to cover the remaining balance on your car loan and the lender’s repossession and auction costs, in most cases you will owe the difference – called the deficiency. (Learn more about deficiency balances after car repossession.)
You owed the bank $12,000. Let’s say the bank incurred costs totally $1,000 to repossess the car and sell it. Because cars depreciate quickly and because repo sales don’t bring in top dollar, perhaps your car will sell for $8,000. The deficiency in this scenario would be $5,000.
Here’s the calculation: $12,000 (loan balance) + $1,000 (lender’s costs in repossessing and selling the car) - $8,000 (sale price) = $5,000 (amount of deficiency)
When Is a California Car Lender Prohibited From Collecting a Deficiency?
In California, the bank can go after you for a deficiency only if it complies with certain notice requirements before selling your car. If it violates any of the rules, you can raise this as a defense in a deficiency lawsuit.
Notice Before Selling Your Car
Your bank must provide you with a notice telling you about your right to either reinstate the car loan or redeem the car. It must send the notice within 60 days of the car repossession and at least 15 days before the sale date.
- Reinstate. You reinstate the car loan by catching up on all past due payments and paying certain costs and fees. If you reinstate, you get the car back and continue making car payments under the original contract. (There are a few instances where you are not allowed to reinstate the contract; if the lender claims you don’t have the right to reinstate it must set forth the reason on the notice.)
- Redeem. You redeem the car by paying the entire loan balance, plus certain costs and fees. If you redeem, you get the car back. Because you paid the loan off, you now own it free and clear.
You have the right to request a 10-day extension of time to redeem or reinstate. The notice must also inform you that if you don’t reinstate or redeem and the lender sells the car, it has the right to sue you for a deficiency. The notice must comply with several other requirements as well, such as providing you with an itemized contract balance. You can read about all of the detailed requirements in the law itself. See Cal. Civ. Code § 2983.2.
It sounds like the lender did send you a notice, but if you think it might not contain all of the correct information, or did not comply with the timing requirements, talk to a lawyer right away.
Other Defenses to Deficiency
Even if the lender complied with the notice requirements, you might have other defenses to the deficiency. For example, if the lender didn’t correctly calculate the amount you owe, you can challenge their numbers. To learn about other possible defenses, see Can a Car Lender Collect a Deficiency After Repo?