Can Car Lender Collect a Deficiency After Repo?

In some situations, the law prohibits a car lender from trying to collect a deficiency balance after a car repo.

After you default on your car loan and the creditor repossesses the vehicle, it will usually sell the car, either through a private sale or at a public auction, to recoup what you owe. In many cases, the sale proceeds aren't enough to cover the remaining balance on the loan plus the lender's costs in repossessing the car. If that happens, you'll owe the difference, called the "deficiency." The creditor might then attempt to collect the deficiency balance from you. But under some circumstances, the creditor can't go after you for the deficiency.

Some of those reasons include:

  • defects in the loan paperwork
  • the creditor didn't provide the required notices
  • the creditor didn't sell the car in a commercially reasonable manner
  • the creditor didn't sell the car at all
  • you filed for bankruptcy, and
  • other legal issues.

Defects In the Loan Papers

The creditor can't collect on the deficiency unless it is the legal payee on the note and has a security interest in the car. If a creditor sues you for the deficiency, you can ask that the court dismiss the lawsuit for the following defects.

  • The creditor hasn't produced a written loan or security agreement that shows you owe the debt.
  • The agreement doesn't give the creditor a security interest in the car.
  • The loan agreement doesn't give the creditor a right to sue you for a deficiency after it has taken the car.
  • The creditor suing you isn't the same creditor on the loan papers and it hasn't produced an assignment or other legal document that establishes that it owns the debt.

The Creditor Didn't Provide Required Notices

A car loan creditor must provide you with various, timely written notices, as well as give you the opportunity to exercise certain rights. If a creditor fails to give you a required written notice, 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 refusing to accept your payment to reinstate the loan or preventing you from participating in the auction—then you may still raise that as a defense and even a counterclaim for damages you sustained as a result of any violations.

The Creditor Didn't Sell the Car in a Commercially Reasonable Manner

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. It has to take reasonable steps to find buyers. A creditor must follow standard practices in your area concerning the resale of vehicles. It 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.

The Creditor Didn't Sell the Car At All

If a creditor repossesses your car but chooses to keep it rather than selling it, it may not sue you for the balance of the loan. Instead, your debt should be canceled. A creditor is required to take steps to minimize losses by selling the car if it chooses to pursue you for more money. If the creditor keeps the car but then sues you on the balance of the note, this is called a "double recovery," and you can raise this as a defense.

You Filed Bankruptcy

If you get a bankruptcy discharge, the discharge will almost always prevent a car loan lender from collecting a deficiency against you. Upon filing for bankruptcy relief, the court immediately issues an automatic stay that orders creditors to stop all collection efforts. If you receive a discharge in bankruptcy, creditors for debts that were included in your bankruptcy are usually permanently barred from collecting those debts from you.

If the creditor knowingly sues you, continues a pending lawsuit, or demands payment for the deficiency balance after you have filed bankruptcy, it violates the law and is subject to penalties. But the exception to this general rule is that if you reaffirmed your car loan in the bankruptcy (sign an agreement renewing the terms of the loan in the bankruptcy), then the lender can pursue a deficiency against you if you later default on that loan.

Other Issues

Aside from repossession issues, the creditor might have violated federal or state consumer lending, debt collection, and consumer sales practices laws in its dealings with you. The creditor might have waited too long to pursue the deficiency judgment, violating your state's statute of limitations. Your state might even prohibit deficiency judgments on car loans. If the creditor violated these other laws, then it could be prohibited from collecting the deficiency from you.

Talk to an Attorney

Even if the creditor can legally collect the deficiency balance, you might have defenses or counterclaims that would reduce or eliminate the debt. Consider talking to a local attorney to learn more.

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