Options If You Owe a Deficiency After Car Repo

Tips on what to do if your car is repossessed and you still owe money to your lender (called a deficiency).

If you default on your car loan and the lender repossesses it, you may still owed money to the lender, called a deficiency balance. (Here's  how car repossession works.) If you don’t have any defenses to the deficiency, you have several options for dealing with it. You can pay the deficiency in full, make payment arrangements with the lender to pay the debt over time, or negotiate a settlement. In some cases, it might be best to do nothing; in others you may want to consider bankruptcy. Read on to learn about ways to handle a deficiency you owed after your car is repossessed.

What Is a Deficiency?

If you default on your car loan and the lender repossesses it, it will usually sell the car (either through a private sale or at a public auction) in order to recoup what you owe. In many cases, the sale proceeds are not enough to cover the remaining balance on the loan plus the costs the lender incurred in repossessing the car. If that happens, you’ll owe the difference – called the deficiency. (Learn more about  deficiency after car repossession.)

Example.  Say you owe $12,000 on the loan before defaulting on the payments. The lender repossesses the car and sells it at auction for $3,500. The lender incurs repossession and auction fees of $150. You would owe a deficiency of $9,350 ($12,000 - $3,500 - $150 = $9,350.).

If you owe a deficiency, in most states the lender can try to collect it from you. Some states restrict the lender’s ability to collect a under certain circumstances. Those circumstances rarely apply in car repossession cases though. (To learn about those state restrictions, see  State Laws on Deficiency After Car Repossession.)

If you don’t pay, the lender can sue you. If you don’t have a  defense to the deficiency, the lender will get a judgment against you. Once the lender has a judgment, it can use various methods to collect it, including garnishing your wages or taking funds from your bank account. (Learn more about  how judgment creditors can collect.)

Options if You Owe a Deficiency

Generally, if you do not have any defenses to the deficiency, you have the following options to deal with it.

Pay the Deficiency

If you owe a deficiency and have resources available, you may choose to simply pay the full amount you owe. This is potentially a good course of action when the deficiency is relatively small and you have access to enough money to cover the balance. Sometimes, it makes sense to obtain a low interest loan from a bank, credit union, friend, or family member. This option allows you pay the lender in full now to avoid stressful collection activity and added interest charges.

Make Payment Arrangements With the Lender

Many lenders will be willing to set up a reasonable payment plan to allow you to pay off the deficiency balance over time. The lender may require that you set up automatic payments from your bank to ensure you make your scheduled payments. Some lenders will ask you to sign a legal agreement, called a stipulated judgment, in which you agree to pay the full amount of the deficiency according to the agreed upon payment plan. If you don’t make the payments as agreed, the judgment permits the lender to begin garnishing your wages or bank accounts without having to go to court first.

Negotiate a Settlement

Many lenders are willing to settle the deficiency debt for a percentage of what you owe. Some lenders will ask for proof of financial hardship before agreeing to settle. You may be able to show financial hardship if you are unemployed, laid off, or disabled, or by providing a tax return or paystubs and a list of living expenses to show the lender why you cannot pay the debt in full. The settlement will likely need to be made in a lump sum and many lenders will expect payment within ten days to two weeks. The disadvantage to this option is that you’ll have to come up with the lump sum of money. But the benefit is that you may be able to eliminate between 20% to 75% of the debt, on average. Also, keep in mind that there are potential tax consequences when the lender agrees to forgive a portion of the debt you owe. (To learn more, see  Tax Consequences of Forgiven Debt.)

When You Can’t Pay

If none of the above options is a valid option for you, doing nothing may be your best choice. While your lender may be entitled to collect the deficiency from you, it may not attempt to do so for some time, if ever. You may want to wait until it is actively pursuing the debt before you decide on a repayment option. If your lender is actively trying to collect the debt, but you are  judgment proof, meaning you have little or no income or assets that your lender can take, you may not need to take any action at all.

Filing for Bankruptcy

Finally, if the deficiency is not the only debt troubling you,  filing for bankruptcy  may be a good option. Most of the time, you can discharge a deficiency after a vehicle repossession along with your other unsecured debts.

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