When you get a loan to purchase a car, you probably have to sign a contract giving the lender a security interest in the vehicle. Depending on the contract terms and state law, the lender might be able to take the car away from you without suing you in court first if you default on the loan (say, by not making payments or by failing to have car insurance). The process of taking the car is called "repossession." Each state has its own rules regarding repossession.
After your car loan lender repossesses your car, van, truck, SUV, or other motor vehicle, it might sue you to recover any money you still owe on the loan (called the "deficiency"). If this happens, you'll need to decide if it's worth paying an attorney to help you challenge the deficiency actions.
In some cases, hiring an attorney might make the difference between having to pay a deficiency judgment and walking away without owing the lender anything.
After the lender repossesses your car, it will most likely sell it at a public or private sale. In many cases, the proceeds from the sale won't be enough to pay off the total amount you owe. Again, the difference is called a "deficiency."
Example. If you owe $29,000 on your car, but your lender repossesses it and only gets $20,000 for the car at the sale, the difference of $9,000 is the deficiency.
The lender must meet certain legal requirements when repossessing and reselling your car. If the lender messed up somehow during the repossession process, you might have a defense to the deficiency action. Hiring an attorney to represent you in the suit and investigate what happened might help you avoid or reduce the deficiency judgment.
Below are a few examples of defenses that might be available to you.
Lenders and their representatives can't breach the peace when repossessing the car. For instance, they can't remove you from your car or physically touch you to take the vehicle.
Also, if the lender repossesses the car while you're current on your payments according to the contract and not in default for some other reason, an attorney could help you recover the vehicle.
After taking your car, the lender must actually sell it to go after you for a deficiency. If the lender repossessed the car but kept it, there's no deficiency.
When the lender decides to sell the car, it must send you proper written notice about the sale. If the notice contains incorrect information or the lender didn't send it, the notice is invalid.
The sale must be commercially reasonable. Whether a sale meets this standard is generally based on the manner, time, place, and terms of the sale. The analysis varies a bit depending on if the sale was private or public. An attorney can explain the requirements to you in more detail.
Under the federal Servicemembers Civil Relief Act (SCRA), a lender must get a court order before it can repossess your car if:
The SCRA is extensive and complex. If you're on active duty, an attorney can inform you about your rights under this law.
If your lender promised to forgive the deficiency if you voluntarily returned the car, this agreement could prevent it from getting a deficiency judgment later on. Be aware that if the lender forgives $600 or more, you'll likely get a Form 1099-C or 1099-A, and the IRS will expect you to report the forgiven balance as income on your tax return.
If the lender waits a long time to sue you, the statute of limitations (the deadline to file the suit) might have passed.
Some states limit the lender's ability to collect a deficiency balance in certain situations.
Sometimes, the lender might incorrectly add up the amount you must repay or include amounts you've already paid in the total it claims you owe. Also, the interest rate, late charges, and various fees that the lender claims you owe might not be accurate.
If the car was a lemon or the dealer misrepresented the credit terms, you might be able to make a claim.
If you think the lender followed all proper procedures and know that you legitimately owe the deficiency amount that the lender seeks (or if you're judgment proof), it might not be worthwhile to hire an attorney to fight the lawsuit.
You might want to try to negotiate a settlement with the lender. The lender might be willing to accept significantly less than you owe if you can come up with a lump sum instead.
Or, if you don't have a lump sum available to settle the account, you might be able to negotiate an affordable repayment plan. (Again, keep in mind that if the lender forgives some of what you owe, you could face tax consequences.)
Even if you decide not to hire an attorney to fight a lawsuit, you might want to at least consult a lawyer before you negotiate with the lender to find out your rights and what's at risk if the case isn't settled. The attorney can also help you in the negotiation process if you're not comfortable tackling that on your own.