If you lease a car, truck, van, motorcycle, or other motor vehicle and fall behind on the payments, the car lease company can repossess (take back) the vehicle. If this happens you'll lose the car and also owe a sum of money to the leasing company. You'll be on the hook for the past-due amounts and also might have to pay the remaining lease balance, as well as certain costs and other amounts. (To general information about vehicle repossessions, see Car Repossession Laws: An Overview.)

Car Leases and Repossession: The Basics

When you lease a car, you sign a contract with the lessor that, along with state law, establishes your rights and obligations, as well as describes what the lessor may do if you stop making your monthly payments. For example, the lessor might be able to repossess the car with no advance warning and no court action—so long as it doesn't breach the peace—as well as charge you certain amounts after your default. (Get further details about how repossession works in How Motor Vehicles Are Repossessed.)

How Much You’ll Owe if the Lessor Repossesses the Car

After the car is repossessed, you’ll likely owe:

• the remaining lease balance
• the past-due payments
• amounts for excess wear-and-tear and mileage (if applicable)
• the costs of the repossession, and
• the costs of resale, like cleaning and detailing the car, if the lessor decides to sell it after the repossession. (Once the lessor repossesses the car, it will usually sell the vehicle through a private sale or public auction.)

Deficiency Judgments

When the lessor sells the repossessed car, the sale price may not cover the total amount that you owe under the lease. The deficiency is the difference between:

• the sale price, and
• the total amount you owe.

Example. Say you owe $3,500 on the car and your lessor sells the car for $1,500. The amount of the deficiency is $2,000.

Most times, the lessor will then send you an invoice for the deficiency amount. If you don’t pay it, the lessor will—depending on state law and the circumstances—send the matter to a third-party collection agency to try to collect the deficiency or pursue a deficiency judgment.

What is a deficiency judgment? If you don’t pay the deficiency, the lessor may file a lawsuit in court to obtain a personal judgment against you for this amount. This kind of judgment is called a “deficiency judgment.” Once the lessor gets a deficiency judgment, it can typically use regular collection methods, like garnishing your wages or seizing your bank account to collect the deficiency. (Learn more about deficiency balances after car repossessions.)

What to Do Before the Lessor Repossesses Your Car

If you can no longer afford the lease payments, have missed payments, or feel that you are at risk of losing your car to a repossession, you should:

Read your contract. The first thing you should do is to learn about the consequences of a default by carefully reading your lease contract. In particular, review the sections that describe what constitutes a default and what happens if you default.

Contact the lessor if you want to keep the car. If you would prefer to keep the car, but can't afford the payments, call the lessor and ask if you can work out a deal to make the payments more affordable. For example, the lessor might be willing to:

• give you an extended grace period (an allotted amount of time during which you are not expected to make payments), or
• modify the terms of your agreement to reduce the monthly payment amount.

If the lessor agrees to change the repayment terms, be sure to get the agreement in writing and keep a copy for your records.

You Can Offer to Settle the Debt If the Lessor Repossesses the Car

If the lessor won’t agree to reduce your payments—or work out an alternate arrangement with you—and later repossesses the car, you can offer to settle the deficiency for a smaller amount than you owe. Some lessors prefer to accept a reduced lump sum instead of going to the expense and hassle of trying to collect the full amount from you. Be aware, though, that settling a debt sometimes has tax consequences.

You might want to consult with an attorney before you try to negotiate a deficiency settlement to ensure that you fully understand your rights and the risks involved.

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