In most states, the lender can try to collect the deficiency from you. Some states restrict the lender’s ability to collect a deficiency under certain circumstances. Those circumstances rarely apply in car repossession cases, though. 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, in most cases, it can use various methods to collect it, including garnishing your wages or taking funds from your bank account.
You have several options for dealing with a deficiency, even if you don’t have any defenses to 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 might want to consider bankruptcy.
Again, when your lender repossesses your car or other property, it sells the property, usually at auction. If the proceeds from the sale don’t cover the total of what you owe to the lender—they rarely do—you might be liable for the balance, the "deficiency."
Example. Say you owe $12,000 on an auto 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 $8,350 ($12,000 - $3,500 - $150 = $8,350).
Although laws differ among states, generally, the lender must send you a notice that the property will be sold and must give the date, time, and location of the sale. The notice must also tell you whether you're liable for any deficiency and provide a phone number to find out how much you still owe. You can attend the sale and bid.
The sale might be public, open to anyone, or private, where the lender invites only certain people it feels might be interested. A private sale can only be held if the item “is of a type customarily sold in a recognized market” or “is the subject of widely distributed standard price quotations.”
Cars are frequently sold at private sales. Car dealers and others who regularly buy repossessed cars are typically invited to the sale. If the notice doesn’t give you the date and location of the sale, call the lender and find out.
The law requires that the lender conduct every aspect of the disposition of the vehicle in a "commercially reasonable" manner, but courts may interpret that phrase differently. In fact, repossession sales are often attended only by used car dealers, who have a motive to keep the bids very low. So, most property sold at repossession sales brings in far less than the lender is owed.
For instance, a car valued at $12,000 might sell for $5,000, and a refrigerator worth $800 might sell for $250. And even though you could have sold the item for much more, the sale usually will be considered “commercially reasonable.” If you attend, you can bid (if you have the cash), but the dealers are likely to outbid you.
After the item is sold, the sale price is subtracted from what you owe the lender. Then, the cost of repossessing, storing, and selling the property is added to the difference. Very often, you're liable for that balance: the deficiency balance.
Here’s one suggestion for avoiding a deficiency balance: If your property, especially a motor vehicle, is about to be repossessed, ask for a contract reinstatement just to get the vehicle back so you can sell it yourself. Even if you get $7,000 for a $9,000 car, it’s better than the lender repossessing it and selling it for $3,000. You can use the $7,000 to pay off your lender and will owe only $2,000 more, far less than the $6,000 you’d owe if the lender sold it through repossession.
Some lenders will forgive or write off the deficiency balance if you clearly have no assets. Where the amount forgiven is $600 or more, the lender will issue you a Form 1099-C or 1099-A, and the IRS will expect you to report the forgiven balance as income on your tax return unless you qualify for an exception or an exclusion.
If the lender doesn’t forgive or write off the balance, expect dunning letters (collection letters) and phone calls, probably from a debt collection agency.
In about half of the states, you won’t be liable for a deficiency balance on certain kinds of transactions or if the amount still owing or that you originally paid is less than a few thousand dollars. The rest of the states don't place limits on deficiency balances after repossession.
It's common for creditors to make mistakes in the repossession process. Most states bar creditors from collecting a deficiency balance if they fail to comply with notice requirements—such as notifying you of the right to cure or of the sale—or didn’t sell the property in a commercially reasonable manner.
If you think the creditor made a mistake, you must raise this defense at the time you're sued for the deficiency balance. Because these cases can be complex, it’s a good idea to consult a lawyer.
If you’d rather take the offensive, you can sue the lender for wrongful repossession. For large items, like cars, you’ll probably need a lawyer. But for smaller items, you can probably represent yourself in small claims court.
Generally, you have the following options if you don't have any defenses to the deficiency.
If you owe a deficiency and have resources available, you can simply pay the full amount you owe. This option 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, getting a low-interest loan from a bank, credit union, friend, or family member makes sense. This option allows you to pay the lender in full now to avoid stressful collection activity and added interest charges.
Many lenders are willing to set up a reasonable payment plan to allow you to pay off the deficiency balance over time. The lender might require you to set up automatic payments from your bank to ensure you make your scheduled payments.
Some lenders will ask you to sign a legal agreement in which you agree to pay the full amount of the deficiency according to the agreed-upon payment plan.
Many lenders will settle the deficiency debt for a percentage of your debt. Some lenders will ask for proof of financial hardship before agreeing to settle. You might be able to show financial hardship if you're unemployed, laid off, or disabled, or by providing a tax return or pay stubs and a list of living expenses to show the lender why you can't 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 a lump sum of money. But the benefit is that you might be able to eliminate around 20% to 75% of the debt, on average. Also, keep in mind that you might have potential tax consequences if the lender agrees to forgive a portion of the debt you owe.
If none of the above options is a valid option for you, doing nothing might be your best choice. While your lender could be entitled to collect the deficiency from you, it might not attempt to do so for some time, if ever. You might want to wait until the lender starts actively pursuing the debt before you decide on a repayment option.
If your lender is actively trying to collect the debt, but you're judgment-proof, meaning you have little or no income or assets that your lender can take, you might not need to take any action at all.
Finally, if the deficiency isn't the only debt troubling you, filing for bankruptcy might be a good option. You might be able to discharge a deficiency after a vehicle repossession along with your other unsecured debts.
If you've become overwhelmed with debt in addition to dealing with a deficiency, you might find relief through bankruptcy. The automatic stay will stop collection efforts, and a discharge could free you from much of your debts, including the deficiency.
If you need help dealing with how to repay a deficiency or raising a defense to a deficiency lawsuit, consider talking to a debt settlement lawyer. If you're considering filing for bankruptcy, consult a bankruptcy attorney.
]]>Repossession laws vary from state to state. Typically, the lender may repossess the vehicle using a process known as “self-help” repossession. With this type of repossession, the lender doesn’t have to file a lawsuit in court before taking your car. Instead, the lender simply hires a repossession company to go get the vehicle.
Still, even after losing your car, van, truck, or another vehicle to a repossession, you have options for getting it back. You may:
Also, you might be able to get the car back if the lender wrongfully repossessed it, though you'll probably need a lawyer to help you through the process.
You may pay off the loan, which is called “redeeming” the vehicle. To redeem the vehicle, you’ll have to pay the entire loan balance, plus any late fees, collection costs, and repossession costs, like towing charges, storage fees, repair expenses, and others.
After you redeem, the lender will return the car to you, and you’ll own it outright.
You may catch up on past-due amounts, which is called “reinstating” the loan. To reinstate the loan, you’ll have to pay the past-due amounts, including late charges or other fees, plus the costs of repossession. Upon reinstatement, the lender returns the car to you, and you have to resume making payments under the terms of the loan contract.
After repossession, the lender will probably send you a letter telling you about your right to redeem or reinstate. The letter will usually contain details about what you should do if you’d like to exercise either of these options.
If you don’t receive a letter from the lender soon after it repossesses your vehicle, be proactive. Contact the lender right away to find out what you need to do to redeem or reinstate. Be sure to ask for a statement that includes a breakdown of what you must pay and how you should make payment.
It’s easy enough to arrange a redemption or reinstatement without help from an attorney, though be aware that you get a limited amount of time for these options. You’ll need to act quickly.
If your lender repossesses your car and then sells it at an auction, you may bid on the vehicle to try to buy it back. But even if you buy back the car, you'll still remain liable for any resulting deficiency balance. (If the proceeds from the sale don’t cover the total you owe to the lender, the difference is called a "deficiency" or a "deficiency balance.")
Below are some examples of situations where the repossession might be unlawful.
Again, you probably don’t need to hire an attorney if you want to redeem the vehicle, reinstate the loan, or buy the car back at the auction. But if you think your vehicle was unlawfully repossessed and the lender won't help you, you should consider hiring or at least consulting with a local attorney.
An attorney can tell you if the lender’s actions were against the law, as well as help you get your car back by raising any illegalities either directly to the lender or by filing a lawsuit in court.
]]>However, the creditor can’t just walk into your house and take your couch. The creditor must have a court order or permission from someone in your household to enter your home.
Creditors who don’t have a security interest in an item of property can’t take it without the approval of a judge or court clerk.
Unless your contract says otherwise, if you miss even one payment, you have defaulted on your loan, and, under most security agreements, the creditor is entitled to take the goods. If you make your payments but otherwise fail to comply with an important term of the security agreement, the creditor can also declare you in default and take the property.
Sometimes lenders can declare a secured debt in default, even if you’re all paid up. This might happen in any of the following cases:
Read the security agreement’s fine print carefully to see what is considered a default.
If you default, here’s what might happen before the creditor repossesses the collateral.
Whether a creditor has to notify you before it takes your property depends on your state and the terms of your original agreement with the creditor. Generally, unless the contract specifically says otherwise, the creditor must notify you that it has accelerated the debt and that the full contract amount is due. This warning can give you time to figure out a plan.
However, you waive the right to receive advance notice in many contracts. In some cases, you can challenge these waiver clauses, but you will likely need the assistance of an attorney to do so.
Fortunately for consumers, many states require creditors to notify you of a “right to cure” the default. If you want to take advantage of the right to cure, you must do so before the debt is accelerated and the property is repossessed.
You get a certain period (usually a few weeks) to pay all missed payments and any late charges, get required insurance, or otherwise rectify the situation that caused the default. You will need to research your state law to see if you have a right to cure where you live.
A few states prohibit creditors from repossessing property without first getting a court order. But even outside of these states, a creditor is unlikely to go ahead and take your property (except perhaps motor vehicles) unless you have defaulted in the past, have missed several payments, or are uncooperative, or the creditor has learned something worrisome about your finances.
You can voluntarily return the collateral, but the creditor doesn’t have to take it. And the creditor probably won’t if it’s worth far less than you owe. If you want to return the property, first call the creditor—ask to speak to someone in the collections department—and find out whether your entire debt will be canceled when the collateral is returned.
If the creditor agrees to cancel the entire debt, get written confirmation. Also, find out whether the creditor will refrain from reporting the default on your credit reports.
If the entire debt isn’t canceled, there probably isn’t much point in returning the item because you’ll be liable for the difference between what the collateral sells for and what you owe.
]]>While credit agreements differ and laws vary from state to state, generally, creditors can repossess:
They can’t, however, usually take:
When you default on a secured loan, like by not making your car payments, the lender can take the vehicle (the collateral) from you. Again, taking the collateral is called “repossession.” Repossessions are usually “self-help,” which means the creditor takes the item without getting a court order ahead of time.
Many states allow repossessors to enter private property to complete a repossession, so long as the taking is without breaching the peace. That is, the creditor can’t use or threaten to use physical force against you to repossess the property. If the creditor or its agent breaches the peace during a repossession, like by pushing you aside and breaking into your locked garage to repossess your vehicle, you can file a lawsuit against that creditor. But it’s usually legal for a repossessor to, for example, hotwire a car or use a duplicate key to take a car.
If a peaceable retaking isn't possible—again, say you locked your car in the garage so the repo company can’t get it—the creditor may use a replevin process to get possession of the item. With replevin, the creditor goes to court to get an order requiring you to hand over the property.
If you fall behind in payments for a secured debt or fail to comply with an important term of the security agreement, you’ve defaulted. In some cases, like if you let insurance lapse or you become insolvent, the lender might have the right to declare a secured debt in default, even if you’re current on payments. Under most security agreements, the creditor may then take the property you pledged as collateral without going to court and getting a judgment beforehand.
Here are a few items that creditors can generally repossess if you default.
Most auto loans, whether you got the loan through the dealer, a bank, a credit union, or another lender, give the creditor the right to repossess the vehicle if you default. The lender usually isn’t required to give advance notice before taking the car.
After repossessing your motor vehicle, the lender will sell it to recover the money you owe. If the outstanding loan balance is more than the sale price, you might be held responsible for paying the deficiency, plus the creditor's repossession expenses.
Items that you rent with the option of purchasing—like furniture, electronics, and appliances—can be repossessed. But the creditor can’t just go into your home and take your sofa, television, or other rent-to-own items. The creditor has to get a court order or permission from someone in your household to enter your home.
But if you leave the property sitting in the backyard, perhaps a new gas barbecue and lawn furniture, it’s likely fair game. However, the repossessor can’t break down a fence to get into your backyard or toss you off the lawn furniture to get it.
Again, a debt is “secured” if a specific piece of personal property (called "collateral") is used to guarantee repayment. If you don't repay the debt or are in default on a loan for some other reason, most states let the creditor take the secured property without first suing you and getting a court judgment.
Example. You have a car that you don’t owe any money on, and you offer it as collateral for a loan to start a new business. If you fail to fulfill the terms of that loan agreement, the lender can take your car.
If you’re unsure about whether a particular debt is secured, check your credit agreement. The agreement will also detail what would put you in default on the loan, like being behind on your payments or not maintaining proper insurance.
Creditors who don’t have a security interest in an item of property can’t take it without a judge or court clerk’s approval. Be aware, however, that the creditor can always sue you in court to recover the money you owe. If the creditor wins the lawsuit, it might be able to garnish your wages, put a lien on property you own, or seize and sell your personal property.
Here's a list of what creditors can’t repossess if you default on a loan.
If something isn’t specifically named as collateral for a debt, it can’t be repossessed. For example, say you have an unsecured personal loan and a car loan. You default on the personal loan. As long as you continue to make payments on the car loan, the bank can’t repossess your car because it wasn’t explicitly named as collateral for the personal loan.
Credit card debt is unsecured, which means the credit agreement doesn’t name anything as collateral for the loan. So, items you purchased with a credit card can’t be repossessed.
A contract that doesn’t comply with your state's legal requirements might be void and unenforceable. If the contract is unenforceable, the creditor might not be able to repossess collateral named in the agreement. A lawyer can review your contract for validity and advise you of your consumer rights.
If you're behind on your payments for a secured debt, it’s a good idea to communicate with your lender. Your lender might be able to offer you a solution such as a reduction in payment amount or interest rate that can help you catch up on your payments and avoid repossession.
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