If a Car is Repossessed, Do I Still Owe the Debt?
The Short Answer – Yes, You Likely Still Owe Money After Repossession
When your car gets repossessed, it doesn‘t just magically make the debt go away. In most cases, you’ll still be on the hook for whatever balance remains after the lender sells the vehicle and applies the proceeds to your loan. This remaining amount is called the “deficiency balance.”It sucks, I know. You already lost your ride, and now you might have to keep paying for it too? That‘s just adding insult to injury. But unfortunately, that’s usually how it works when you default on a car loan.The good news is, there are some exceptions and defenses you can use to potentially get out of paying the deficiency. We‘ll go over those in detail later. But first, let‘s take a step back and understand exactly what happens during and after a repossession.
What is a Repossession and How Does it Work?
A repossession happens when you stop making payments on your car loan, and the lender decides to take back the vehicle that was securing the debt.Most loan agreements give lenders the right to repo the car as soon as you miss even a single payment. Though in practice, they‘ll usually wait until you’re at least 60-90 days behind before taking action.Once they decide to pull the trigger, the lender will hire a repo company to locate and tow away your car – often without any advance warning. As long as they don’t use physical force or cause a disturbance (known as a “breach of the peace”), repo agents can basically take the vehicle from wherever it’s parked, even your private driveway.After they‘ve got the car, the lender will likely send you some paperwork explaining what happened and what comes next. This is where the potential for a deficiency balance comes into play.
-How Does the Deficiency Balance Get Calculated?
When the lender repossesses your car, their goal is to sell it and use the proceeds to pay off as much of your outstanding loan balance as possible. But since used cars rarely sell for the full amount owed, there‘s usually still some debt left over after the sale. That remaining amount is the deficiency balance you may be liable for.Here’s a simplified example of how it works:
- You took out a $20,000 loan to buy a car
- You’d paid $5,000 towards the principal when the car got repossessed
- So your outstanding loan balance was $15,000
- The lender sells the repossessed car at auction for $10,000
- That leaves a $5,000 deficiency balance ($15,000 owed minus $10,000 sale price)
On top of that $5,000, the lender can also tack on various fees related to the repossession and sale, like towing costs, storage fees, auction fees, etc. So your total deficiency could easily be $6,000-7,000 or more in this example.And unfortunately, in most states the lender has the legal right to pursue you for that full deficiency amount through collections or by suing you in court. A court judgment would then allow them to garnish your wages or put liens on other property to collect what you owe.
Defenses Against Paying the Deficiency Balance
Okay, so that all sounds pretty bleak if you‘re facing a hefty deficiency after repossession. But don’t lose hope just yet! There are some potential ways to avoid or reduce that debt, depending on the circumstances.
Improper Sale ProceduresLenders have to follow certain rules when selling a repossessed vehicle to ensure they get a reasonably fair price for it. If they cut corners or deliberately undersell the car, you may be able to challenge the deficiency amount.For example, in many states lenders must:
-- Provide proper notice of the sale date/time/location so you can attend
- Make reasonable efforts to advertise and market the vehicle
- Accept the highest bid received at auction
- Sell the car in a “commercially reasonable” manner
If the lender fails to meet these requirements, you could argue in court that the sale was not done properly, and therefore any deficiency balance is invalid or should be reduced.
Violation of Repossession LawsRepo agents have to play by the rules too when taking your vehicle. If they breach the peace, damage property, use excessive force, or otherwise violate state repossession laws, you may have grounds to get the deficiency tossed.Some common illegal repo tactics include:
- Removing the car from a closed garage without permission
- Using physical threats or violence against you
- Causing an excessive disturbance or public nuisance
- Holding your personal property from the car for “ransom”
If any of those happen, be sure to document everything and consult an attorney about potential claims against the repo company.Bankruptcy DischargeFor those in severe financial distress, filing bankruptcy can eliminate the deficiency balance entirely in some cases. Certain types of secured debts like car loans may be eligible for a “cramdown” in Chapter 13 that reduces the balance to the vehicle’s current value.Or if you file Chapter 7, the deficiency could potentially be discharged along with your other debts through the bankruptcy process. Just be aware that a bankruptcy stays on your credit for 7-10 years, so it’s not a decision to take lightly.Negotiating a SettlementEven if the lender followed all the rules, you can still try negotiating to pay a reduced lump sum to settle the deficiency balance. Offer an amount you can realistically afford, and make the case that it‘s better for the lender to get something rather than potentially nothing if you have to file bankruptcy.Lenders are sometimes willing to accept discounted payoffs, especially from debtors who demonstrate good faith efforts. Just get any settlement agreement in writing before making a payment.Statute of Limitations DefenseIn some states, lenders only have a limited time window to file a lawsuit over a deficiency balance, usually 2-6 years from the date of default or repossession. If they miss that deadline, you may be able to get the debt dismissed based on the expired statute of limitations.However, be very careful with this defense because the statute can be “reset” if you make any payments or acknowledge the debt during the limitations period. It’s wise to consult a local attorney first.
How to Avoid Repossession and Deficiency Balances
Of course, the best way to steer clear of these deficiency nightmares is to be proactive and avoid having your car repossessed in the first place. If you’re struggling to make your monthly payments, you have a few options:
- Request a Loan Modification – Ask your lender about modifying the loan terms through things like lower interest rates, extended repayment periods, deferred payments, etc. They may be willing to work with you, especially if you communicate early before missing payments.
- Refinance the Loan – If your credit is still in decent shape, you may be able to refinance the loan with a new lender at better rates and lower monthly payments you can actually afford.
- Sell the Car Yourself – You’ll likely get more for the vehicle by selling it privately rather than letting the lender auction it off after repossession. Use the proceeds to pay off or at least pay down the loan balance.
- Voluntarily Surrender the Vehicle – As a last resort before repossession, you can voluntarily turn in the car and hand over the keys/title to the lender. This avoids some repo fees and looks slightly better on your credit than an involuntary repossession.
The key is being proactive and communicating with your lender as soon as you foresee trouble making payments. Lenders would generally prefer to work something out rather than go through the hassle and expense of repossession.
-Rebuilding Your Credit After Repossession
No matter how the situation plays out, having a vehicle repossessed is going to severely damage your credit reports and scores. The late payments, repossession status, collections accounts, and potential deficiency judgments can all linger for 7 years or more.But that doesn‘t mean your credit is ruined forever. You can start rebuilding right away by getting a secured credit card, taking out a small credit-builder loan, or becoming an authorized user on someone else’s card. Just make sure to make all new payments on time as payment history is the biggest factor for your scores.It will take diligence, but your credit can recover from a repossession over time. And once it does, be sure to learn from that experience so you don’t end up in a similar situation down the road.
The Bottom Line – Don’t Ignore Potential Deficiencies
Having your car repossessed is undoubtedly stressful and frustrating. But ignoring any potential deficiency balance owed to the lender can make a bad situation even worse down the line.If you find yourself in this position, know that you do have some rights and defenses available. Carefully review the repo company and lender’s actions, as well as the sale procedures, for any violations or improprieties you could use to challenge the debt.