How to Handle Repaying Auto Loan Deficiency Balances


How to Handle Repaying Auto Loan Deficiency Balances

Having your car repossessed can be an incredibly stressful and challenging situation. On top of losing your vehicle, you may also be faced with owing a deficiency balance – the amount left unpaid on your auto loan after the lender sells the repossessed car. Being on the hook for thousands of dollars can feel totally overwhelming. But there are options for dealing with deficiency balances in an affordable way. This article will walk you through the ins and outs of deficiency balances, your rights and responsibilities, and strategies for tackling the debt in a manageable way.

What is a deficiency balance?

When you finance a car purchase, the auto loan is secured by the vehicle itself. If you default on the loan, the lender can repossess the car and sell it to recoup some of what you owe. But vehicles depreciate quickly, so the lender rarely gets the full loan amount back through the sale. The remaining unpaid loan balance is called a deficiency balance, and you are still responsible for paying this debt even though you no longer have the car.

For example, say you bought a car for $15,000 and financed the purchase with a loan for the full amount. After a year, you default on the loan and the lender repossesses the car. They sell it at auction for $10,000. That leaves a $5,000 deficiency balance that you still owe the lender.

Do I have to pay the deficiency balance?

In most cases, yes – you are still legally obligated to repay any deficiency balance left after the repossession and sale of your car. The loan agreement you signed made you responsible for the full loan amount, not just the value of the vehicle. Defaulting does not erase the unpaid balance.

The lender will send you a written notice stating the amount of the deficiency balance and demanding repayment. If you do not pay, they have the right to pursue collection through calls, letters, referral to a collection agency, or a lawsuit. If they sue and win a judgement against you, they can garnish your wages or put liens on your property.

So attempting to dodge the deficiency balance can badly damage your credit and lead to serious legal and financial consequences. In most cases, you should make a good faith effort to repay what you owe.

Are there any defenses against the balance?

There are a few potential defenses you could raise against a deficiency balance:

  • The lender did not send proper notice of the balance owed
  • The lender did not sell the car in a commercially reasonable manner
  • The lender miscalculated the deficiency balance amount
  • The loan agreement violated state laws regarding deficiency balances

For example, if the lender sold your repossessed car for far below market value, you may argue they did not make reasonable efforts to get the best price. Consult a consumer protection attorney to discuss whether you have grounds to contest the deficiency using one of these defenses.

Are there laws limiting the balance amount?

In some states, laws limit how much deficiency balance lenders can recover from borrowers after repossession. For example:

  • Some states cap balances at the difference between the loan amount and the fair market value of the car, rather than the actual sale price.
  • Other states limit balances based on a percentage of the total loan amount.
  • A few states prohibit deficiency balances entirely under certain circumstances.

Research your state statutes to find out if any laws restrict how much you can be required to pay. This Nolo guide summarizes the laws in each state.

Should I try negotiating with the lender?

Yes, it’s usually worth attempting to negotiate with the lender to reduce or settle the deficiency balance for less than the full amount. Be polite but firm in asking for their best offer. Here are some approaches to try:

  • Offer a lump sum payment – Propose paying a smaller lump sum, say 30-50% of the balance, as full settlement. Many lenders will accept a smaller guaranteed payment versus taking their chances collecting the full amount.
  • Request an affordable payment plan – Ask to repay the balance in affordable monthly installments over 1-2 years. This spreads out the financial impact over time.
  • Claim financial hardship – If you’re unemployed, have large medical bills, etc., highlight that you simply cannot afford the full balance right now due to your situation.

Negotiating requires persistence and creativity, but many people have success settling deficiency balances for pennies on the dollar this way.

What if I just can’t pay at all?

If there is truly no way for you to repay the deficiency balance due to unemployment, major medical issues, or other catastrophic circumstances, you still have options:

  • Ask for forgiveness – Some lenders may agree to forgive all or part of the balance if you provide evidence you have no income or assets. They would rather write it off than waste time and money trying to collect from someone with nothing.
  • File bankruptcy – Declaring Chapter 7 or Chapter 13 bankruptcy stops collection activity and can eliminate or reduce the deficiency balance owed.
  • Wait out the statute of limitations – If you take no action to repay, the lender loses the right to sue you for the debt after the statute of limitations passes, typically 3-6 years depending on your state.

While the consequences of defaulting on a deficiency balance can be severe, be aware you have options. Seek help from nonprofit credit counseling services if you are struggling. With persistence and creativity, many people reach affordable resolutions of their deficiency debt.

How can I rebuild my credit after a repossession?

Having your car repossessed and a deficiency balance owed will deliver a major hit to your credit standing. Here are some tips for rebuilding credit over time after a repossession:

  • Get current on all other bills and loans – On-time payments will demonstrate you are accountable.
  • Pay down credit card balances – Lower balances relative to limits helps your credit utilization.
  • Avoid new loan applications – Each application can ding your score a few points.
  • Ask lenders to report paid deficiency balances – This helps show the obligation was met.
  • Add positive information – Become an authorized user on someone else’s account.

With a diligent effort to manage credit responsibly going forward, you can gradually recover from the repossession and deficiency balance over a few years.

Key takeaways

  • A deficiency balance is the amount still owed on an auto loan after the repossessed car is sold.
  • In most cases you are still legally required to repay the deficiency, and failure to do so can result in collection lawsuits and wage garnishment.
  • Some states limit how much lenders can collect in deficiency balances.
  • It’s often possible to negotiate with the lender to settle the balance for less than the full amount.
  • If you truly cannot pay, options include asking for forgiveness, declaring bankruptcy, or waiting out the statute of limitations on collection.
  • Rebuilding credit after a repossession takes time, but is possible by consistently making on-time payments and keeping credit card balances low.


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