Dealing With a Deficiency Judgment After Car Repossession

Strategies for protecting your income and property when a car lender tries to collect a deficiency judgment after a repossession.

By , Attorney

It's common for repossessed cars to sell for less than what's owed at auction. Most lenders won't let you off the hook, though. The lender will likely go to court to get a money judgment for the unpaid "deficiency" balance. You can protect yourself by learning:

  • the collection steps the lender can take, and
  • your options if you can't afford to pay the deficiency judgment.

Keep in mind that if you want to get a repossessed car back, you'll have to act fast. Check your state law. If it doesn't help, bankruptcy might.

To make it easier to learn how bankruptcy works, we've put together a few things you should know about bankruptcy. Or our quick ten-question bankruptcy quiz can help you figure out whether bankruptcy would help solve your financial problems. Ultimately, a bankruptcy lawyer will be in the best position to help you recover your car or get rid of a deficiency judgment.

Why Car Lenders Get Deficiency Judgments After Repossession

Before getting a money or deficiency judgment, all the lender can do is ask you to pay. But the dynamics change once a lender sues you in court, gets a deficiency judgment, and becomes a "judgment creditor." Then the lender can force you to pay for the deficiency by seizing (taking) your property.

That doesn't mean you'll lose all of your belongings. The lender can't take everything you own because some of your property will be exempt from collectors (we explain how to determine whether property is exempt below).

Also, the lender won't seize property unless it's worthwhile to do so—that is, the lender would need to recoup a reasonable amount after subtracting sales costs.

How Car Lenders Collect Deficiency Judgments After Repossession

Your car loan deficiency likely isn't a considerable amount, so the lender will be looking for assets that are cheap to recover or "easy pickings" like:

It costs a lot to seize things like a car, boat, or home, and it takes time, too. But a lender will do it if you owe a lot and the property is valuable enough to pay any outstanding loans secured by the property (like a home or car loan—the lender would have to pay it in full), the deficiency judgment, and costs of sale.

If the lender can't find your assets and your debt is substantial, the lender might force you to disclose what you own and its location in court under oath. The procedure is typically known as a "debtor's examination."

Responding to a Lender's Deficiency Judgment Collection Tactics

The easiest way to handle a deficiency is by paying it. But if you can't, you have options. Here are common ways to handle collection attempts.

Do Nothing

In most cases, this isn't a good approach. Not only will a judgment accrue interest over time, but a creditor can often renew and extend the collectible life of a judgment for decades. Because a judgment amount increases significantly over time, you won't want to ignore the debt unless you're a "judgment-proof" debtor without collectible assets now and for the foreseeable future.

People in this category are usually out of the job market due to age or disability. And even then, an inheritance or lottery winning can significantly change a judgment-proof individual's financial status.

Also, judgment-proof people aren't always penniless. If you earn low wages and your property consists of essential things needed to work and live—no luxury items—everything you own might be exempt and protected from creditors.

Negotiate a Payment Plan to Pay the Deficiency

If you don't have readily collectible assets, consider negotiating down the deficiency balance. If you offer a lump sum payment, a lender might be open to reducing what you owe.

Another option is negotiating a payment plan with the lender, although lenders aren't receptive to this approach after receiving a judgment. Why? Because they'll have identified collectible assets before investing money in the litigation process.

Also, if you choose this approach, be prepared to prove you can't pay by producing bank statements and paycheck stubs. You could also try presenting overdue credit accounts, proof of foreclosure, or other items demonstrating hardship.

Keep in mind that the lender will use anything you turn over to collect the debt if you can't work something out. For instance, knowing where you work and do your banking will make it much easier to garnish your wages or seize funds from your checking or savings account.

File for Bankruptcy

A Chapter 7 bankruptcy wipes out deficiency judgments and many other debts without requiring payment into a lengthy repayment plan. If you're behind on a house or car payment and don't want to lose the property, Chapter 13 provides a way to catch up and keep it.

It always makes sense to consider bankruptcy early because, for many people, bankruptcy is inevitable. If the deficiency is significant or you have other dischargeable obligations, this might be the right way to go. You'll want to avoid paying a debt you could have discharged (erased) in a future bankruptcy case.

You'll also want to check whether you can protect your property with exemptions. An unexpected upside to bankruptcy is that your credit score will likely recover faster by wiping out obligations in bankruptcy as opposed to waiting years for bad debts to fall off of your credit report.

Check Your State's Property Exemption Laws

Exemption laws allow a debtor to protect certain types and amounts of property from creditors in both collection actions and bankruptcy. Exemptions vary by state but commonly include:

  • some personal property
  • a portion of your wages if you make under a certain amount
  • retirement accounts
  • some equity in your homestead
  • work or medical equipment, and
  • certain public benefits.

Most states require you to assert your exemption rights in court to prevent losing them. If you receive paperwork involving property seizure, immediately contact the sheriff, local court, or legal self-help organization to determine when you must respond. It will likely be less than ten days. An attorney can also explain the procedures and provide advice about your case.

You'll find exemption laws by state here (most apply to both collection actions and bankruptcy).

Navigating a Bankruptcy Case

Bankruptcy is an unusual area of law because it's essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because all rules apply in every case, you can't skip a step.

The forms and resources below will help you find more information. Also, you can use this list of Chapter 7 and 13 bankruptcy forms to see where this topic falls. And this handy bankruptcy document checklist will help you gather the things you'll need to complete the petition.

More Bankruptcy Information

Bankruptcy Forms

You'll find fillable, downloadable bankruptcy forms on the U.S. Courts bankruptcy form webpage.

Related Information

Should I Ignore a Debt Collector's Calls and Letters?

What You Should Know About Filing for Bankruptcy

Will Chapter 7 Bankruptcy Prevent a Car Repossession?

Using Chapter 13 Bankruptcy to Get Your Car Back After Repossession

Can I File for Bankruptcy If I Have a Judgment Against Me?

Will I Lose All of My Property in Bankruptcy?

Need More Info?

We want to help you find the answers you need. Go to TheBankruptcySite for more easy-to-understand bankruptcy articles, or consider buying a self-help book like The New Bankruptcy by Attorney Cara O'Neill.

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by consulting with a local bankruptcy lawyer.

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