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 · University of the Pacific McGeorge School of Law

If you lose your car to repossession, you'll likely have to pay the "deficiency" balance, the amount remaining when the car lender sells the vehicle for less than you owe. If you don't pay the deficiency balance voluntarily, the lender can file a lawsuit and, if successful, force you to pay the deficiency. Here are some of the things you'll want to know when facing repossession:

  • what to expect after repossession
  • steps lenders take to collect deficiency balances, and
  • options available if you can't pay, including filing for bankruptcy.

If you've already lost your car and want to regain your repossessed vehicle, you must act fast. Your state law might provide a remedy, but if not, filing for bankruptcy might be the answer. A local bankruptcy lawyer can help.

What to Expect After Your Car Gets Repossessed

After repossessing a car, the lender sells it at auction to the highest bidder and applies the sales proceeds to the car loan. Most cars sell for less than what's owed because of depreciation, leaving a "deficiency balance."

For instance, suppose you owe $15,000 on your vehicle loan, and the car sells for $10,000 at auction. The remaining unpaid amount of $5,000 is a deficiency balance. Unless your state law provides otherwise, you'd be responsible for paying the deficiency amount.

Dealing With a Deficiency Balance After Auto Repossession

Expect to get a bill for the deficiency balance. But before you pay it, check your state law. Some states place limits on the collection of deficiency balances. For instance, state law might limit the amount the lender can recover.

A local lawyer can verify whether you're responsible for paying a deficiency balance. If you are and don't pay what you owe, the lender will likely take more aggressive collection actions.

How Lenders Collect Deficiency Balances After Car Repossession

Expect to receive collection calls and letters for some months. If the bill remains unpaid and the balance is sizeable, the next step would be to sue you in court.

You'll know the lender has filed a lawsuit against you when you're served with a civil summons and complaint or other court paperwork. The complaint will ask the court to give the lender a deficiency judgment—a type of money judgment—for the amount you owe.

If you're served with a lawsuit, talk with a lawyer as soon as possible. A lawyer will review your case and advise whether it's best to pay what you owe, respond to the complaint and fight the action, or wipe out the debt in bankruptcy.

The Deficiency Judgment: Why You're Being Sued for a Repossessed Car

A lender sues you in court to get a deficiency judgment and become a "judgment creditor." A judgment creditor has more power because the money judgment lets the lender "seize" or take your property.

However, 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

Judgment creditors look for assets that are simple to recover or "easy pickings" like:

  • bank account balances using a "levy," and
  • wages from your paycheck using a "wage garnishment."

Judgment creditors don't often take physical property because many people can protect their belongings, and seizing things like a car, boat, or home costs a lot. 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 in addition to the deficiency judgment and costs of sale. For instance, if a lender seized a financed home or car, the lender would have to pay off the loan in full before using any sales proceeds.

If the lender can't find your assets and your debt is substantial, the lender might force you to disclose the location of your assets 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 to pay the amount. But if you can't, you have options. Here are common methods of handling 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 Auto Deficiency

Consider negotiating the deficiency balance if you don't have readily collectible assets. A lender might be open to reducing what you owe if you offer a lump sum payment.

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.

Remember 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

Most people solve financial problems using either Chapter 7 or 13. If you don't know the differences, here are the basics.

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 the home, car, or another type of property you've used as collateral for a debt.

It always makes sense to consider bankruptcy early because, for many people, bankruptcy is inevitable. If bankruptcy is in the cards for you, you'll want to avoid wasting money by paying a debt you could have "discharged" or erased in bankruptcy.

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 instead of waiting years for bad debts to fall off 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 Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.

Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

More Bankruptcy Information

Bankruptcy Forms and Document Checklist

U.S. Courts Bankruptcy Form webpage

Chapters 7 and 13 Bankruptcy Form List

Bankruptcy Document Checklist

More You Might Like

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

Will Chapter 7 Bankruptcy Prevent a Car Repossession?

Will Filing For Bankruptcy Get Back a Repossessed Vehicle?

Can You File Bankruptcy on a Judgment?

Will I Lose All of My Property in Bankruptcy?

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 hiring a local bankruptcy lawyer.

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