Deficiency After Car Repossession: Will I Still Owe Money?

Yes, you can still owe money after your car lender repossesses your car, truck, or motorcycle. If the lender sells the vehicle for less than you owe, and that happens often, you're stuck with a "deficiency balance," the unpaid part of your loan. Filing for Chapter 7 or Chapter 13 bankruptcy can wipe out that balance in most cases, even after the lender has already sued you for it. Below, you'll find out:

• why you might owe a deficiency balance after a repossession
• how bankruptcy gets rid of that deficiency balance
• steps the lender can take to collect a deficiency, and
• your options for paying off or settling a deficiency balance outside of bankruptcy.

What Is a Deficiency Balance After Car Repossession?

When you buy a vehicle on credit, you agree to grant the lender a lien that allows it to repossess your car if you don't pay as agreed. Once the lender takes the car, it sells it at auction and applies the proceeds to your loan. Whatever's left over becomes your deficiency balance.

Your deficiency balance equals your loan payoff amount, minus the sale price, plus repossession and sale fees.

Example. You owe $12,000 on your auto loan when the lender repossesses the car. The lender sells the vehicle at auction for $7,500 and tacks on $250 in repossession and sale fees. You'd owe a deficiency balance of $4,750 ($12,000 minus $7,500 plus $250).

When a Lender Can't Collect a Deficiency Balance

A lender can lose its right to collect a deficiency balance if it cuts corners by failing to follow the law. Most states don't require the lender to go before a judge before a repossession. However, your state likely mandates that you receive notice of the sale's date and location. Also, lenders usually must sell the car in a commercially reasonable manner, advertising it publicly and getting a price approaching fair value. So a skipped notice or a lowball sale might provide you with a defense.

Some states limit how much a lender can collect or bar deficiency balances on certain debts, while others don’t limit them at all. You’ll want to check your state's rules.

Can Bankruptcy Wipe Out a Car Repossession Deficiency Balance?

A car repossession deficiency balance is unsecured debt, the same as credit card or medical debt, and both Chapter 7 and Chapter 13 bankruptcy can eliminate it.

Discharging a Deficiency Balance in Chapter 7

In Chapter 7, if your car was repossessed before you filed, your deficiency balance is typically discharged along with your other qualifying unsecured debts. You don't have to wait for a repossession to use this option, either. Plenty of filers voluntarily surrender a car they can no longer afford after filing for Chapter 7. Any balance owed on the loan is wiped out with other debts. (11 U.S.C. § 727.)

Handling a Deficiency Balance in Chapter 13

In Chapter 13, a deficiency balance from a surrendered or repossessed car gets folded into your other unsecured debts and paid, if at all, through your repayment plan, often at just a few cents on the dollar. Whatever's left is wiped out once you complete your plan and receive discharge. (11 U.S.C. § 1328.) Learn more about what happens to your car loan in Chapter 13 bankruptcy.

Stopping a Repossession With the Automatic Stay

Filing for bankruptcy before the repossession happens can stop it cold. The moment you file, the automatic stay blocks most creditors, including car lenders, from continuing to collect. If the lender has already taken your car but hasn't sold it yet, filing quickly can pause the sale. (11 U.S.C. § 362.)

In some cases, you can get your repossessed car back in Chapter 7. However, the window is tight and best handled with a lawyer's help. 

How Do Lenders Collect a Deficiency Balance?

A lender can't simply take your money or property to satisfy a deficiency balance. It must sue you and win a deficiency judgment first. Once a creditor has a deficiency judgment, it can force payment by:

• garnishing your wages
• levying your bank account, or
• seizing other property.

Before that, expect a voluntary request to pay. Learn more about dealing with a deficiency judgment after car repossession.

What Are Your Options for Paying a Deficiency Balance Outside Bankruptcy?

You don't need to file for bankruptcy to get some breathing room on a deficiency balance, and you don't have to pay it all at once, either. You can try to set up a payment plan with the lender, negotiate a lump-sum settlement (lenders often accept 20% to 75% of what's owed, especially if you can show hardship like job loss), or do nothing if you're “judgment proof,” meaning you have little income or property a lender could take. Just don't ignore the debt forever, since being judgment proof can change.

Important note. If the lender forgives $600 or more of your deficiency balance outside bankruptcy, the lender will likely send you an IRS Form 1099-C, making that forgiven amount taxable income. Debt wiped out in a bankruptcy discharge isn't taxed that way.

Repossession Deficiency Balance FAQs

• Can a Lender Repossess My Car After I File for Bankruptcy?
• Will I Owe Taxes on a Deficiency Balance Discharged in Bankruptcy?
• How Long Can a Lender Try to Collect a Deficiency Balance?

Can a Lender Repossess My Car After I File for Bankruptcy?

Usually not right away. The automatic stay stops repossession the moment you file. Fall behind on payments after filing, though, or miss your Chapter 13 plan payments, and the lender can ask the court for relief from stay to resume collection, including repossession.

Will I Owe Taxes on a Deficiency Balance Discharged in Bankruptcy?

No. Debt canceled through a bankruptcy discharge is excluded from taxable income, unlike a deficiency balance a lender simply writes off outside of bankruptcy.

How Long Can a Lender Try to Collect a Deficiency Balance?

It will depend on your state. You'll want to determine the statute of limitations that applies. It's the law that limits how long a lender has to sue you over a deficiency balance. It's typically three to six years from your last payment or default, but it varies significantly by state. Once that period passes, the court can no longer force you to pay it.

Getting Help With a Repossession Deficiency Balance

If a deficiency balance is weighing you down, bankruptcy is often the fastest way to shed it for good, and the paperwork is manageable if you take it step by step. Bankruptcy is essentially a qualification process, with instructions for completing a 50- to 60-page bankruptcy petition, and because every rule applies in every case, you can't skip a step.

Start with this list of Chapter 7 and 13 bankruptcy forms to see where this topic falls, and use this bankruptcy document checklist to gather what you'll need to complete the petition. For more easy-to-understand bankruptcy articles, go to TheBankruptcySite, or consider a self-help book like The New Bankruptcy by Attorney Cara O'Neill.