Recently on our bankruptcy forum a user asked, “If I was unable to make car payments on my vehicle and the lender came and repossessed the vehicle then sold it at auction for less than the full value of my loan, what does this mean? Will I be responsible for repaying the balance of the loan payments or the deficiency after the auction?”
A deficiency occurs when an asset, such as a home or car, is sold but the sale price does not cover the original loan balance. For example, if you owe $20,000 for your car, but it sells for $15,000, there is a $5,000 deficiency balance.
Now, in most cases, although the lender may be happy to have $15,000 more than zero, they will generally also want all the additional money owed from the loan. If they decide to seek legal action against you to collect the remaining balance, this can be done by taking you to court and getting the court to issue a deficiency judgment.
How much is the Deficiency Judgment?
Deficiency judgments for car loans can only be pursued after the lender takes you to court and wins a judgment against you (they will, however, already have repossessed the car and sold it). If they are successful in court, the court will issue a deficiency judgment in the amount of the deficiency. The lender may also successfully sue for additional monies to pay for the court costs and the cost of the repossession.
What can the lender take for a deficiency judgment?
Assuming the lender wins a deficiency judgment against you, they may have the legal right to collect the debt through wage garnishments, bank account levies, and property repossessions. State laws vary, however, and not all creditors are allowed to utilize all collection actions.
For example, in the state of Texas, certain unsecured creditors do not have the legal right to collect deficiency judgments through wage garnishments (exceptions exist for spousal and child support, student loan debt, and certain tax debts).
Laws may also protect certain accounts and assets from deficiency judgments, including your primary residence and retirement accounts. Review your state’s laws if you have more specific questions about what can be garnished or repossessed in your state to satisfy a deficiency judgment.
How likely is the creditor to pursue the deficiency?
Unfortunately, there is generally no way to know for sure whether a creditor will take the time and effort to pursue a deficiency. Some creditors may decide the time, cost, and effort to pursue the deficiency are too high, especially if the deficiency is minimal. Creditors may also decide that if you had any money left then you probably would not have defaulted on the loan.
How can I avoid a repossession and deficiency judgment?
The most important step to avoid a repossession is not to buy a car that you cannot afford. Understand your monthly expenses and plan for emergencies, including unemployment. Next, if you are unable to make a car payment, contact your lender immediately. They do not want to repossess your car and may be willing to work with you.
If a repossession and sale are impossible to avoid, make sure your creditor follows state laws and sells the vehicle legally and gets the highest possible price.
Latest posts by Beth (see all)
- Chapter 7 bankruptcy how to avoid filing a second time? - April 24, 2017
- Chapter 7 bankruptcy how do they determine if I can file? - April 19, 2017
- Receiving Supplemental Security Income can I file for bankruptcy? - April 12, 2017