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Information on Creditor Actions On A Deficiency Balance

If I default on my loan, besides affecting my credit and repossessing the car, what can the lender legally do?

If I default on my loan, besides affecting my credit and repossessing the car, what can the lender legally do? I know that if they sell the car, they will get enough to pay it off, can they take other measures to get the rest from me?

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Bill's Answer
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Updated: Dec 21, 2011

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Highlights

  • Review how a deficiency balance is incurred.
  • Understand what actions a creditor can take to collect from you.
  • Learn how a deficiency balance affects your credit.

One of the biggest problems caused by the repossession of vehicles is that a large debt often remains to be paid, even after the consumer no longer owns the vehicle. When a car is repossessed or voluntarily surrendered, the lender usually auctions the vehicle and applies the amount received at auction to the balance of the loan. Whatever remains to be paid is called a deficiency balance. The former owner is responsible for the deficiency balance, which can leave the former owner on the hook for many thousands of dollars.

Deficiency Balance

If you end up owing a deficiency balance after your vehicle is repossessed, your creditor can proceed with collection actions against you. You could face a lawsuit against you to collect the debt. Depending on your state's laws, if a creditor files a lawsuit and obtains a judgment against you, it may be able to garnish your wages, levy your bank accounts, and place liens on any property you own. To read more about your specific state's laws regarding what property can be taken from you to enforce judgments, I encourage you to visit the Bills.com page about collection laws.

Impact on Credit

In addition to the risk of the creditor filing a lawsuit against you, having a deficiency balance on your credit reports can significantly lower your credit score and make rebuilding your credit score very difficult. I encourage you to work with the creditor to negotiate repayment terms to pay off any deficiency balance owed on your vehicle.

Settlement and Taxes

If you can save or borrow a lump sum to offer a settlement to the creditor, the creditor may be willing to settle the account for significantly less than what you actually owe. Frequently, creditors will settle for as little as 30% or 40% of the balance owed. If you cannot raise a lump sum to settle the account, you should be able to negotiate an affordable repayment plan with the creditor to prevent further collection activity on the debt. Keep in mind that when a debt is settled for less than is owed, you could have to pay taxes on the forgiven debt.

Improve Your Credit

While I encourage you to try to repay any deficiency balance on your vehicle, you should keep in mind that the more time that passes from the time you defaulted on the auto loan, the less impact the account will have on your credit score. Even if you are unable to resolve the delinquency balance, you should be able to rebuild your credit score over the course of the next few years, but you must be responsible with any credit that is extended to you.

To learn more about credit and ways to improve your credit score, I encourage you to visit the Bills.com Credit Solutions and Resources page. I hope that the information I have provided will help you Find. Learn. Save.

Best,

Bill

Bills.com

10 Comments

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  • DT
    Dec, 2011
    Dana
    Okay so about three years ago I lost my job, got behind on car payment and couldn't afford it. So I did a voluntary repossession and surrendered my car. They sold it at an auction, and contacted me over the remaining balance. I worked out payment plans with them until I got my income tax, and then with my income tax I paid them off. So, two years later I got this letter from the IRS saying I owe a little over 800.00 for cancellation of debt. How is this cancellation of debt when I paid them!!!! What do I do? Is this a error on their side or what?
    0 Votes

    • BA
      Dec, 2011
      Bill
      It sounds like you did not receive a copy of a 1099-C, but that one was sent to the IRS directly. If you paid the debt in full and none of it was forgiven, then the 1099-C should not have been sent to the IRS. Here are two suggestions to resolve this problem:
      1. Contact the IRS Office of the Taxpayer Advocate and explain your situation. The Taxpayer Advocate is a free service.
      2. Contact a tax professional to get assistance with filing the proper form(s) to dispute the 1099-C.

      If you have solid proof that you paid the deficiency balance in full, then I assume that you will have an easier time resolving this matter.

      0 Votes

  • BA
    Jun, 2010
    Bill
    The creditor's intent is clear: Pay the deficiency or they will see you in court. Start negotiating to avoid a lawsuit.
    0 Votes

  • MS
    Jun, 2010
    Manuel
    i had a car that got repossessed and now the lender is asking me to pay off the deficiency balance; but they also told me if i dont pay it there goin to file a lawsuit. was the best interest here?
    0 Votes

  • BA
    Jan, 2010
    Bill
    Review Arizona 33-814 Action to recover balance after sale or foreclosure on property under trust deed. If the loan for an RV was titled under a trust deed, then I would argue that an RV will qualify under Arizona's antideficiency laws. However, in my experience in California, RV loans are not structured as deeds of trust. Accordingly, I urge you to consult with an Arizona property attorney who has experience with Arizona 33-814. Be sure to bring all of the documents regarding the loan and title of the RV to your meeting so that you can receive an accurate answer. I would also ask you to return here once you learn your answer and share it with other Bills.com readers.
    2 Votes

    • JF
      Jun, 2011
      John
      I have basically the same situation concerning my RV. I did a voluntary surrender of my RV and wondered if you have heard if there is any protection against a deficiency balance in Arizona because of the anti-deficiency balance laws for Arizona. Each year I had the RV, I deducted the interest on my taxes and when I surrendered the RV, I thought the RV was considered same as home loan repossessions.
      0 Votes

    • BA
      Jun, 2011
      Bill
      I am not aware of the Arizona anti-deficiency laws applying to an RV. That does not mean that they do not. I suggest you consult with an Arizona attorney. Please report back, so the information you gain can be shared with others.
      0 Votes

  • 35x35
    Jan, 2010
    Robert
    I purchased an RV (fifth wheel trailer) to use as my primary and only residence. I have now purchased a home in Arizona and I find I cannot afford the RV. If it is repossessed and sold is there any protection against a deficiency balance in Arizona because of the anti-deficiency balance laws here?
    0 Votes