Do I Still Owe Money After My Car Is Repossessed?

Yes, you may still owe money after your car is repossessed. If the lender sells your car at auction for less than your loan balance, you’re responsible for the difference. The remaining amount is called a deficiency balance. Additional fees like towing, storage, and auction costs add to what you owe. Repossession doesn’t erase your debt. You have options like negotiating with your lender or filing for Chapter 7 bankruptcy to manage or eliminate the balance.

When Can Your Car Be Repossessed?

If you fall behind on your auto loan, you could face repossession. Vehicle repossession happens when you default on your car loan. Missing payments or violating loan terms triggers default. Failing to maintain proper insurance coverage can also cause default. Read and understand your loan agreement before signing.

Car loans are secured loans. The car itself serves as collateral for the loan. Lenders can take back the car if you don’t meet the loan terms. When you take out a car loan, you agree to this arrangement. If you stop making payments, the lender has the right to repossess.

Repo laws vary by state. In most cases, lenders can start repossession as soon as you miss a payment. Repossession rarely happens immediately. Most lenders first try to contact you about missed payments. If you’re facing financial hardship, reach out to your lender. Many lenders will work out payment plans or temporary solutions.

Important: In most states, repo agents can take your car without warning. They typically don’t need your permission, but they must follow specific rules. Repo agents can’t break into locked areas like a garage. They are allowed to take your car from a driveway, street, or public parking lot.

Can You Still Owe Money After Your Car Is Repossessed?

Yes, some people will owe money even after their car is repossessed. Once your car is repossessed, you may have a chance to get it back. The process is called redemption. To redeem your car, you typically need to pay the full amount necessary. You must cover missed payments, interest, penalties, and fees. You’ll also need to cover repossession costs like towing and storage fees. Each state has its own rules about how and when you can redeem a vehicle.

If you’re unable to pay the redemption amount, the lender will sell your car at auction. The lender must notify you of the auction’s date and location. State laws outline the specific steps the lender must take to conduct the sale.

Lenders are generally required to sell the car for a commercially reasonable price. You won’t always get full market value. Auction prices are often lower than private sale or trade-in values. The sale amount might not fully cover what you owe. Even though state laws ensure fairness, the final sale price may leave you responsible. The remaining balance on your loan is known as a deficiency balance.

How Is a Deficiency Balance Calculated?

Here’s a simplified example of how a deficiency balance is calculated. Say you owe $15,000 on your car loan at the time of repossession. The lender sells your car for $10,000 at auction. You’ll still owe the $5,000 difference, plus any fees the lender adds.

Many people find themselves in situations where their car loan is underwater. An underwater loan means you owe more on the loan than the car is worth.

What Are Underwater Car Loans?

An underwater loan happens when you owe more than your car is worth. If you were to sell the car or if it’s repossessed, the amount wouldn’t fully pay off your loan balance.

There are a few common reasons why car loans become underwater:

• Car depreciation: Cars lose value quickly, especially in the first few years. Your loan balance can exceed the car’s current market value.
• Little or no down payment: When you buy a car with little or no money down, you start with a high loan balance. Since cars lose value quickly, your loan can go underwater almost immediately.

Underwater loans are a big factor in repossessions. If your car is repossessed and sold at auction, an underwater loan makes it harder for the auction price to cover the full loan balance. Many people end up with a deficiency balance. The auction sale isn’t enough to pay off the loan and additional fees.

How Are the Proceeds From the Auction Used?

Once the car is sold at auction, the proceeds are used to cover various costs in a specific order. Here’s how lenders typically distribute the money:

• Repossession and auction costs: First, the money goes toward paying for repossession-related expenses. Towing, storage, and auction costs can add up quickly and take a significant chunk of the proceeds.
• Loan balance: After repossession and auction costs are covered, the remaining money is applied to the outstanding balance. The auction price often isn’t enough to fully pay off the loan, especially if the car loan was underwater.
• Leftover funds: If there’s any money left over after paying off the repossession fees and loan balance, the surplus is returned to you. Unfortunately, this is rare because repossessed cars often sell for less than the amount owed.

If the auction proceeds don’t cover all the costs and your loan balance, you’ll be left with a deficiency balance. Unlike the car loan, the deficiency balance is considered an unsecured debt. The lender or a collection agency will likely pursue this debt through phone calls, written notices, and even a debt lawsuit.

Even if you voluntarily surrender your car to avoid repossession, the same rules apply. The lender will sell the car, and you’ll still be responsible for any deficiency balance if the sale doesn’t cover the full loan amount.

Options for Dealing With a Deficiency Balance After Repossession

If you’re left with a deficiency balance after the auction proceeds are applied, you do have options for handling it.

Here are some steps you can take:

• Negotiate with your lender
• Wait for the debt to be sent to collection and negotiate with the debt collector
• Set up a free consultation with a nonprofit credit counselor to get personalized debt and budget advice
• File Chapter 7 bankruptcy to get relief from debt collectors and erase the deficiency balance and other unsecured debts

Negotiate With Your Lender

Many lenders are willing to work with borrowers to settle a deficiency balance. You can try:

• Requesting a reduction: Ask the lender to lower the total amount you owe. Many lenders prefer a partial payment rather than no payment at all.
• Offering a lump-sum payment: If you can afford it, offering a lump sum may make the lender more likely to settle for a lower amount.
• Setting up a payment plan: If a lump sum isn’t an option, ask the lender to arrange a manageable payment plan that works with your budget.

Tip: Make sure any agreement you reach is in writing so you have proof of the terms.

Wait for the Debt To Be Sent to Collections

If you can’t come to an agreement with your lender, they may sell the deficiency balance to a collection agency. While not ideal, some people choose to negotiate with the collection agency instead. Collection agencies often purchase debts for less than their full value. They may be more willing to settle the debt for less than you owe.

Important: Keep in mind that collection agencies can be aggressive in their attempts to recover the debt. The balance will continue to hurt your credit score while it remains unpaid.

Set Up a Free Consultation With a Credit Counselor

Many people facing repossession are also struggling with other debts like credit card debt or medical bills. If that’s you, consider setting up a free consultation with a nonprofit credit counselor. These debt and budgeting professionals can assess your financial situation and offer potential solutions. Options include a debt management plan through our partner Cambridge Credit Counseling or Chapter 7 bankruptcy.

File for Chapter 7 Bankruptcy

If the deficiency balance is too large to handle and you’re struggling with other debts, Chapter 7 bankruptcy may be an option. Chapter 7 has a few major benefits. As soon as you file, you get the protection of the automatic stay. The automatic stay immediately stops all collection efforts including lawsuits and wage garnishment.

The second big benefit of Chapter 7 is that it gives you a total financial fresh start. A successful Chapter 7 filing wipes out almost all unsecured debts. You can speak with a bankruptcy attorney for free to see if you qualify. Deficiency balances, credit card debt, medical bills, and more can be discharged.

There are some downsides to filing bankruptcy as well, so keep those in mind. Your credit score will likely take a hit in the short run. You’ll probably have a higher interest rate when you go to take out new credit cards or loans.

3 Ways To Avoid Owing After Repossession

Avoiding repossession altogether is often the best way to prevent a deficiency balance. Taking proactive steps can help you stay in control of your situation. You can avoid long-term consequences like damaged credit or lawsuits. Here are some strategies to help you avoid repossession and minimize your risk of owing money.

Keep Track of Your Loan and Car’s Value

One of the first things you can do is track how much you owe. Compare your loan balance to how much your car is worth.

You can do this by checking your loan balance through your lender’s online portal. You can also check your monthly loan statement. Research the value of your car using tools like Kelley Blue Book (KBB) or Edmunds. These websites provide current estimates of your car’s market value based on factors like its make, model, mileage, and condition.

Watch for negative equity. If you owe more on your car loan than the car is worth, your loan is considered underwater or upside down. Cars lose value quickly due to depreciation, especially in the first few years.

If your loan is underwater, be cautious about trading in your car. Many dealerships will roll the negative equity into your new loan. Your overall debt and monthly payments will increase. Keeping up with payments becomes harder and increases the risk of repossession.

Keeping tabs on your loan and car value helps you make informed decisions. You can avoid getting trapped in a cycle of debt.

Communicate With Your Lender Early

If you’re having trouble making payments, don’t wait until you’re behind. Reaching out to your lender early can often help you avoid repossession and additional fees. Here are some tips:

• Be proactive: Lenders are usually more willing to work with borrowers who contact them before missing payments. Explain your situation and ask about possible solutions.
• Ask about loan modifications: Many lenders offer loan modification programs that allow you to adjust the terms. You might extend the loan term to reduce your monthly payment or lower your interest rate.
• Request a payment deferment: Some lenders may allow you to temporarily pause payments (a deferment). You can reduce your monthly payment amount for a short time while you get back on your feet.
• Work on a budget: In addition to speaking with your lender, consider revisiting your household budget. Cutting nonessential expenses temporarily can free up money for car payments.

By being open and honest with your lender, you can often avoid repossession and the resulting deficiency balance.

Sell the Car Before Repossession

If you can’t afford to keep making payments, selling the car yourself before repossession may help. Private sales often bring higher prices than lender auctions. Use tools like Kelley Blue Book to set a fair price and attract buyers. A higher sale price can help you pay off your loan balance. If the sale doesn’t cover the full amount, you’ll likely owe less than if the car were repossessed.

For those who still need a vehicle, trading in your car for a less expensive one is another option. You can get lower payments. However, be cautious about rolling negative equity into a new loan. You could leave yourself in a worse financial situation. If you still owe money on the loan, work with your lender to release the car’s title. Most lenders will cooperate since a private sale often recovers more of the loan balance.

Selling your car yourself can help you avoid extra costs, protect your credit, and stay in control of your finances.

FAQs About Car Repossession and Deficiency Balances

Here are answers to some common questions about car repossession and deficiency balances: