In the majority of states, a lender is not legally obligated to obtain a court order to repossess a car, as long as the repossession process is peaceful and no one objects. As a result, many vehicles are taken when the owner is not present or the car is parked in a public area.
Discovering that your car has been repossessed can be an overwhelming experience, but the situation may not be over yet. If the lender doesn’t receive full payment for the loan, they can pursue a deficiency judgment.
So what Happens After the Lender Repossesses your Car?
Most states require lenders to send a letter to the borrower notifying them of the repossession and the amount owed. The letter sets a deadline for the borrower to pay off the entire loan. If the borrower fails to pay the loan in full, the lender will sell the car.
The proceeds from the sale of the vehicle are applied to the loan balance. However, if the sale doesn’t cover the entire amount of the car loan, the lender can seek a deficiency judgment to recover the remaining balance. It’s important to note that the laws surrounding deficiency judgments vary by state, so it’s important to understand the specific regulations in your area.
What Is a Deficiency Judgment for Car Repossessions?
After a car is repossessed and sold, the deficiency refers to the amount still owed on the loan after the sale’s net proceeds have been applied. For instance, let’s assume that you owe $19,000 on your car loan, but the lender repossesses and auctions the car for $11,000. In this case, the deficiency amount would be $8,000.
The lender can file a debt collection lawsuit to recover the $8,000, as well as attorneys’ fees, filing fees, and interest. If the judge rules in favor of the lender, you would be liable for the deficiency amount. In other words, you would have a personal judgment against you for over $8,000, even if your car has already been taken.
The lender may take legal action to collect the judgment, such as asking for a wage garnishment order, depending on your financial situation and state law. This could lead to you paying off a judgment for a car that you no longer own.
Does Filing for Bankruptcy Eliminate Deficiency Judgments from Repossessions?
Yes, filing for Chapter 7 or Chapter 13 bankruptcy can discharge deficiency judgments from repossessions, as well as those from foreclosures.
Deficiency judgments are classified as unsecured debts, which means they are dischargeable under the Bankruptcy Code. When you file for Chapter 7, the debt is wiped out entirely once you receive your discharge. If you file for Chapter 13, the lender would receive a percentage of what you owe, and the remaining debt would be discharged once your case is over.
What Are the Advantages of Filing for Chapter 7 Before My Car is Repossessed?
If you know you can no longer afford to keep your car, you may want to consider filing for Chapter 7 bankruptcy before the lender repossesses it.
With Chapter 7, you can surrender your vehicle in full satisfaction of the debt, which means the lender can’t file a debt collection lawsuit or garnish your wages if they don’t receive enough money to pay off the loan entirely. Additionally, filing for Chapter 7 bankruptcy discharges all of your unsecured debts, including credit card bills, medical debts, personal loans, most judgment debts, and some old income tax debts.
Most people experience a financial crisis at some point in their lives, and bankruptcy can be the fresh start you need to get back on your feet. Whether it’s due to divorce, illnesses, unemployment, accidents, loss of a spouse, or other life events, if you’re struggling with debts you can’t pay, filing for bankruptcy can help you get a fresh financial start. Chapter 13 bankruptcy offers similar benefits to Chapter 7.
Summary
If your car is repossessed, the lender may seek a deficiency judgment to recover the remaining loan balance after the sale of the vehicle. Filing for Chapter 7 or Chapter 13 bankruptcy can eliminate deficiency judgments, as they are considered unsecured debts. Chapter 7 bankruptcy can allow you to surrender your vehicle in full satisfaction of the debt, while Chapter 13 bankruptcy enables you to repay a percentage of what you owe over a period of three to five years. Filing for bankruptcy can also discharge other unsecured debts, such as credit card bills, medical debts, and personal loans.