Can You Settle a Deficiency Balance After Auto Repossession?

Financial hardship can put you in a tough spot if you have a car loan. If you can't keep up with payments, a repossession could be in the cards. 

Unfortunately, losing your car might not end your obligation to the auto lender. That's because repossessed vehicles are usually auctioned off to the highest bidder. The proceeds go to the lender, and anything left over should be returned to you (minus fees).  

If the auction doesn't bring in enough money to cover the amount left on your loan, though, you could owe a deficiency balance. That means you'll still have debt associated with the car, even when you no longer own it. 

If you can't cover this balance, debt relief may be a workable option. Here's how settling a deficiency balance works, and how to decide if it's right for you.

What Is a Repossession Deficiency Balance?

A deficiency balance is any amount that's owed to the lender after a repossessed vehicle is auctioned off. Deficiency balances can include any amount still owed on the loan you used to buy the car, plus any costs the lender incurred to repossess the vehicle and arrange the auction. 

Deficiency balances are generally considered to be unsecured debts, since they're not attached to collateral. Collateral is something of value that backs up the loan. The car itself was the collateral for the auto loan, but it doesn't secure the deficiency balance since it's already been sold.

Can you have a deficiency balance if you do a voluntary surrender?

Yes, you could end up with a deficiency balance if the lender repossesses your car after default or if you voluntarily surrender it. A voluntary surrender of a car means that you agree to give the vehicle back to the lender because you can't afford the loan payments. 

If you can't pay your car loan, voluntary surrender is usually better than repossession. Both can hurt your credit, but voluntary surrender may help you avoid some of the added fees a lender might charge for a repossession. 

You also have control over when and where the car goes back to the lender when you surrender it voluntarily. That saves you having to worry about a repossession agent showing up with a tow truck while you're at work, or coming to your home in the middle of the night. 

Can You Settle a Deficiency Balance After Auto Repossession?

Yes, it could be possible to settle a deficiency balance after a car is repossessed, or if you voluntarily surrender it to the lender. Debt settlement is when the lender agrees to accept less than the full deficiency balance and forgive the rest of the debt. 

Why would an auto lender settle a deficiency balance? The simplest answer is that it may be easier and cheaper to settle than to pursue debt collection, which can be expensive and may not even work. 

If you owe a deficiency balance, the lender has a right to try to collect. You may get collection calls, letters, or texts; if you don't pay, a debt lawsuit could be next. If a lender sues you for an auto loan deficiency balance and wins, that could open you up to wage garnishment or a bank account levy.

Pursuing debt settlement doesn't guarantee that you won't be sued for a deficiency balance. However, successfully settling the balance does release you from the debt permanently. So, you might see debt settlement as a realistic solution for your situation if you can't afford to pay in full and don't want to file bankruptcy. 

How to Settle a Deficiency Balance After Auto Repossession

To settle a repossession deficiency balance, first review your finances to estimate how much you can afford to pay toward what's owed. The deficiency balance owed, the original loan amount, and the age of the debt can influence how much a lender may accept for a settlement. 

Then, decide if you're comfortable enough to negotiate debts yourself or whether you'd prefer to work with a debt settlement expert. Debt settlement companies offer some advantages:

• You don't have to negotiate directly; a debt specialist does it for you.

• You don't necessarily need to have a big stack of cash to settle with right away. Instead, you'll make a fixed payment into a secure account each month until you have enough saved to negotiate.

• A debt expert may be able to negotiate a better settlement offer than you could get on your own. 

• Your expert could also negotiate how a settled deficiency balance is reported to the credit bureaus. 

Debt relief services aren't free, but a reputable debt settlement company won't charge any settlement fees unless you agree with the offer and at least one payment to your creditor is made. That means if the settlement company isn't able to successfully negotiate with your lender, you won't pay a debt settlement fee for that debt. 

Debt Settlement Alternatives for Deficiency Balances

Debt settlement could help you pay off a deficiency balance for less than what's owed, but it's just one potential solution for your situation. You may have other options, each with its own pros and cons:

• Pay in full: If you owe a smaller amount, you might just pay the deficiency balance in full. It won't undo any credit score damage caused by a repossession, but it could get the lender or collection agency off your back. 

• Get a loan: You might use a personal loan to pay off a deficiency balance if you don't have enough cash. Keep in mind that if your credit score has taken a hit from the repossession, you may have a harder time qualifying for the lowest personal loan rates. 

• Work out a payment plan: You could propose a monthly payment plan to the lender if you need more time to pay off a deficiency balance. If you go this route, get the terms of the agreement in writing so both sides are clear about how much will be paid each month and when the balance will be paid in full.

• File for bankruptcy: Bankruptcy is a legal way to get out of debt you can't afford to pay, and it may be appropriate if you have a financial hardship that isn't likely to improve. You may be able to discharge the full deficiency balance, along with other unsecured debts. Bankruptcy can also stop a debt lawsuit in its tracks. 

What if you're sued for a deficiency balance? You have the right to submit an answer to a summons to the court; this is essentially your defense to the lawsuit. It's a good idea to consult with an attorney licensed in your state if you're considering bankruptcy or have been sued over debt.

Talking to a debt specialist could also help you decide whether debt settlement or another option makes sense when you have a repossession deficiency balance. Get a no-obligation consultation with Freedom Debt Relief today.