Debt remaining after a vehicle repossession could represent a significant challenge for the debtor. Most lenders or credit agencies will insist on payment of the debt, and may file a lawsuit to collect. A lawsuit in civil court could lead to a monetary judgment and garnishment of the debtor's bank account or wages.
Process
After repossessing a vehicle, lenders sell it at auction or private sale and apply the proceeds to the loan. Often the sales price isn't enough to pay off the loan. Cars depreciate quickly, and some people make low down payments, so it's not unusual for person to have negative equity in a car.
Statement
The credit agency will send the debtor a statement after selling the car and request immediate payment of a deficiency balance, i.e., the difference between the proceeds of the sale and the balance due on the loan before the sale. For example, a debtor may lose a car to repossession that sells for $9,000 at auction, although the balance on the loan was $13,500. This leaves a deficiency balance of $4,500.
Solutions
Debtors receiving a statement for a deficiency balance should contact an attorney to confirm that the credit agency followed applicable laws for selling the vehicle. According to the Federal Trade Commission (FTC), the credit agency must seek a reasonable price for the car, even at auction. That means a credit agency cannot not sell a $10,000 car for $500 and bill the former owner for an inflated deficiency balance.
Unsecured Debt
Deficiency balances are unsecured debt, the same as credit cards. The debtor can resolve the debt for less than the full balance. Settlements for 20 to 75 percent of the balance are sometimes possible, according to Smart Money. It depends on what a negotiator will accept.
Lawsuit
Credit agencies may pursue legal action against debtors who refuse to pay deficiency balances. It is usually better to resolve the issue through settlement before the bank files a lawsuit.
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