Having your car repossessed can make a bad financial situation worse by taking away your transportation; it can also be a blow to the ego. To add insult to injury, you might even get a collection notice after the lender has already taken your car. A car lender can send your account to collections even after a repossession to collect a deficiency balance.
Car Loans are Secured Debts
A secured debt is a debt you obtained by offering collateral in exchange for the money. When you buy a car and finance the purchase, you give the lender a lien on your car in exchange for the loan. The lien remains on the car title until you pay off the loan. The lien makes your creditor a secured creditor and the debt a secured debt. The creditor has the added security that if you don't pay the debt, it can come and take the collateral. If you default on a car loan and the lender has a lien on the car, the lender can take the car to satisfy the debt.
Repossession
When a car lender takes your car after you default on payments, the act is called repossession. The lender will hire a company to come take your car from your driveway or from in front of your house. If the repo company finds out where you work or that you're storing the car somewhere else, they'll go wherever the car is and take it. Once the lender has the car, the lender will sell it at auction and use the proceeds to satisfy the debt.
A Deficiency Balance is Unsecured Debt
If the lender sells the car for less than the outstanding loan balance, the difference is called a deficiency balance. For example, if your car is worth $3,000 but the lender only gets $1,800 for the car at auction, the deficiency balance is $1,200. The lender will still release the lien and give clear title to the new owner, extinguishing the security interest, but the deficiency balance is your responsibility. Because the lien is gone, the deficiency balance is an unsecured debt, which is a debt that has no collateral backing it.
Collections
A creditor may hire a collection agency to collect a deficiency balance. A collection agency is a third party a lender can use to collect debts on its behalf. A collection agency can send you letters and call you repeatedly to collect the debt. If you still don't pay, the collection agency or the lender will eventually sue you for the amount you owe. If you have a deficiency balance after a repossession and don't pay it, the account can go to collections.
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