Do I still owe after my car is repossessed?

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In a Nutshell

Unfortunately, having your car repossessed isn’t the end of the road on your car loan. Many Americans owe more on their car than it is worth and their loan is “underwater.” Here’s what you need to know about vehicle repossession and how Chapter 7 bankruptcy can offer some debt relief.

Written by Attorney Amelia Niemi.  
Updated July 22, 2020


Unfortunately, having your car repossessed isn’t the end of the road on your car loan. Many Americans owe more on their car than it is worth and their loan is “underwater.” Here’s what you need to know about vehicle repossession and how Chapter 7 bankruptcy can offer some debt relief.

Vehicle loans are secured debt

There are two kinds of debt – secured debt and unsecured debt. If you have unsecured debt, the lender can’t take away, or repossess, your house, car, or truck if you don’t make payments. Medical bills, student loans, and most credit card debt are examples of unsecured debt.

A car loan is secured debt. The loan that let you buy the car is secured by, or attached to, the car. If you don’t make your monthly car payments, the company that gave you the loan can repossess your car. Under state law, the company probably may even be able to repossess your car immediately after one late or missed payment. After a certain number of missed payments, it can and will send the repo man out with the tow truck, looking for your vehicle.

What happens after a repossession?

After your car is repossessed, you may have time to redeem it. To redeem the car, you will likely have to pay enough to bring the loan current. This typically includes the full amount of the missed payments, interest, penalties, and other charges on the loan, as well as towing and storage fees. Your state will have specific rules about what you and the car company must do to redeem your vehicle.

If you can’t afford to pay the redemption amount, the car company will sell your car at a public auction. The loan company must tell you the date and location where it will sell the car. Your state’s laws will list exactly what the loan company must do when it sells the car. 

In general, loan companies must sell the car for a reasonable price. Nevertheless, the sale price might not be the full market value of the vehicle and it might not match the amount that’s still owed. However, your individual state laws make sure that the auction happens in a reasonable manner.

How the proceeds from the auction are used

When a repossessed car is sold at auction, your state’s laws list who receives the money from the sale, or the proceeds from the auction. Generally, the first thing paid is the cost of selling the car at the auction and the cost of car repossession. This includes: the costs of towing and the tow truck while the repo man does his job, storing the vehicle before auction, and attorney fees for the loan company.

After these costs are covered, the loan company needs to use the rest of the money to pay down the auto loan. This money is used to pay fees for late payments, interest on the loan, the loan balance, and any other penalties from the loan company. Any money left over after everything is paid gets returned to you, although this doesn’t usually happen.

In most cases, after the auction, there isn’t enough money to cover the loan balance after the car repossession costs are paid. Many people don’t make a large down payment on their new car, so they don’t have enough equity in their vehicle to pay everyone. 

The deficiency balance

Many people have a misconception that if you give back the car, even with a voluntary repossession, you won’t have to pay any other money on the loan. Unfortunately, this isn’t true! You still might owe the loan company some money.

After the loan company sells the car at the auction, there often isn’t enough money to pay everything you owe on the car. This difference is the deficiency balance. This is an unsecured debt because it’s not attached to anything. There is no personal property, house, or car that can be taken. While it may take a while before your loan company does anything, the loan company can take legal action by suing you for this money.

Sometimes, people are able to negotiate monthly payments with the loan company to avoid a lawsuit. If you can’t work out a payment plan, the loan company can go to court and get a judgment against you for the rest of the money. With this judgment, you might have to deal with wage garnishment each cycle before your paycheck hits your bank account. Additionally, deficiency judgments do affect your credit report and can lower your credit score. 

The deficiency balance includes negative equity from trade in

Car salespeople and loan companies sometimes advertise that they’ll pay off the balance of your old car when you buy a new car from them. This sounds like a good deal, but it might be too good to be true. If you owe more on your old car than it is worth, the car dealership will add that difference into your new loan. You might be looking at higher fees, a higher principal, or a higher interest rate. However they do the math, it’s all one big loan. You might have much higher monthly payments than you did before because of this negative equity.

This might not be manageable in the long run. You may have to deal with the loan company repossessing your car. If that happens, anything rolled in when you bought the car is part of the loan and will be part of the deficiency balance. The Federal Trade Commission (FTC) encourages people to pay special attention to this sort of trade-in deal. If you can, it’s better to avoid negative equity built-in to your new car loan.

Repossessions and Chapter 7 bankruptcy

One of the great things about Chapter 7 bankruptcy is many of your debts are discharged, meaning that you won’t have to pay them. Your personal liability on unsecured AND secured debt will be gone.

If you owe money on your repossessed car, this debt will be discharged with the rest of your unsecured debts. It doesn’t matter if the repossession happened before or after filing for bankruptcy. Filing your papers will stop the collection agency from going after you for the rest of the auto loan if your car was repossessed.

Watch out! If you sign a reaffirmation agreement with the lender, you agree to continue making loan payments. You can still keep the car by signing a reaffirmation agreement, but you need to keep making payments. An important thing to think about: if you can’t keep making car payments in the future, you may have to deal with vehicle repossession down the road. You would lose the car and your Chapter 7 discharge will not protect you from having to pay repossession costs because you reaffirmed the debt.

If you’re feeling lost in a sea of debt and are considering filing for Chapter 7 bankruptcy, see if Upsolve is the right answer for you! Upsolve provides free Chapter 7 assistance to qualified low-income individuals.



About the author
Attorney Amelia Niemi

Amelia Niemi is an attorney licensed in Illinois. She received her J.D. from DePaul University College of Law. At DePaul, she was a staff writer for the DePaul Journal of Art, Technology & Intellectual Property Law. Her legal practice includes multi-million-dollar international b... read more

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