Do I Still Owe Money After My Car Is Repossessed?

When Can Your Car Be Repossessed?

If you fall behind on your auto loan or miss payments, you could face the risk of repossession. Vehicle repossession happens when you default on your car loan, which can occur if you miss payments or violate other terms of the loan, like failing to maintain proper insurance coverage. This is why it’s important to carefully read and understand the terms of your loan agreement before signing.

Car loans are considered secured loans, meaning the car itself serves as collateral for the loan. This allows the lender to take back the car if you don’t meet the terms of the loan. When you take out a car loan, you’re essentially agreeing that if you stop making payments, the lender has the right to repossess the vehicle.

Repo laws vary by state, but in most cases, lenders can start the repossession process as soon as you miss a payment. That said, repossession rarely happens immediately. Most lenders will first try to contact you about missed payments through phone calls or written notices. If you’re facing financial hardship, it’s always a good idea to reach out to your lender. Many lenders are willing to work out payment plans or temporary solutions to help you avoid repossession.

Important: In most states, repo agents can take your car without warning or prior notice. They typically don’t need your permission, but they must follow specific rules. For example, repo agents can’t break into locked areas like a garage, but they are allowed to take your car from a driveway, street, or public parking lot.

Can You Still Owe Money After Your Car Is Repossessed?

Yes, some people will owe money even after their car has been repossessed by the lender. Let’s explore this process.

Once your car is repossessed, you may still have a chance to get it back through a process called redemption. To redeem your car, you typically need to pay the full amount necessary to bring the loan current. This includes not only the missed payments but also any interest, penalties, and fees that have accrued. On top of that, you’ll likely need to cover additional repossession costs like towing and storage fees. Keep in mind that each state has its own rules about how and when you can redeem a vehicle, so it’s important to check your state’s specific laws.

If you’re unable to pay the redemption amount, the lender will usually sell your car at a public auction to recover as much of the loan balance as possible. By law, the lender must notify you of the auction’s date and location, and state laws outline the specific steps the lender must take to conduct the sale.

Lenders are generally required to sell the car for a commercially reasonable price, but this doesn’t always mean you’ll get full market value. Auction prices are often lower than private sale or trade-in values, and the sale amount might not fully cover what you owe on the loan. Even though state laws are in place to ensure the auction process is fair, the final sale price may still leave you responsible for the remaining balance on your loan, known as a deficiency balance.

How Is a Deficiency Balance Calculated?

Here’s a simplified example of how a deficiency balance is calculated: Say you owe $15,000 on your car loan at the time your vehicle is repossessed, and the lender sells your car for $10,000 at auction. You’ll still owe the $5,000 difference, plus any fees the lender adds. 

Many people find themselves in this situation because their car loan is underwater, meaning they owe more on the loan than the car is worth. 

What Are Underwater Car Loans?

An underwater loan happens when you owe more on your car loan than your car is worth. This means that if you were to sell the car or if it’s repossessed, the amount it’s worth wouldn’t be enough to fully pay off your loan balance.

There are a few common reasons why car loans become underwater:

• Car depreciation: Cars lose value quickly, especially in the first few years after purchase. This can leave you owing more on the loan than the car’s current market value.

• Little or no down payment: When you buy a car with little or no money down, you start with a loan balance that’s very close to the car’s purchase price. Since cars lose value quickly, this can leave your loan underwater almost immediately.

Underwater loans are a big factor in repossessions. If your car is repossessed and sold at auction, an underwater loan makes it much harder for the auction price to cover the full loan balance. This is why many people end up with a deficiency balance — the amount left over after the auction sale isn’t enough to pay off the loan and additional fees like repossession and storage costs. 

How Are the Proceeds From the Auction Used?

Once the car is sold at auction, the proceeds are used to cover various costs in a specific order. Here’s how lenders typically distribute the money:

• Repossession and auction costs: First, the money goes toward paying for repossession-related expenses, such as towing, storage, and the costs of holding the auction. These fees can add up quickly and take a significant chunk of the proceeds.

• Loan balance: After repossession and auction costs are covered, the remaining money is applied to the outstanding balance on your loan. However, as mentioned, the auction price often isn’t enough to fully pay off the loan, especially if the car loan was underwater.

• Leftover funds: If there’s any money left over after paying off the repossession fees and loan balance, the surplus is returned to you. Unfortunately, this is rare because repossessed cars often sell for less than the amount owed on the loan.

If the auction proceeds don’t cover all the costs and your loan balance, you’ll be left with a deficiency balance. Unlike the car loan, the deficiency balance is considered an unsecured debt. The lender or a collection agency will likely pursue this debt through phone calls, written notices, and even a debt lawsuit.

It’s important to know that even if you voluntarily surrender your car to avoid repossession, the same rules apply. The lender will sell the car, and you’ll still be responsible for any deficiency balance if the sale doesn’t cover the full loan amount.

Options for Dealing With a Deficiency Balance After Repossession

If you’re left with a deficiency balance — remaining debt on the car loan after the auction proceeds are applied — you do have options for handling it.

Here are some steps you can take:

• Negotiate with your lender

• Wait for the debt to be sent to collection and negotiate with the debt collector

• Set up a free consultation with a nonprofit credit counselor to get personalized debt and budget advice

• File Chapter 7 bankruptcy to get relief from debt collectors and erase the deficiency balance and other unsecured debts

Let’s look at each of these in more detail.

Negotiate With Your Lender

Many lenders are willing to work with borrowers to settle a deficiency balance. You can try:

• Requesting a reduction: Ask the lender to lower the total amount you owe. Many lenders prefer a partial payment rather than no payment at all.

• Offering a lump-sum payment: If you can afford it, offering a lump sum may make the lender more likely to settle for a lower amount.

• Setting up a payment plan: If a lump sum isn’t an option, ask the lender to arrange a manageable payment plan that works with your budget.

Tip: Make sure any agreement you reach is in writing so you have proof of the terms.

Wait for the Debt To Be Sent to Collections

If you can’t come to an agreement with your lender, they may sell the deficiency balance to a collection agency. While this isn’t ideal, some people choose to negotiate with the collection agency instead of the lender. Collection agencies often purchase debts for less than their full value, so they may be more willing to settle the debt for less than you owe.

Important: Keep in mind that collection agencies can be aggressive in their attempts to recover the debt, and the balance will continue to hurt your credit score while it remains unpaid.

Set Up a Free Consultation With a Credit Counselor

Many people facing repossession are also struggling with other debts like credit card debt or medical bills. If that’s you, consider setting up a free consultation with a nonprofit credit counselor. These debt and budgeting pros can assess your financial situation and offer potential solutions like a debt management plan or Chapter 7 bankruptcy. 

You can also take Upsolve’s free screener to see which debt relief options you qualify for.

File for Chapter 7 Bankruptcy

If the deficiency balance is too large to handle and you’re also struggling with other debts, Chapter 7 bankruptcy may be an option. Chapter 7 has a few major benefits. For one, as soon as you file, you get the protection of the automatic stay. The automatic stay immediately stops all collection efforts including lawsuits and wage garnishment. 

The second big benefit of Chapter 7 is that it gives you a total financial fresh start. A successful Chapter 7 filing wipes out almost all unsecured debts, including deficiency balances, credit card debt, medical bills, and more.

There are some downsides to filing bankruptcy as well, so keep those in mind as you’re making your decision. One downside is that your credit score will likely take a hit in the short run, which means you’ll probably have a high interest rate when you go to take out new credit cards or loans.

3 Ways To Avoid Owing After Repossession

Avoiding repossession altogether is often the best way to prevent a deficiency balance and the financial stress that comes with it. Taking proactive steps can help you stay in control of your situation and avoid long-term consequences like damaged credit or lawsuits. Here are some strategies to help you avoid repossession and minimize your risk of owing money.

Keep Track of Your Loan and Car’s Value

One of the first things you can do to protect yourself is to track how much you owe on your car loan compared to how much your car is worth.

You can do this by checking your loan balance through your lender’s online portal or your monthly loan statement and researching the value of your car using tools like Kelley Blue Book (KBB) or Edmunds. These websites provide current estimates of your car’s market value based on factors like its make, model, mileage, and condition.

It’s also important to watch for negative equity. If you owe more on your car loan than the car is worth, your loan is considered underwater or upside down. This can happen because cars lose value quickly due to depreciation, especially in the first few years after purchase.

If your loan is underwater, be cautious about trading in your car for a new one. Many dealerships will roll the negative equity into your new loan, increasing your overall debt and monthly payments. This only makes it harder to keep up with payments and increases the risk of repossession.

Keeping tabs on your loan and car value can help you make informed decisions and avoid getting trapped in a cycle of debt.

Communicate With Your Lender Early

If you’re having trouble making payments, don’t wait until you’re behind to do something about it. Reaching out to your lender early can often help you avoid repossession and additional fees. Here are some tips on how to do this:

• Be proactive: Lenders are usually more willing to work with borrowers who contact them before missing payments. Let them know you’re struggling and ask about possible solutions.

• Ask about loan modifications: Many lenders offer loan modification programs that allow you to adjust the terms of your loan to make payments more affordable. This might include extending the loan term to reduce your monthly payment or lowering your interest rate.

• Request a payment deferment: Some lenders may allow you to temporarily pause payments (a deferment) or reduce your monthly payment amount for a short time while you get back on your feet.

• Work on a budget: In addition to speaking with your lender, consider revisiting your household budget to free up money for car payments. Cutting nonessential expenses temporarily can make a big difference.

By being open and honest with your lender, you can often avoid repossession and the resulting deficiency balance.

Sell the Car Before Repossession

If you can’t afford to keep making payments on your car, selling it yourself before repossession may help minimize financial damage. Private sales often bring higher prices than lender auctions, allowing you to use tools like Kelley Blue Book to set a fair price and attract buyers. A higher sale price can help you pay off your loan balance, and if the sale doesn’t cover the full amount, you’ll likely owe less than if the car were repossessed and sold at auction.

For those who still need a vehicle, trading in your car for a less expensive one with lower payments is another option. However, be cautious about rolling negative equity into a new loan, as this could leave you in a worse financial situation. If you still owe money on the loan, work with your lender to release the car’s title. Most lenders will cooperate since a private sale often recovers more of the loan balance without repossession.

Selling your car yourself can help you avoid extra costs, protect your credit, and stay in control of your finances.

FAQs About Car Repossession and Deficiency Balances

Here are answers to some common questions about car repossession and deficiency balances:

Can I Stop a Repossession Once It Starts?

In some cases, yes, it’s possible to stop a repossession once it’s in motion. The most straightforward way is to pay the overdue amount, including any late fees, to bring the loan current. If you can’t pay the full amount, you can try contacting your lender to negotiate a payment plan or temporary deferment. 

Many lenders are willing to work with borrowers to avoid repossession, as it’s often costly for them, too. Act quickly and communicate with your lender as soon as possible to get the best chance at stopping the process and keeping your car.

What Happens if I Voluntarily Surrender My Car?

If you voluntarily surrender your car, you can avoid some of the extra costs associated with repossession, such as towing and storage fees. But you’ll still be responsible for paying the deficiency balance if the car is sold for less than the amount you owe on the loan. Voluntarily surrendering the car doesn’t erase the debt. It just allows you to return the vehicle on your own terms rather than have it forcibly repossessed. 

While this option won’t save your credit from the negative impact of defaulting on your loan, it may show lenders that you’re taking responsibility, which could make them more willing to negotiate payment terms for the remaining balance.

How Long Does a Repossession Stay on My Credit Report?

A repossession will typically remain on your credit report for seven years, starting from the date you first missed a payment that led to the repossession. Having a repo on your credit report will hurt your credit score, which can make it harder to qualify for loans or credit cards and get good interest rates. 

That said, the impact on your credit score lessens over time, and you can take steps to rebuild your credit and offset the damage.

Will Filing Bankruptcy Stop Repossession?

Filing for Chapter 7 or Chapter 13 bankruptcy can stop repossession through a legal process called the automatic stay, which temporarily halts all collection efforts, including repossessions. In Chapter 13 bankruptcy, you may be able to keep your car by reorganizing your debt and catching up on missed payments through a repayment plan. In Chapter 7 bankruptcy, the automatic stay might give you some time to negotiate with your lender, but if you can’t afford to bring the loan current, the lender may still repossess the car once the bankruptcy process is complete.