Can Bankruptcy Eliminate a Car Loan Deficiency After Repossession?

If your car is repossessed, you could be responsible for paying back a deficiency. Learn how to get rid of a deficiency by filing for Chapter 7 or 13 bankruptcy.

When you can’t afford to make your car payment, the lender has the right to recover the vehicle, sell it at auction, and apply the sales proceeds to the loan. Sometimes the auction amount isn’t sufficient to cover the entire balance you owe, leaving a “deficiency.” In this article, you’ll learn:

  • whether you’re responsible for paying a repossession deficiency balance
  • the steps the lender must take to collect the deficiency balance, and
  • how you can get rid of a car loan deficiency in bankruptcy.

Learn more about your car in bankruptcy or how to avoid repossession.

Car Loan Deficiencies After Repossession

When you take out a car loan, you’re liable for paying back the loan, but you also agree to give the lender a lien allowing the lender to repossess the vehicle if you stop making your payments. If you default on your car loan, your lender will repossess your car and sell it at a public auction to satisfy its loan (as well as any fees incurred during repossession).

Because cars tend to depreciate quickly, in many cases, the sale proceeds from the auction might not be enough to pay off the outstanding loan balance and fees. If that happens, the unpaid balance is called a deficiency.

Learn how to keep a car in Chapter 7 bankruptcy or how to get your car back after repossession using Chapter 13.

Car Lenders Can Collect a Deficiency After Repossession

In most states, your car lender can come after you to collect its deficiency balance. The lender is limited to asking you to pay the deficiency without first doing more. If, however, your lender sues you in court and obtains a deficiency judgment against you, the lender can start garnishing your wages or placing liens on your other assets.

Bankruptcy Can Eliminate a Deficiency After Repossession

If your lender is suing you for a deficiency balance, filing for bankruptcy relief can stop the lawsuit. A Chapter 7 or Chapter 13 bankruptcy discharge can eliminate your responsibility to pay back a car loan deficiency. When possible, it’s best to file for bankruptcy soon after receiving notice of the suit and before the time to respond elapses. Here’s how it works.

After filing, the automatic stay prevents your lender from moving forward with collection activities, including its deficiency lawsuit against you. However, if your lender has already obtained a judgment and placed a lien on other property (such as your house), you’ll need to file a bankruptcy motion to remove the lien.

To learn more, see Lien Avoidance in Bankruptcy.

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