Can bankruptcy eliminate a car loan deficiency after repossession?

If your car is repossessed, you may be responsible for paying back a deficiency.

by:  , Attorney

Whether you voluntarily surrender your car or your lender repossesses it, you may end up being liable for a deficiency balance on your car loan. Read on to learn more about how bankruptcy can wipe out your car loan deficiency.

For more information on how bankruptcy can help you avoid repossession, see our article area on  Car Repossession Laws.

What Is a Car Loan Deficiency?

When you take out a car loan, your lender normally has a right to repossess the vehicle if you stop making your payments. In addition, you are personally liable for paying back the loan as well. 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 may not be enough to pay off the outstanding loan balance and fees. If that happens, the unpaid balance is called a deficiency.

Your Car Lender Can Sue You to Collect a Deficiency

In most states, your car lender can come after you to collect its deficiency balance. If your lender sues you and obtains a deficiency judgment against you, it can start garnishing your wages or placing liens on your other assets. If your lender is suing you for a deficiency balance, filing for bankruptcy relief can stop the lawsuit and wipe out your obligation to pay the deficiency.

Bankruptcy Can Wipe Out Your Car Loan Deficiency

In bankruptcy, your car loan deficiency receives the same treatment as your other general unsecured debts. This means that a  Chapter 7  or  Chapter 13  bankruptcy discharge can eliminate your liability for and obligation to pay back a car loan deficiency. In addition, the moment you file your case the  automatic stay  requires your lender to stop all collection activities (including its lawsuit) against you.

However, if your lender has already obtained a judgment and placed a lien on any of your other property (such as your house), you will need to file a special motion to remove that lien in your bankruptcy.

To learn more, see  Lien Avoidance in Bankruptcy.

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