A deficiency balance is the amount still owed after your property (car or home) is sold after it is repossessed or foreclosed on. Unfortunately, that means that after losing the property, you may still face collection actions.
The Post-Repossession Auction
In the majority of states, homes cannot be sold after foreclosure for less than seventy-five percent of the appraised value. Vehicles, on the other hand, can be auctioned off for any amount bid, as long as it is “commercially reasonable,” and the vehicle only has to be offered once. Your vehicle may have a value of several thousand dollars, but if no one is interested in it that day, it may sell for just a few hundred, leaving you a large deficiency balance.
The Impact on your Credit
All states require that you be given the opportunity to pay the deficiency balance. Some even require that a creditor accept installment payments. Even if you pay the balance, your credit report will reflect a repossession. A single repossession can lower your credit score significantly. The exact drop depends on how high your score was to begin with. If you had an excellent rating, say 790 or higher, and had a repossession, your score could drop by 200 points or more. If your score was 620 before the repossession, it may only drop by 30 or 40 points. If you are unable to pay the deficiency balance, your score will dip even lower.
Alternatives if You’re at Risk of Repossession
Let’s say you are at risk of repossession, and you know you have negative equity in the car, meaning a deficiency balance is a given. One alternative is work out a deal with the lender to sell the vehicle yourself. It’s likely that you will be able to get more for the vehicle than the lender would at a public auction, where it will sell for a wholesale (versus private retail) price. Speak with your lender about the possibility of doing this. It may require a reinstatement of your contract.
Are Deficiency Balances Ever Forgiven?
Yes, in some cases a lender will forgive the deficiency balance. However, you will have to pay taxes on the forgiven amount, just as if it were income. This means that, at best, you’ll still be liable for a percentage of your balance.
Getting a Car Loan after Repossession
If you have had a repossession and still have deficiency balance, you may still be able to get another car loan. The repossession generally needs to be more than a year in the past and you may have to prove that you are on more solid financial footing. It will help a great deal if you either pay the deficiency balance in full or start making payments that can be verified by a potential lender.