Best Options to Pay Off Debt After a Car Repossession

Losing money
••• Alberto Ruggieri / Getty Images

It is every car owner’s worst nightmare: you have been making your payments on time for months or even years, but you start getting bogged down by financial troubles and miss a few payments. After a while, your auto loan servicer realizes that you are not going to be able to pay back what you owe on the loan, and takes the drastic step of repossessing your vehicle

It feels terrible. But even that feeling does not compare with how you might feel when the lender takes away your vehicle, and you realize that you still owe them money. 

What could you possibly be on the hook for, and what options do you have for paying off this debt now that your car has been repossessed? 

This annoying amount that you owe is a deficiency balance, and thankfully, there are several ways that you can pay it back.

What is a Deficiency Balance?

Unfortunately, getting your car repossessed does not mean that you are off scot-free. Even once a vehicle has been reclaimed, you will still be on the hook for any amount of what you owed that was not covered by the sale of the car. For example, if you still owe $3,000 on your vehicle and the lender only manages to fetch $2,500 for it at auction, you will have a deficiency balance of $500. 

And unfortunately, that is not all. You will also owe the cost of the repossession itself, the storage of the vehicle while it was waiting to be sold, and the costs of selling the vehicle. The costs can add up quickly. 

What Are You Obligated to Pay After Auto Repossession?

There are several options you have after your car has been repossessed. You can, if you are able to, simply pay the deficiency amount in full. If it’s relatively small, this might be reasonable and will help you avoid the additional stress of having to deal with other options. 

If money is very tight, which is to be expected if your car was recently repossessed, then you typically have the option of making a payment plan with the lender. This will allow you to slowly pay back your deficiency balance over time rather than all at once. 

Sometimes, if you can prove that you are in dire financial straits, the lender might agree to settle for a percentage of what you owe them.

If you choose this option and can come to an agreement, you will likely need to pay off the full amount of the settlement immediately. There can be tax consequences if you choose this option, so you should consult with an attorney rather than going it alone. 

If you absolutely cannot pay what you owe, then you may need to declare bankruptcy. Doing so will hurt your credit for a long time to come, so it should truly only be used as a last resort. You could also just try to wait it out, as there is usually some delay between the time that your car is repossessed and the time that the lender sends out a collection notice for the deficiency amount.

Best Options to Pay Off Debt After Car Repossession

To recap, there are several options you can take to pay off your debt, and the best one for you will depend on your financial situation. 

The best option for your credit score is going to be to make a lump sum payment for the total amount or to set up a payment plan with the lender. Ask a family member for a loan, sell things around the house, or pick up a side job to try to fill the gap. Doing so won’t make your credit score immediately recover from the hit it took by having a repossession on record, but it will undoubtedly help you get on the road to getting back on sound financial footing faster than the other methods will. 

Of course, desperate times call for desperate measures, and you might not always be able to pay a lump sum or make a payment plan. If times are really tough, negotiating a settlement or declaring bankruptcy might be the best option that you have. It might not save all of your financial woes, but it will give you the peace of mind that comes from no longer having to deal with this particular lender or debt collector.