Paying Off a Deficiency Balance After Your Car Is Repossessed

A repossessed car on the flat bed of a tow truck driving down a street.
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If you fall behind on your car loan payments, your auto loan servicer may have the right to repossess your vehicle. If you don't pay them what you owe on the loan, this is one of the few options open to them. They may then sell the car or keep it as compensation for your debt.

What's worse is when the lender takes away your vehicle, and you learn that you still owe them money. If your car has been repossessed and sold for less than what you owe on the loan, the difference is called a deficiency balance. There are several ways that you can pay it back.

Deficiency Balance

When your car is repossessed, it does not mean that you are released from repaying the loan you took out to buy the vehicle. Even once a car has been reclaimed, you are still responsible for paying the portion of the loan balance that remains after the lender sells your 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. You have an obligation to pay off this debt.

Your lender may also require that you pay the cost of repossessing, storing, and selling the vehicle, in addition to the deficiency you still owe. Those administrative costs can add up quickly.

If you still owe money after your car has been repossessed, you have several options, depending on your financial situation.

Pay the Debt in Full

If you are able to, pay the deficiency amount (and any associated fees) in full. This method lets you avoid the stress of drawing out the process of repayment. You also might be able to reinstate your loan by catching up on your past-due payments and paying any required fees. 

You will probably have 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. Use this period to save and plan how you will pay any balance due on the loan.

To come up with the required amount, you might ask a family member for a loan, sell things around the house, or pick up a side job to try to cover the gap.

Work Out a Payment Plan

If money is tight and you cannot afford to pay the deficiency in full, then you may be able to make a payment plan with the lender. This will allow you to slowly pay back your deficiency balance over time rather than all at once. 

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.

With repossessions, negative accounts will remain on your credit report for seven years from the date of delinquency. The date of delinquency is the first missed payment that led to the repossession, not the date of the repossession itself. Paying your deficiency over time won’t immediately revive your credit score from the hit it took by having a repossession on record, but it will help you start getting back on your feet.

Agree on a Settlement Amount

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. However, if your lender agrees to your paying only a percentage of the remaining balance due, they may demand you 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 or a tax accountant rather than going it alone. 

Declare Bankruptcy

If you simply cannot pay what you owe, then you may need to declare bankruptcy. If you do this before your creditor sells the car, you may be able to get it back. Bankruptcy may also help you pay a lower amount or lower interest costs, depending on whether you file Chapter 7 or Chapter 13.

If you reaffirm your debt with the lender under Chapter 7, they will promise not to repossess your car again so long as you continue to make your payments.

Filing bankruptcy can affect your credit score for years, so this method should only be used as a last resort.

The Bottom Line

The best method for paying off a deficiency balance is to pay the entire balance in full—and if that isn't possible, the next best option is to work out a payment plan.

If times are really tough, declaring bankruptcy might be your only choice. It might not solve 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 debt.

Article Sources

  1. Federal Trade Commission Consumer Information. "Vehicle Repossession." Accessed May 1, 2020.

  2. Consumer Financial Protection Bureau. "My Car Has Been Repossessed, and I Was Told It Will Be Sold. What Can I Do?" Accessed May 1, 2020.

  3. National Consumer Law Center. "What to Do After Your Car Is Repossessed." Accessed May 1, 2020.

  4. Experian. "How Long Does It Take for a Repossession to Come off Your Credit?" Accessed May 1, 2020.

  5. United States Courts. "Chapter 7 - Bankruptcy Basics." Accessed May 1, 2020.