Do You Still Owe After a Voluntary Repossession?
Considering a voluntary vehicle repossession? Understand whether your financial obligations truly end or if you still owe a balance.
A voluntary repossession occurs when a borrower willingly returns collateral, typically a vehicle, to a lender because they can no longer meet the agreed-upon loan payments. This action can be a proactive step to avoid an involuntary repossession, where the lender seizes the asset without warning. While returning the vehicle might seem like a final resolution to the debt, it often does not absolve the borrower of their financial obligations. The central question is whether an outstanding balance remains after the asset is surrendered.
Understanding the Deficiency Balance
A deficiency balance is the amount still owed to a lender after repossessed collateral is sold, but the sale proceeds did not cover the full outstanding debt. This balance arises because the sale price of a repossessed asset, especially at auction, is frequently less than its market value. It is calculated by subtracting the sale proceeds from the total amount owed, which includes the original loan balance, accrued interest, and any late fees.
Costs incurred by the lender, such as towing, storage, sale preparation, and auction fees, are added to the outstanding debt before the sale proceeds are applied. For example, if a borrower owed $12,000 and the vehicle sold for $3,500, with an additional $150 in repossession and auction fees, the deficiency balance would be $8,650. If the sale proceeds exceed the total debt and associated costs, a “surplus” may occur, which the lender must return to the borrower.
Lender’s Actions After Repossession
After a lender receives a voluntarily repossessed vehicle, their objective is to sell the asset to recover as much of the outstanding loan balance as possible. This sale occurs through a public auction or a private sale. The lender prepares the vehicle for sale, which may involve cleaning or minor repairs to enhance its saleability.
The lender has a legal obligation to notify the borrower of their intent to sell the vehicle. This notice includes details such as whether the sale will be public or private. For public auctions, the notification specifies the time, date, and location of the sale, allowing the borrower an opportunity to attend or even bid on the vehicle. This notification also outlines the borrower’s liability for any deficiency balance that may arise after the sale.
Borrower’s Next Steps
Once a deficiency balance has been determined and the borrower has received notification, taking proactive steps is important to manage the situation. One common option is to negotiate directly with the lender to establish a payment plan for the outstanding amount. Many lenders are open to setting up a reasonable installment agreement to pay off the deficiency balance over time. This approach can help avoid further escalation of the debt and potential legal actions.
A borrower may attempt to negotiate a lump-sum settlement for a reduced percentage of the total deficiency. Lenders might consider such offers, especially if the borrower can demonstrate financial hardship, such as unemployment or disability. If direct negotiation does not yield a favorable outcome, seeking legal counsel can provide guidance on rights and available defenses. Ignoring the deficiency balance can lead to severe consequences, including the debt being sent to collections, potential lawsuits, wage garnishment, or liens on other assets.