If They Repo Your Car Do You Still Have to Pay?

A car repossession can be a distressing financial event, often leaving individuals uncertain about their financial obligations. Many people assume that once a vehicle is taken by the lender, any associated debt automatically disappears. However, in most situations, this is not the case, and borrowers may still owe a significant amount of money even after losing their car.

Understanding Repossession and Your Debt

Repossession is the act by which a lender seizes collateral, such as a car, due to a borrower’s default on loan payments. The vehicle serves as collateral for the loan, meaning it secures the debt, giving the lender the right to take possession if the borrower fails to uphold the loan terms. This action does not, by itself, erase the debt; instead, it is a method for the lender to attempt to recover some of the outstanding balance. The amount owed is tied to the original loan agreement, and the lender’s aim is to recoup the funds loaned.

Lenders have the right to repossess a vehicle once a borrower defaults. This can occur after even a single missed payment, though it frequently happens after multiple payments are missed, such as 90 days past due. Repossession can happen without prior warning, though some loan agreements or state regulations may require notice. The lender engages a repossession agent to reclaim the vehicle without needing a court order, provided they do not “breach the peace” during the process.

The Sale of the Repossessed Vehicle

After a vehicle is repossessed, the lender sells it to recover a portion of the outstanding loan amount. Methods for this sale include public auctions or private sales. The proceeds from this sale are then applied to the borrower’s outstanding debt.

The sale price plays a significant role in determining the borrower’s remaining obligation. Lenders are required to notify the borrower about the impending sale, providing details such as the date and time of a public auction or the date after which a private sale may occur. Repossessed vehicles sell for less than their market value, especially at auction, and may not cover the full outstanding loan balance along with the costs incurred by the lender. The Uniform Commercial Code (UCC) requires that all aspects of the sale, including the method, manner, time, place, and terms, be “commercially reasonable.”

Calculating the Deficiency Balance

The “deficiency balance” is the amount of money still owed by the borrower after the repossessed vehicle has been sold and the proceeds applied to the loan. This balance is calculated by taking the outstanding loan amount, adding any costs associated with the repossession and sale, and then subtracting the sale price of the vehicle. For example, if a borrower owes $12,000, the vehicle sells for $3,500, and repossession and auction fees total $150, the deficiency balance would be $8,650 ($12,000 – $3,500 + $150).

The costs added to the loan balance can be substantial, encompassing fees for towing, storage, and administrative or auction fees. In some instances, legal fees incurred by the lender during the collection process may also be added to this amount. These collective expenses increase the final deficiency balance that the borrower is legally obligated to pay, even after their car is no longer in their possession.

Consequences of a Deficiency Balance

When a deficiency balance remains after a car repossession and sale, the borrower faces direct financial and credit implications. Lenders will pursue collection of this remaining debt, which involves collection calls, letters, and potentially legal action. If the borrower does not pay, the lender may file a lawsuit to obtain a judgment, which could lead to wage garnishment or the freezing of bank accounts.

Both the repossession itself and any unpaid deficiency balance can damage a borrower’s credit report and credit score. A repossession is a negative mark and can remain on a credit report for up to seven years from the date of the first missed payment that led to the repossession. This can cause credit scores to drop by 100 points or more, making it difficult to qualify for future loans, credit cards, or other forms of credit at favorable interest rates. If the deficiency balance is not paid, it may be sent to collections, creating another negative entry on the credit report and further impacting creditworthiness.