Deficiency Balance: What You Owe After the Car Is Sold

How the deficiency is calculated

The lender starts with what you owed, subtracts what the car sold for, and adds the costs of taking, storing, preparing and selling the car, including attorney's fees if the contract allows them. In a consumer case, the written explanation must list these items in a set order, so you can follow the math line by line.

If the sale brings in more than the balance and costs, the extra is a surplus, and the lender may have to pay it to you. That is rare for cars. The lender may also buy the car itself at a public sale, which is one reason to check how the sale was run and who bought the car.

Rules the lender must follow before and after the sale

• Commercially reasonable sale. The method, manner, time, place and other terms of the sale must all be commercially reasonable. The lender may sell at a public auction or privately.
• Notice before the sale. For a public auction, the notice tells you when and where it will be held; for a private sale, the date after which the car may be sold. In a consumer case it must also say whether you will still owe a deficiency and give a phone number where you can learn the exact amount needed to buy the car back.
• Explanation of the deficiency. The lender must send it before or when it first demands payment in writing. If you ask for one in writing after the sale, it must answer within 14 days. One answer in any six months is free, and each extra one can cost no more than $25.
• State extras. Some states limit or bar deficiency claims in certain cases, or set their own notice forms and deadlines. Each state page summarizes its rules.

When a lender breaks these rules, you may owe less than it claims. For consumer goods such as a family car, Article 9 also sets a minimum damages award the borrower can recover: the credit service charge plus 10% of the principal, or a similar formula for a time-price sale. How courts apply this differs by state, so take your papers to a legal aid office or a consumer lawyer before you pay.

How to check and dispute the figure

1. 1 Gather the paperwork. The contract, payment records, the notice of sale, the explanation of the deficiency and any letters from a collector.
2. 2 Check the dates. Did the notice arrive before the sale, with enough time for you to redeem the car? Keep the envelope.
3. 3 Check the costs. Compare each fee with your contract and ask for invoices for towing, storage and reconditioning.
4. 4 Check the sale. Ask how and where the car was sold, how it was advertised and who bought it. Compare the price with used-car guides for the same model, mileage and condition.
5. 5 Dispute in writing. Send the lender a letter listing each problem and keep a copy. If a collector now holds the debt, send the dispute there as well.

If a collector contacts you, federal law limits how it may do so and gives you the right to ask it to verify the debt. Lendmira's guide to debt collectors and your rights walks through those rules. A lawsuit over an old deficiency may also come too late under your state's statute of limitations; ask a lawyer before you pay or sign anything that could restart that clock.

Settling or paying a deficiency

Once the car is gone, the deficiency is usually an unsecured debt. Lenders and collectors often take a lump sum smaller than the full amount, or a payment plan. Get any settlement in writing before you pay, and make sure it says the payment resolves the whole debt.

If the car has not been sold yet, you may still be able to stop this. See getting a repossessed car back, and if you are still driving it but cannot keep up, compare a voluntary surrender with a sale you arrange yourself.

Canceled debt and your taxes

If a lender forgives or cancels part of a deficiency, the IRS generally treats the canceled amount as ordinary income, and the lender may send you Form 1099-C, Cancellation of Debt. If the form is wrong, ask the lender to correct it; you still report the correct amount. Exclusions exist, for example when the debt was discharged in a bankruptcy case or to the extent you were insolvent; you claim them on Form 982. IRS Publication 4681 covers repossessions in detail. Talk to a tax preparer if you receive a 1099-C.

Questions people ask