What is an auto loan deficiency? Deficiency balances and bankruptcy
Auto loan deficiencies, or a "deficiency balance" are one of the most common reasons people need to file for bankruptcy. Let's see what they are!
What is a deficiency balance? This is a debt that is leftover usually on an auto loan (although it can also be from a house mortgage) after an asset has been voluntarily surrendered, turned in, foreclosed or repossessed. Let's look at an example:
Example: Mark purchased a brand new vehicle when he started his new job. He financed the vehicle for $25,000 with payments of $500 per month. Mark loses his job and decides he cannot afford the vehicle payments anymore. He gives the vehicle back to the lender in a "voluntary surrender" or "voluntary repossession". When he returns the vehicle, he owes $20,000. The lender sells the vehicle at an auto auction for $15,000 and then sends Mark a letter telling him he still owes $5,000 to finish paying off the $20,000 left on his loan. The $5,000 is the "deficiency balance" left on his loan after the collateral is sold.
Is this common? Deficiency balances are very common. Cars depreciate in value very quickly and if you have not put down a large down payment on your vehicle, it is common to be "underwater" on your auto loan. Often, people give a vehicle back to a lender when they cannot afford the payments thinking that this will fix the issue, only to find out they owe a large deficiency balance afterwards.
Can this happen with Mortgages? Yes, the same can also happen with a mortgage. If a house is sold at a foreclosure sale for less than what you owe on the mortgage, you will owe a deficiency balance on the mortgage.
What can I do if I owe a deficiency balance? Your first option is, of course, to pay it. However, if the deficiency balance is too much to pay back or if you have been sued, considering a bankruptcy case might be a good option. A bankruptcy case stop garnishments and a lawsuit.
Attorney Allison Greenlee Korr handles cases in Kalamazoo, Battle Creek and all surrounding counties, call today for a consultation.269-381-4471