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Non-Traditional Unsecured Debts: Auto Loan Deficiency Claims

Auto Loan Debt

Among the most common type of loans, a car loan is a part of many people's everyday lives. Fortunately, most people can get the credit they need to get a car to help them function in our car-dependent society because car loans have collateral built into them. If you default on the loan, the lender can take the car back and sell it to help pay off the amount you owe. In some cases, though, even the sale of the car isn't enough to pay back the full amount of the loan. In that case, you may still owe money on the loan even though you've lost the car, which is called a deficiency claim.

What Is A Deficiency Claim?

After you default on your car loan and the creditor repossesses the vehicle, it will usually sell the car, either through a private sale or at a public auction, to get back some of the money that you owe on the car loan. In some cases, the sale proceeds aren't enough to cover the remaining balance on the loan plus the lender's costs in repossessing the car.

Recourse Versus Non-Recourse Loans

Car loans are usually a type of agreement called a recourse loan, which means that the lender can go after other assets the debtor has if seizing the car and selling it didn't bring in enough to satisfy the obligation. If that happens, you'll owe the difference, called a “deficiency.” The creditor might then attempt to collect the deficiency balance from you.

But under some circumstances, the creditor can't go after you for the deficiency. Some of those reasons that might protect you from a deficiency judgment include:

  • There are legal flaws in the details of the loan and its paperwork.
  • The lender failed to give the right legal notices before proceeding with the repossession and sale.
  • The lender didn't sell the car even after it took it back from you.
  • The lender didn't follow reasonable market means to sell the car, meaning they didn't get the full value for it.
  • You've filed for bankruptcy.
  • The statute of limitations on the loan has passed.

Legal Flaws In The Process

Under California law, the creditor must be a party to your agreement, and all the loan documents must properly identify the security interest in your car. Some common legal errors might include:

  • The lender is unable to supply the original written loan and security agreement that defines your duty to pay.
  • The loan paperwork doesn't give the lender a valid legal claim on the car.
  • The loan agreement is non-recourse; that is, it doesn't let the creditor take you to court for a deficiency judgment after it's repossessed the car.
  • Another party is the one suing you, but they are unable to prove their position with a proper assignment or legal written document that proves their right to collect the debt.

The Creditor Didn't Provide Legally Required Notices

You are entitled to receive the proper notices and exercise certain rights throughout the process. If the creditor trying to collect on your car loan has failed to give you these written notices as required and didn't let you exercise those rights, you might be able to challenge the claim for a deficiency judgment. Mandatory notices include:

  • You have a right to get the car back or restart the loan on certain terms, and how and when you can do that.
  • If the car is to be sold at a private sale, they must tell you the date of the sale.
  • If the car will be offered for sale at an auction, you have a right to know the date, time, and location of the sale.
  • You have a right to a valid assessment of the deficiency balance (or surplus, if that is true in your case), including a description of fees and charges.

Not only must the creditor provide you with the proper written notices, but they must also allow you to exercise your rights in regard to those notices. They aren't legally allowed to refuse your payment to reinstate the loan, for example, and they have to let you participate in the auction, as well. If those legal obligations are violated, you can point to these defects as a defense and potentially even counterclaim for damages that you sustained as a result of any violations.

The Creditor Didn't Sell The Car In A Commercially Reasonable Manner

The creditor has to follow certain commercially reasonable procedures in selling your car. It must also act in good faith while selling the car. The creditor is required to act in an honest and fair manner, including the steps they take to find willing buyers. They can't just transfer the car to a friend or associate secretly or junk the car if it has value, and they must give adequate public notice of the auction.

The Creditor Didn't Sell The Car At All

If a creditor repossesses your car but then keeps it instead of selling it, they have no right to sue you for the balance of the loan. In that case, they have to cancel your debt. The creditor must make reasonable efforts to minimize the losses by selling the car if it wants to go after you for a deficiency. If the creditor kept the car and then sued you to get more money on the loan, it's called a “double recovery.” This can be used as a defense in a suit against you.

You Filed Bankruptcy

When you are discharged from bankruptcy, the creditor is almost certainly forbidden from collecting a deficiency against you. When you file for bankruptcy relief, the judge issues an automatic stay that orders creditors to stop all collection efforts. After you are discharged in bankruptcy, creditors on debts that were part of your bankruptcy case are generally not allowed to collect those debts from you.

Potential Tax Consequences

Any savings you have from debt relief might be considered taxable income. Creditors and collection companies may report debt settlements at a discount to the IRS. The IRS considers the savings you didn't have to pay on the debt to be income in most cases.

Get Legal Help

Don't make decisions based on which collectors are pressuring you the most; that may lead to actions that aren't in your best interest. Instead, take time to research your options and choose the best one for your situation.

The experienced debt resolution lawyers at Fitzgerald & Campbell, APLC have helped Californians handle debt trouble since 1992. Our efforts have saved our clients millions of dollars of debt. Our caring and compassionate legal experts understand that debt problems can feel overwhelming and stressful. That is why we work with you throughout the process to ensure your rights are protected. You know we are on your side from the start because our exclusive focus is on consumer and small business debt issues. We are eager to apply our extensive legal knowledge and skills to represent you as you work to get your finances stable. Reach out to speak to an attorney today to see how we may be able to help you eliminate your unsecured debts. Call us at (844) 431-3851 or contact us online.