An auto loan deficiency occurs when your car is repossessed, and the proceeds from the sale of your vehicle do not fully cover the outstanding balance on your loan (or in some situations, if the fair market value of the loan is less than the balance). The remaining amount owed is called a deficiency balance.
How Does it Happen?
- Default on Loan Payments: If you fail to make your car loan payments as agreed upon in the loan contract, the lender can initiate repossession.
- Vehicle Repossession: The lender takes possession of your vehicle.
- Vehicle Sale: The lender typically sells the repossessed vehicle at an auction.
- Deficiency Balance: If the sale proceeds are less than the total amount you owe on the loan (or sometimes, if the fair market value is less than the loan balance), you are responsible for the remaining balance, which is the deficiency.
What Happens Next?
If you owe a deficiency balance, the lender may:
- Negotiate a settlement: The lender might be willing to negotiate a lower amount to settle the debt.
- Sue you: The lender can take legal action to recover the deficiency balance.
It's important to note that laws regarding deficiency balances vary by state. Some states place restrictions on a lender's ability to collect a deficiency.
Understanding your rights and options is crucial if you find yourself facing an auto loan deficiency. Consulting with an attorney can help you protect your interests and explore potential solutions.
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