How to Best Deal With A Deficiency Balance From A Repossessed Vehicle

Rebecca Williams
5 min readAug 24, 2021
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Car repossession occurs when you are late on payments for your car. This act can occur as soon as the first default and lenders are free to repossess your car without needing a court warrant. A deficiency balance therefore occurs when there’s a payable balance left after the sale price of the car has been deducted from your loan balance. Financial problems can occur at any point in our lives therefore it is understandable that you miss some payments.

If you find yourself facing a deficiency balance and do not know what to do, this is the right place for you to be. Facing down the deficiency balance from a repossession can seem like a daunting task but in this article, we are going to discuss how you can clear this balance and how it affects your credit score.

How To Settle Deficiency Balances From Vehicle Repossession

The value of cars can drop very rapidly and this creates deficiency balances when these cars are repossessed and sold. For instance, if you have a car that is worth $12,000, you may owe $16,000 at the time of repossession. Therefore, your deficiency balance will be $4000 although this depends on how much the car sells for at auction.

A deficiency notice will be issued by your lender to confirm the price at which the car was sold. This notice will help you to confirm your owed balance and the payment due. The first thing you need to do is to read the letter from your lender regarding the deficiency balance. This will help you to figure out how much your total repossession debt is. If you are not able to read and understand the notice yourself you should get a qualified person to explain the contents to you.

If possible, you should consult a lawyer with experience in handling deficiency balances to negotiate on your behalf. The best way to clear these balances and keep them from reflecting on your credit report is debt settlement. Negotiating a suitable payment plan between yourself and the lender will enable you to make steady and sustained payments until the debt is cleared. Your negotiator will send a written request to your lender to open room for negotiations.

You should know that deficiency balances are regarded as unsecured debt therefore, they are usually settled for between 20%-70% of the balance. You should also remember to contact your tax advisor on any possible problems that may arise as a result of debt settlement. The IRS classifies any settlements of $600 and above as income, therefore, if you settle a $20,000 deficiency balance for $10,000 you are required to file the balance $10,000 as income.

It is always in your best interest to settle any debts that you have because your lender can decide to sue you. Having to drag a legal battle with your lender can be messy and also quite expensive therefore you should avoid it at all costs. Having a court case plus an unpaid debt balance could make it extremely difficult for you to get loans or other lines of credit in the future. This is why debt settlement is always the preferred choice to settle any disputes with your lender.

Settlement Effects On Your Debt Ratio

Paying off your deficiency balance helps to improve your debt ratio. One important metric that affects your credit score is your debt to credit ratio. When you pay off a bit of your balance, it lowers your debt and increases your credit standing. If you are not able to pay the balance as a one time payment, you should put a structured payment plan in place with your lender and ensure that you follow it strictly.

Meeting your payment deadlines and keeping your payment agreement with your lender will reflect on your credit report as recent payments go towards reducing your debt. This is why debt settlement is the preferred choice when choosing a method to settle your deficiency balance. Keeping your debt to credit ratio low is important if you hope to raise your credit score quickly. Scoring low on a credit rating can be repaired if you make deliberate efforts to rebuild your credit worthiness.

Does Paying Off Repossessions Affect My Credit Score?

There are two important steps to paying off your repossession successfully. The first step is paying what you see which is the easier part. The second step is ensuring that the lender reports the payment as being paid in full. Once you ensure this has been reported, you could also try to scrub the account from your credit report. If your lender agrees to wipe the account from your credit report, ensure that you get this in writing so that you can enforce it later.

If the lender refuses to clear this account from your report, it is legally obligated to remain on your report for seven years even if the debt has been cleared. The presence of this account on your report can negatively affect your credit score. You can challenge this with the credit bureaus and have it removed but only after you have cleared the debt in the account. It is important that you hire appropriate representation to guide and help you to reach a suitable solution for you.

How Settlements Affect Your Credit Score

A settlement occurs when you are unable to pay the full amount in your deficiency balance. This negotiation occurs between you and your lender. Your lender will agree to write off a portion of your debt if you agree to pay the outstanding balance. The amounts negotiated usually depend on the sums involved and it is always best to utilize the services of a skilled negotiator to determine the best monetary outcome for yourself. Settling can be a very tricky process and it is always best if you have a professional handling all affairs relating to the settlement from beginning till the conclusion.

These settlements have varying implications for your finances. You should be careful when using them and they should only be an option when it is the last resort for yourself. Your credit report will show that you settled for less than the amount that was owed and this could harm your future prospects when you want to get a loan. This could also keep your credit score low and hinder your chances of improving your credit. You may also owe taxes on the amount you did not pay as that money is recorded as income in your tax statement. When using this instrument to clear your debt, you should contact a professional on the steps you should take.

In Conclusion

Having unpaid debt can be such a burden on your finances and your credit score. It is always best to clear these debts and settle whatever amounts you have unpaid. Settling your debt will give you a chance to restore your credit score and it would also improve your chances of getting loans later in the future. As always, it is important that you should contact a professional for advice on what you should do and the best solution for your situation.

Sources — Become Debt Free