Your deficiency balance

In the event that the debtor is unable to either <a href=how-to-avoid-a-car-repossession.html>reinstate or redeem the automobile</a> or other property, a repossessed car will be sold through a bidding. The property will be auctioned off, and dealers will be invited to the event. It is part of the lender's responsibility to inform the borrower of the date, time, and place of the bidding. If the returns of the sale do not prove to pay off the entire amount owed, a debtor is subject to pay for the remaining balance, also known as a deficiency. More often than not, the proceeds of selling the property do not cover the actual amount owed by the debtor. In fact, the price for the item to be sold is required by law to be at a “commercially reasonable” rate. For example, a motor vehicle valued at $10,000 may be sold at $4000, or a washing machine originally valued at $850 would be sold at $200. If the debtor chooses to attend the bidding, they may also attempt to bid for the property at stake, given that they have funds available. However, other bidders--more notably, car dealers—are determined to outbid the original borrower.

Some states do not impose deficiency balances on personal property that was repossessed. An individual qualifies for non-exemption if the amount that he or she originally paid towards the item is less than a few thousand dollars. More often than not, a debtor will almost always be responsible for making payments on their deficiency balance, especially with the current prices of motor vehicles. Also, lenders will not hold a borrower accountable for a deficiency if the former decides to sue the borrower for non-payment. When this happens, it is very likely that the debtor's wages will be garnished.

Below is a list of states that do not impose deficiency balances, and the conditions of the agreement:

Alabama, Arizona, Idaho, Kansas, Wyoming If the debtor paid at least $1000 or less for the collateral
California If goods were bought on installment; and if the purchase was a mobile home, truck camper, manufactured home, commercial coach, or floating home
Colorado If the debtor paid at least $3000 or less for the collateral
Connecticut Deficiency balances are not allowed with all repossession sales, except for cars and boats with a cash price of $2000
District of Columbia, Florida, Maryland If the debtor paid at least $2000 or less for the collateral
Indiana If the debtor paid at least $3300 or less for the collateral
Louisiana If the lender or the seller is not able to get an appraisal before the sale, unless the debtor expresses his agreement to a sale without an appraisal in writing
Maine If the debtor paid at least $2800 or less for the collateral
Massachusetts If the debtor's unpaid balance is at least $2000
Minnesota If the amount that was financed totals $5700 or less
Missouri If the amount that was financed totals $500 or less
Nebraska If the unpaid balance is at least $3000 or less
Oklahoma If the debtor paid at least $3800 or less for the collateral
South Carolina If the debtor paid at least $4200 or less for the collateral
Utah If the debtor paid at least $3000 or less for the collateral
West Virginia, Wisconsin If the unpaid balance is at least $1000 or less


How to take care of your deficiency balance

There are a number of ways that an individual can take care of the deficiency balance. Paying off the loan is the most ideal means of curing the balance that is due. It is also possible for a borrower to be able to set up payment arrangements with their lenders. In fact, some creditors are willing to forgive the deficiency if it is evident that the debtor has reached the state of insolvency, or when he or she no longer has any assets available. When the creditor forgives the debt amounting to $600 or higher, the debtor is required to submit paperwork to the IRS. He or she is required to fill out a Form 1099-C or 1099-A, and report the forgiven debt as taxable income. If the lender decides not to forgive the balance, however, the next logical scenario would be receiving letters and phone calls from a collection company, as the lender may hire their services to attempt on collecting the debt.

A debtor may actually be able to prevent the deficiency balance from happening. When an item is about to be repossessed, he or she can request for a reinstatement of their contract from the creditor to get the item back. When this happens, it is possible for the borrower to sell the item himself, instead of going through a bidding. For example, if Gwen is unable to sustain her monthly car payments, she decides to sell her $10,000 car for $8,000. This is a more viable option than having the car repossessed and sold for a value of $2,500. She would still be able to pay off her lender and owe $2,000, instead of $7,500 if the car were repossessed.

An individual may resort to settling the deficiency balance. They may negotiate with the creditors themselves on how much will be settled on the balance. Debt settlement is also one of the fastest ways of paying off a loan balance. More often than not, a creditor may choose to grant a 20-30% settlement of the deficiency, but there have been cases that the lender granted a very affordable settlement for the borrower, provided that the latter would be able to make a lump sum payment. If the borrower would not be able to do so, however, he or she may arrange for a payment plan done in increments. The best way for an individual to see if this option is feasible is to get in touch with their creditor as soon as possible. Keep in mind that the forgiven remainder of the balance, if it were at $600 or higher, would also be considered as taxable income. As mentioned earlier, the debtor is required to report this amount to the IRS on their tax return.

There are various debt settlement companies currently offering their services in the market, and they offer up to 60% of a settlement on the market. Unfortunately, most debt negotiation firms only choose to deal with customers who have unsecured debts, or loans that do not require collateral for repayment. Also, settling debts is not allowable in all states. Currently, the states that disallow debt settlement practices are Colorado, Delaware, New Jersey, West Virginia, Maine, Rhode Island, Georgia, Virginia, Kentucky, North Carolina, South Carolina, Utah, Ohio, Kansas, Mississippi, Idaho, and New Mexico.

An option that some people choose to take is by taking a home equity loan, otherwise known as a second mortgage. Here, an individual acquires a loan by putting their house or homestead up for security. In other words, the house will serve as collateral for this loan. While there may be seeming advantages to acquiring a home equity loan, and more care is needed upon making this decision. Home equity loans are proven to be riskier, and in the event that the debtor defaults on their payments for this loan, he or she may end up losing their house instead.

Also, bear in mind that in whatever payment arrangement a debtor chooses from the above options, these will be reported accordingly on their credit reports. These notations will remain for seven years.

Bankruptcy is definitely a last resort to paying off a deficiency balance. Filing for Chapter 7 of bankruptcy enables all of a debtor’s delinquent loans to be completely discharged, meaning they will no longer have any obligations to take care of any past due debt. Of course, not all their loans will be completely disregarded once he or she files for bankruptcy; they will still be entitled to pay government subsidized-loans such as student loans, alimony, child support, and the like. Also, a bankruptcy notation will remain on an individual's credit report for ten years.

If your car has not yet been repossessed, check out this article about how to avoid a car repossession