What is Repossession Deficiency?
Written by AskTheLawyers.com™ on behalf of David Shuster with Shuster Law, PLLC.
When a creditor or lender repossesses a piece of property such as a vehicle and sells it in order to cover the debt you owe, the value they are able to sell it for may not equal the total of your debts; this situation is referred to as repossession deficiency, and it happens more often than not. Before a sale of your property can occur to pay a debt, you should receive a letter informing you of the time and date of the sale. If you are not provided with this information, request it. This letter should also inform you of whether you will be held responsible in case of a deficiency in the value the property is sold for. For help understanding the bankruptcy process, reach out to a bankruptcy attorney.
In the case of a repossessed car, reinstating the loan might be a good option.
In order to reinstate the loan, the car’s owner will need to pay off enough of the loan to bring them current with the contract. In this situation, if the car’s owner can reinstate the loan by making all past due payments at once, they may then choose to sell the vehicle themself. Rather than letting a creditor sell the car for whatever amount they see fit, if the vehicle owner can reinstate the loan and then sell it for a higher amount, they may be able to avoid repossession deficiency or at least lessen the deficiency.
If the creditor decides to forgive the repossession deficiency, the forgiven amount may need to be counted as taxable income.
Although the laws vary from state to state, in most cases if the forgiven deficiency is greater than $600, the borrower will need to list that amount as taxable income using Form 1099-A or 1099-C. However, if the lender does not forgive the repossession deficiency, a debt collector will be in contact regarding how to pay it. It may be possible for the borrower and debt collector to agree upon a lesser amount to pay back or a specific payment plan.
Depending on the kind of bankruptcy a person files for, repossession of a vehicle may not even be a factor.
In Chapter 7 bankruptcies, commonly referred to as “fresh start” or “clean slate” bankruptcies, the filer is usually allowed to keep their home, vehicle, and other potentially exempt properties. Exemption rules vary from state to state, so it’s important to talk to a financial advisor or bankruptcy attorney in your area. Even if a vehicle or other property is not exempt, a bankruptcy attorney may be able to negotiate with creditors to work out a better or lesser payment plan to protect the filer from further financial damage. An exemption does not always cover the item itself, but labels the item as exempt up to a certain financial value; this may mean that a filer can keep only a certain amount of the property.
In the case of a vehicle, if a state has a $5,000 exemption for personal vehicles but the filer’s car is worth $15,000, the repossessor may sell the vehicle and give the filer $5,000 from the sale. However, if a vehicle is only worth several thousand dollars, repossessing and/or selling the vehicle may not be worth the hassle.
For help understanding repossession deficiency or for other help in the bankruptcy process, reach out to a bankruptcy attorney.