What Happens After a Car is Repossessed? The Process to Deficiency Judgment

A common misconception among debtors is that the repossession or voluntary surrender of a vehicle fully satisfies the underlying auto loan obligation. In the vast majority of cases, this is inaccurate. The process of repossession often initiates the creditor’s pursuit of a deficiency judgment, leaving the debtor liable for a significant unsecured balance that could force the debtor into bankruptcy.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Updated on December 7, 2025.

Key Points:

• Secured Debt vs. Unsecured Balance: The underlying auto loan is a secured debt, but once the collateral (the vehicle) is sold, the remaining balance converts to an unsecured debt.
• The Deficiency Judgment: The debt that remains after the repossession sale is the deficiency balance. The lender will sue the debtor to convert this balance into a court-ordered judgment.
• Voluntary Repossession: Agreeing to a voluntary surrender of the vehicle may save on towing/storage fees, but does not eliminate liability for the deficiency balance.
• Bankruptcy Requirement: A deficiency judgment must be listed on the bankruptcy petition (Schedule E/F for unsecured claims) to be eligible for discharge.

The Car Repossession and Post-Sale Process

An auto loan creates a secured interest in the vehicle, giving the creditor the right to take possession (repossess) the collateral upon default. This is similar to a mortgage foreclosure on real property.

Repossession and Notice

When a payment default occurs, the lender (or its agent, the repo company) seizes the vehicle. Whether the repossession is involuntary or a voluntary surrender by the debtor, the process afterward is largely the same.

The creditor is generally required to send the debtor a notice detailing the right to redeem the vehicle (pay the full remaining loan balance plus fees) and the impending sale of the collateral.

The Collateral Sale (Auction)

The lender then sells the vehicle, typically at a wholesale auto auction. The sale proceeds are applied to the loan balance. These auction prices are often significantly lower than the vehicle’s retail or private sale value.

Calculating the Deficiency

The deficiency balance is the amount the debtor still owes after the sale proceeds and any associated costs are factored in. This is calculated as:

Remaining Loan Principal + Fees – Net Auction Sale Proceeds = Deficiency Balance

Fees often include:

• Repossession/Towing fees
• Storage and insurance costs
• Costs associated with preparing the vehicle for sale (e.g., reconditioning)
• Attorney’s fees related to the sale

If the vehicle sells for more than the total debt (a rare event), the difference is called a surplus, which the lender is typically required to remit to the debtor.

Term	Description
Remaining Loan Principal	The total balance outstanding on the loan at the time of repossession, including any accrued interest.
Fees	All legitimate costs incurred by the lender for the repossession, storage, preparation for sale, auction, and attorney’s fees. These costs increase the debtor’s liability.
Net Auction Sale Proceeds	The actual dollar amount the lender received from selling the repossessed collateral (usually at an auction), minus the auction house’s commission. This amount reduces the debtor’s liability.
Deficiency Balance	The final remaining balance the debtor legally owes. If this figure is negative, it’s called a surplus, and the lender must remit that amount to the debtor (though a surplus is rare).

Item	Figure	Calculation
Remaining Loan Principal	$15,000	The amount owed at the time of repossession.
+ Fees	+$2,000	(Towing, storage, auction prep, attorney’s fees).
Total Debt	$17,000	($15,000 + $2,000)
– Net Auction Sale Proceeds	-$10,000	The amount the car sold for at auction.
= Deficiency Balance	$7,000	($17,000 – $10,000)

Statement: Based on the figures above, the debtor has a Deficiency Balance of $7,000 that the creditor can then seek to convert into a deficiency judgment via civil lawsuit.

The Deficiency Judgment and Enforcement

If the deficiency balance is not paid, the creditor typically files a civil lawsuit against the debtor. Once the court rules in favor of the creditor, the deficiency balance is converted into an enforceable Deficiency Judgment.

Enforcement Mechanisms

A deficiency judgment gives the judgment creditor several legal avenues to collect the debt:

Wage Garnishment (Wage Levy): The creditor can obtain a court order to withhold a percentage of the debtor’s disposable earnings. State law dictates the maximum percentage, which is typically between 15% and 25%.

Bank Account Levy: The creditor may freeze and seize funds in the debtor’s bank accounts.

Judgment Lien: The judgment can be used to place a judicial lien on the debtor’s non-exempt assets, such as other real estate or property, making it difficult to sell or refinance without satisfying the lien.

Listing the Debt in the Bankruptcy Schedules

It is essential for debtors to understand that the deficiency balance is no longer a secured debt; it is an unsecured claim.

When filing a bankruptcy petition (Chapter 7 or Chapter 13), the creditor who holds the deficiency debt must be listed under Schedule E/F (Creditors Who Have Unsecured Claims).

Failing to list this debt, which is common when debtors assume the repossession resolved the matter, can lead to the debt not being discharged.

Debtor Options for a Deficiency Judgment

A deficiency judgment, even if there is an active wage garnishment, is generally treated as a dischargeable unsecured debt in bankruptcy.

Negotiation/Settlement: An attorney can attempt to negotiate a lump-sum settlement for a reduced amount. However, once a wage garnishment is in place, the creditor’s motivation to settle is significantly reduced, as they have a guaranteed statutory payment stream.

Chapter 7 Bankruptcy: Filing Chapter 7 provides an automatic stay, immediately halting the wage garnishment and other collection efforts. The deficiency judgment is typically discharged entirely, eliminating the debtor’s legal obligation to pay it.

Chapter 13 Bankruptcy: The deficiency judgment debt can be consolidated and managed within a Chapter 13 repayment plan, where the unsecured claim may receive only a partial or zero payment over the life of the plan.

Given the severity of collection actions like wage garnishment and bank account levies, consulting with a bankruptcy attorney immediately upon receipt of a deficiency lawsuit or pre-suit notice is paramount.

Professor’s Note:

The figures for the Chapter 7 Means Test are updated twice annually. Since the average income increased, this could help you qualify for Chapter 7. Your state’s average income for purposes of the Means Test can be read in this prior article.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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Updated initially on January 4, 2025.