Car repossession and deficiencies.

Question

I was sick most of 2009 and was in the hospital twice and now I am unemployed. I have a car that I have gotten behind on the payments and they are going to repossess it. What should I do? I got approved for another car with a low down payment and lower payments than what I was paying on the car I have now. Should I let the current car go?

Answer

If you let the current car go you could potentially be liable for a deficiency balance on the loan after the repossession.  A deficiency is when a lender that has a lien in collateral, repossesses the collateral, sells it at an auction, applies the sale proceeds to the balance of the original loan, and then claims the difference between the amount owed on the loan and the amount received from the sale as due and owing. Under the common law, creditors can sue you for a deficiency  - after they have already taken the vehicle, regardless of whether you voluntarily give it back or it is repossessed. Some states have consumer protection statutes that prohibit deficiency lawsuits, Minnesota unfortunately does not.  Of course, if the creditor is able to sell the car for more than you owe on the loan, the creditor cannot claim a deficiency and in fact, you would be entitled to the surplus (minus the creditor's expenses for transporting and selling the vehicle). 

If the creditor sues you on the deficiency, it can obtain a judgment and begin garnishing wages or levying money out of your bank accounts.  If you cannot workout a settlment with the creditor on the deficency balance, you may want to consider bankruptcy.