What Happens if You Don’t Pay a Deficiency Balance?

What Is a Deficiency Balance?

When a lender repossesses a vehicle or forecloses on a home, it'll typically sell the property to recoup the remaining balance on your loan. If the proceeds from the sale aren't enough to cover your full outstanding balance, you'll end up with a deficiency balance. Here are some situations where it can happen:

• Vehicle repossession
• Home foreclosure
• Voluntary surrender of a vehicle
• Voluntary home foreclosure

In some cases, lenders may also add legal fees associated with the sale of the vehicle or property, which can increase your balance.

What Happens if You Don't Pay a Deficiency Balance?

A deficiency balance can result with unsecured debt since there's no collateral left to seize and satisfy what you owe. This is a contrast to secured debt that's backed by something of value that will cover the lender's financial loss.

When a deficiency balance occurs, lenders may take other steps to collect the balance, including the following.

Collection Calls

The lender may try to collect the balance on its own at first, or it may hire a third-party collection agency or sell your debt to one. Regardless of which direction they take, you can expect to receive phone calls, emails and possibly even text messages asking you to pay.

If it's a third-party collection agency, there are laws that prohibit the collector from using unfair, deceptive and abusive tactics. For example, they can't make threats, harass or lie to you, and they can't call you at a time or place that's inconvenient to you.

Learn more: How to Deal With Debt Collectors

Lawsuits

Either the original lender or a debt collection agency may choose to file a lawsuit against you to collect what you owe. If you're sued, you'll receive court papers detailing the complaint and a date by which you need to respond.

That deadline is crucial because if you don't respond, the judge may enter a default judgment against you. In other words, they'll rule in favor of the collection agency without hearing your side.

That judgment gives the creditor legal permission to garnish your wages, seize funds from your bank account or place a lien on your property. It also becomes public record, and while civil judgments don't show up on your credit report, lenders can still search for them.

Wage Garnishment

If the creditor obtains a court order to garnish your wages, they can require your employer to withhold a portion of your paycheck until the debt is satisfied.

For most consumer debt, the amount they can garnish is capped at the lesser of:

• 25% of your disposable earnings, which is your earnings after legally required deductions, such as income taxes.
• The amount by which your disposable earnings exceed 30 times the federal minimum wage ($7.25 per hour).

For example, if you earn minimum wage and work fewer than 30 hours in a week, you can't legally be subject to wage garnishment. Also, if your state's wage garnishment law sets a lower limit than the federal cap, the lower one will apply.

Bank Levies

With a court-ordered bank levy, the creditor can freeze funds in your bank account and request that your bank turn it over to pay down the debt.

Your bank will be required to protect certain funds from seizure. More specifically, if you receive certain federal benefits, such as Social Security or veterans' benefits, by direct deposit, your bank must protect two months' worth of benefits from levies. Some states may also provide additional protections.

Property Liens

If you own a home, vehicle or other assets, a creditor with a judgment may be able to place a lien on it. The lien requires you to pay off your deficiency balance before you can sell the asset or even refinance an outstanding loan where the asset serves as collateral.

In some cases, the creditor may even be able to force you to sell the asset to pay off what you owe.

What to Do When You Owe a Deficiency Balance

If you're faced with a deficiency balance, here are some ways you can respond.

Make a Lump-Sum Payment

If you can afford it, the simplest course of action is to pay off the deficiency balance with a lump-sum payment. This step will wipe out the debt and prevent any further damage to your credit score. That said, avoid depleting your emergency fund if you have other options you can consider.

Get on a Payment Plan

If you can't afford the amount due, communicate that to the creditor immediately. You may be able to get on an affordable payment plan, which can keep the lender from selling the debt to a collection agency or prevent a collector from filing a lawsuit.

Negotiate a Settlement

You may also consider trying to settle the debt for less than what you owe. Depending on how much you offer, it could be worth more than what the lender would get from selling the debt to a collector—or more than what the collection agency paid for it.

You may even be able to get your lender to waive the balance as part of your agreement to give up the home or vehicle, or if it's clear you don't have the assets to pay the debt. In some states, the law doesn't allow lenders to collect the deficiency balance if you voluntarily surrender your home.

If your debt has already been sold to a collection agency, you can also try to negotiate with the collector to pay less than what you owe to avoid a lawsuit.

Prepare to Defend Yourself

Some people who are sued for a deficiency balance may have a legal defense against paying. If you live solely off of federal benefits or simply have no way to afford repayment, a wage garnishment may not be allowed. You can also defend against judgment if you can prove that the lender didn't make an effort to sell your property for fair market value.

How Long Do You Have to Pay a Deficiency Balance?

There's no universal deadline for satisfying a deficiency balance. Instead, yours may be determined by state law, the type of debt, your loan agreement and whether a court judgment is involved. Here are some of the important deadlines:

• Payment deadline: The lender or collector may demand the remaining balance immediately, or they may agree to a payment plan or settlement. It's worth asking about options to avoid having to pay it all at once.
• Time to sue: State law sets a statute of limitations for the creditor to sue you for the deficiency. For most states, it's three to six years after your first missed payment or your most recent payment. After it expires, a creditor may still be able to contact you about the debt, but they can't file a lawsuit.
• After a judgment: If a creditor sues within the allowed period and obtains a judgment, the judgment can potentially remain collectible considerably longer. In some states, it can be 10 years or more, and it may be renewed.

Note: In some states, making a payment on an older debt or acknowledging the debt in writing can restart the statute of limitations. Before you pay a collector on an old deficiency, check how your state handles this.

How Does a Deficiency Balance Affect Your Credit Score?

Owing a deficiency balance doesn't directly affect your credit score, but the circumstances leading up to the deficiency and what happens if you can't pay may have a severe negative impact. Here are some credit activities that hurt your score:

• Delinquent loan payments: Your debt payment history is the biggest factor in calculating your credit score, so missing an auto loan payment or a mortgage payment can cause your score to take a big hit.
• Loan default: Your credit score takes an additional hit when your loan enters default, which can happen once you're anywhere from 30 to 180 days late (or later, depending on the type of loan and lender).
• Repossession: Vehicle repossession has a serious negative impact on your score and stays on your credit file for seven years from the date you stopped paying your loan.
• Foreclosure: As with a repossession, a foreclosure can have a drastic impact on your credit score.
• Voluntary surrender or foreclosure: Even if you voluntarily return your car or home to your lender, your credit score will be impacted. But the hit may be slightly less severe than a repossession or foreclosure.
• Collections: If your deficiency balance is sent to collections, you'll experience another drop in your credit score if the collection agency reports it. Collection accounts stay on your reports for up to seven years from the date you originally fell behind on your debt payment.

How to Rebuild Your Credit

If you have a deficiency balance on an auto loan or a home loan, your credit score may have already sustained significant damage. But even if you're not out of the woods yet with the amount you owe, you can start taking steps to rebuild your credit. Here are some tips to help you get started:

• Make payments on time. While you're dealing with the fallout of a repossession or foreclosure—whether voluntary or not—make sure you're still paying your other debt payments on time to avoid even more damage.
• Keep your credit card balances low. The percentage of your credit limit that you're using at a given time (your credit utilization rate) is an influential factor in your credit score. Try to avoid using credit cards to pay for things you can't afford and keep your balances as low as possible. A utilization rate can have a greater negative effect on your credit as it approaches and climbs above 30%, and those with the highest credit scores tend to keep theirs below 10%.
• Ask family and friends for help. If you're unsure about how to pay for a deficiency balance, asking loved ones to help you pay it can stave off collectors and the damage they can do to your credit. You may also ask a family member or friend to help you rebuild your credit by adding you as an authorized user on their credit card account.
• Consider credit counseling. If you're overwhelmed with your debt situation, you may consider consulting with a credit counselor, who can give you some advice on how to better manage your situation or even get you on a debt management plan to take care of your unsecured debt.

Frequently Asked Questions

Monitor Your Credit to Track Your Progress

No matter where you are in the process of repossession or foreclosure, it's important to monitor your credit regularly to understand how these events affect your credit score. As you work to rebuild your credit, having access to your FICO^® Score^{☉ Θ} and credit report can help you pinpoint other areas of concern and take the right steps to improve your credit habits.

Over time, you can get alerts when changes are made to your credit report, allowing you to track your progress.