Consumer Law

Deficiency And Repossession

Deficiency And Repossession

What Is A Deficiency? How Does It Relate To Repossession?

Generally, what would happen is once a vehicle has been repossessed, the creditor, the finance company, is required by Maryland law to send out a series of notices. Once those notices, those initial notices are sent, a sale of a vehicle is going to be scheduled. There’s either going to be a public auction or a private sale. The debtor is to be notified of the time and location of the sale. Usually, the proceeds of the sale are applied to whatever the balance is still on the loan. Let’s say, for instance, at the time that the vehicle is repossessed there is $25,000 that’s still on the loan. Once the car goes to sale, let’s say the amount realized at sale is $10,000, that’s going to be applied to reduce the balance still on the loan. There is going to be some cost deductive for the cost of the sale, the charges related to the repossession, and storage charges. The balance is going to be applied to reduce the loan. You have $25,000 still on the loan. There is maybe $300 or $400 deducted for costs and the sale proceeds are $10,000 so $9,600 is applied to reduce the balance. The remaining balance due is a deficiency. In extremely rare cases if there is a surplus, in other words if the car were to sell for $28,000, the debtor is actually entitled to receive the surplus after costs are deducted. By and large, the sales of the vehicles result in a balance remaining due on the loan and that’s the deficiency. Generally, you can expect any time within a month to five or six months after the sale of the vehicle, the creditor is going to file a lawsuit against the debtor to recover the deficiency balance due.

Is There A Way To Avoid A Deficiency Balance After A Repossession?

There’s a way to avoid a judgment for a deficiency balance. Let’s again go back to the example of a $25,000 balance due on the car. The car is sold for $10,000 and there is roughly a $15,000 balance that’s due. Under Maryland law, there are certain notices that have to be sent by the creditor before the creditor can recover a deficiency balance. For example, once a vehicle has been repossessed, there is a notice that needs to go out to the debtor or debtors that informs the debtor of the repossession and is also required to contain other information. It has to be sent within a certain timeframe. If it’s not sent, in the vast majority of cases, the debtor would be barred from recovering a deficiency judgment. There is a notice that must be sent with respect to the sale of the vehicle. There are also time requirements that are related to the delivery of that notice. If that’s not sent and it doesn’t contain the proper disclosures then the creditor is barred from a deficiency.

Once the creditor files a claim to recover a deficiency, the court is not going to look to determine whether or not these notices have been properly sent. The debtors need an attorney that is familiar with the requirements and knows what to look for. Sometimes it is non-compliance with the time requirements. Sometimes the notices aren’t sent to a correct address and sometimes sales are cancelled and there’s not a follow-up. Sometimes the address of the sale is incorrect. There are different factors that may affect the creditor’s ability to recover a deficiency. The other reason why an analysis of these factors is important is it can also affect the potential settlement value of a case. For example, if there’s an argument regarding whether the notices were properly sent on time or whether they were sent to the correct address, that’s going to, more than likely, affect the settlement value of the case.

You may have a creditor in the example that we’ve given that’s demanding $15,000. If you can point out a flaw in their notices, they may be much more willing to settle the case at a substantial discount on a payment plan. There are also ways to avoid the entry of a judgment. What I try to do is develop as many options for a client in those cases as possible and let them make a decision as to what the best choice is for them.

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