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Consumer Law

How Is The Deficiency Balance Collected?

Deficiency Balance

After the sale, a creditor is required to send out a notice of deficiency. A notice of deficiency is designed to explain how the proceeds from the sale of the car were applied and how a determination was made as to what the remaining balance due is. That will usually be accompanied by a demand for payment of that amount. If the debtor doesn’t respond to that demand or respond in a way that the creditor finds satisfactory, they’re ultimately going to file a lawsuit to collect the deficiency. That’s where a lawyer can help defend the creditor’s action for a deficiency or try to work out some kind of an agreement. What often happens is people will ignore the lawsuit and a judgment will be entered for the amount that the creditor is seeking to recover. At that point, what the judgment does is give the creditor an opportunity to enforce payment. In other words, it gives the creditor an opportunity to require the debtor to provide certain information like copies of tax returns, sources of income, and banks where they have accounts. The creditor will use that information to enforce payment by attaching wages and/or garnishing a bank account. Usually when it gets to the lawsuit stage, the purpose of the creditor filing a lawsuit is that they’re engaging in an effort to try to compel the payment of the deficiency judgment.

What Are Defenses Against The Collection Of A Deficiency Balance?

Of course, the most obvious defense against collection of a deficiency balance could be that the math is not correct. Typically what we would do in that case is we’d get an account history of the payments and we go over that with our client. Usually, you don’t find debtors expressing a belief that the payments that they have made have not been properly credited. The first thing that you want to take a look at is whether or not the vehicle was sold in a commercially reasonable manner. The law requires that the vehicle be sold in a manner that’s commercial reasonable. Typically, that’s why you find most of the major automobile lenders will sell the vehicle at a recognized public auction. You also want to take a look at things like the mileage of the vehicle at the time it was repossessed and the time that it goes to auction, the condition of the vehicle, whether or not the vehicle was in need of repairs, where the auction was held, and the timing. The most crucial part of an analysis as to whether or not there is an effective defense is a look at the notices. Were the notices sent? Were they sent on time?

I had a case recently where the notices were sent two or three weeks late. In addition to having been sent two or three weeks late there was a co-debtor. The co-debtor wasn’t notified and the law requires it. The sale was held at a public auction in another state. They provided the correct street address and town for the location of the public auction, but they indicated that the auction was going to be held in Maryland rather than in the foreign state where it was conducted. All of those things were flawed, which any one of them in a proper application of the law would have barred the creditor from a deficiency judgment. That case happened to be a private sale and the debtor actually as a consequence of those errors had a claim against the creditor for three times the amount of the finance charges on that vehicle.

Once we notified that creditor of the errors that had been made, the creditor dismissed that lawsuit and it was a claim for over $20,000. Those are examples of very effective defenses to claims for a deficiency judgment. That case was egregious in the fact that the errors were so obvious. Usually notices aren’t sent out three weeks late, but it’s not unusual to find one that’s been sent out two or three days late. It’s not unusual to find that a letter was generated within the proper timeframe but there was a delay of two or three days before it was deposited in the mail. You can find that out by tracking the certified mail delivery. Those are all things that you want to examine to find a defense. Once one of these errors is committed or is present it doesn’t reduce the amount that the creditor is due, it bars the creditor from recovering any amount.

Should I Ever Sue The Lender In Such a Case?

It depends on the circumstances of the case whether or not you should sue the lender. There are basically two types of sales. Maryland has laws related to repossessions and deficiencies that can be somewhat complex because there are four or five similar laws which could apply but that are different in certain particulars. You have to examine the particular car purchase and look at the contract to determine which of these laws applies. The second thing that you have to look at is whether there was a private sale of the car or a public sale. Our primary statute provides that if it’s a public sale and there’s not compliance with the statute then the creditor is barred from obtaining a deficiency judgment.

There is another statute that most of the creditors will elect application of the statute in their contract, and that law makes a distinction between private sales and public sales. Again, if there is a public sale and there’s not compliance with the applicable provisions of law then the creditor is barred from recovering a deficiency judgment. In the case of a private sale, the statute doesn’t say that. What the statute does say though is that all payments that the creditor recovers must be applied to the principal. If the statute is violated, the creditor can’t recover any amounts for finance. Then you have to go back and examine the entire payment history of the transaction to determine how much of the amounts paid from the sale of the vehicle and from the debtor’s payments before the repossession were applied to finance charges. Because the debtor, if there’s been a violation of the statute, is required to recover three times the amount of the finance charges that were recovered by the creditor. While the creditors are often under the impression that electing a private sale is a better recourse for them, they are often surprised to find that that statute actually oftentimes permits the debtor to take the offensive in a legal action. Often there is not merely a bar to a deficiency judgment but the debtor could be entitled to money back. These issues have to be raised within a certain timeframe for the creditor, so it’s crucial in those cases to get an early and complete analysis by an attorney who is familiar with these laws.

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