How to Settle a Deficiency Balance on a Repossession

A deficiency balance on a repossession occurs after a credit agency seizes the property and sells it at a private sale or auction. The lender subtracts the sales price from the loan balance to calculate the deficiency balance, if any. Repossession of automobiles often leads to deficiency balances because cars lose value so quickly. For example, a car owner with an automobile worth $10,000 may owe $14,000 on the car at the time of the repossession. That could result in a deficiency balance of $4,000 or even more, depending on what the car sells for at auction. Settling a deficiency balance is a straightforward process but may require extensive negotiation.

Read correspondence from the lender to determine the deficiency balance following repossession of your property. Or contact the lender and ask for an updated statement. Getting the deficiency balance in writing is important as you prepare to settle.

Consult with a consumer affairs attorney with experience settling deficiency balances. You can settle the debt on your own, but an attorney may save you money by using her experience to negotiate a better deal than you would reach. Settlement allows for debtors to resolve debts for less than the full balance, but there is no exact standard for what lenders will accept on a deficiency balance. That means an experienced negotiator, such as an attorney, may have the best chance to forge a reasonable deal when matched against a negotiator from the lending company.

Send a request to the lender in writing asking to negotiate a settlement if you would rather not hire an attorney. A deficiency balance is an unsecured debt, the same as credit cards. Unsecured debt is sometimes settled for 20 to 70 percent of the balance, according to "The Wall Street Journal's" In your letter offer to settle the deficiency balance for 20 percent of the balance. Continue negotiating through letters if the creditor balks at your initial offer, or call the lender if you're comfortable negotiating over the phone.

Increase your offer once a month until you have a deal. Get details of the agreement in writing.


  • Consult a tax adviser about possible tax problems as a result of debt settlement. In most cases, the IRS treats debt settlement savings of $600 or more as income. That means settling a $15,000 deficiency balance for $7,500 will require you to report the savings of $7,500 as income. The tax adviser can explain the possible impact on your next tax bill as well as an IRS exception for avoiding higher taxes because of debt settlement.


  • Failing to reach a settlement agreement could prompt the creditor to file a lawsuit in civil court. A lawsuit could lead to a deficiency judgment, ordering you to pay the full amount of the deficiency balance.