Many consumers believe that debt is settled when an item is repossessed. Unfortunately, that is not always the case. Many times, you will still owe money to the lender due to something known as a deficiency balance. Fortunately, Resolvly can help you to avoid this debt by connecting you with an experienced legal team.
An unexpected expense from a repossessed item can be especially crippling, as you are left without the items while also being expected to pay the lien holder. Everything from vehicles to furniture can result in a deficiency balance if you default on a corresponding loan.
While the most practical approach is to avoid repossessions, you may not be able to do so. If you are facing the possibility of having to default on secured debt, then you must understand the ways that deficiency balances can affect your long-term financial health.
What is a Deficiency Balance?
According to Investopedia, a deficiency balance is “the net difference between the amount a borrower owes on a secured loan and the amount the creditor receives after selling the collateral.”
For context, a secured loan is any type of loan that involves real property. This can be an auto loan, home loan, or any other type of financing that involves making payments on a piece of property or equipment.
If your creditor repossesses something that you are financing, they will resell it. If they can resell it for what you owed or more, then you will not have a deficiency balance. Unfortunately, this rarely happens because of the depreciation of items. Used goods like vehicles depreciate faster than payments can lower the balance of the loan, resulting in negative equity.
For example, say that you financed a car for $30,000 and paid off $5,000 of the loan before defaulting. In our scenario, the car depreciated by $8,000 in that same time frame. When the creditor repossessed your car and sold it, they were only able to obtain $22,000 for the vehicle.
Since your remaining balance owed was $25,000 at the time of repossession, you would owe them approximately $3,000. Oftentimes, creditors will tack on additional fees, such as the cost of repossessing the vehicle or making “repairs,” which can increase your deficiency balance further.
Mortgages are a bit more complicated. While they can result in a deficiency balance, you may be able to negotiate a short sale with your lender. If they agree, they will sell the house for its appraised value, even though you owe more than what the home is worth. A short sale will leave you without a deficiency balance.
Does a Deficiency Balance Affect My Credit Score?
If you owe a deficiency balance, it will show as a form of debt on your credit score. It is often listed as a “charge-off” or settlement, but the terms may vary depending on your creditor. This can negatively affect your score and can even make it more difficult to obtain a future loan.
Overcome Deficiency Balances with Resolvly
Accruing any deficiency balance can be harmful to your long-term financial outlook, which is why you need a partner like Resolvly. We can connect you with a skilled legal team that can negotiate on your behalf. They will fight on your behalf to help reduce overall deficiency balances. Do not deal with financial hardships alone -- contact Resolvly and get help today!
Resolvly is a Florida Bar-approved lawyer referral service that helps clients nationwide to connect with consumer protection attorneys that specialize in debt resolution. We are devoted to helping our clients reach true financial freedom. The company can assist with all types of unsecured debt, including credit cards, medical bills, private student loans, business debt, and vehicle repossessions.