How Repossession Works

• Lending consumers large sums of money is a considerable risk for banks. Auto loan lenders, like mortgage lenders, reduce this risk by placing a lien on the vehicle the borrower wants to buy. The lien gives the lender an ownership claim on the car until the borrower pays it off. When this occurs, the lender releases its lien and the car belongs solely to the borrower.
  
  The lender’s lien gives it the right to repossess the car if you stop making payments. If you do not pay the amount you owe, plus any late fees, repossession fees and storage fees your lender charges, it will sell your car and put the proceeds toward your debt.
  
  

Repossession Deficiency

• The lender will sell your repossessed car for the best price it can find, but that price may not be high enough to pay off both the remaining loan balance and any additional fees the lender levied against you during the repossession process. You are legally liable for the difference between the amount the lender recovered through the sale and the amount you owe.
  
  

Legal Consequences

• Your lender will contact you and demand payment of any deficiency that remains after it sells your car. If you do not make payment arrangements, the lender has the right to file a lawsuit against you. If the lender wins its lawsuit, it receives a legal judgment from the court. State laws vary regarding the different judgment enforcement methods creditors can use following a lawsuit, but in general a lender can attach liens to other property you own, levy your bank account and garnish your wages.
  
  

Tax Implications

• If the lender does not believe it can collect the debt from you, or cannot enforce its judgment, the Internal Revenue Service allows it to write off the unpaid deficiency as a bad debt. Doing so provides your lender with a tax deduction equal to the amount you owe.
  
  While writing off the repossession deficiency as a tax loss benefits the lender financially, it could pose a problem for you. The IRS requires taxpayers to pay taxes on any debts they owed that were subsequently forgiven. Thus, if you leave your repossession deficiency unpaid, you could end up owing additional taxes.