What Happens if You Don’t Pay a Deficiency Balance?

Quick Answer

If your vehicle is repossessed or your home foreclosed on, you may have a deficiency balance if you still owe money after the lender sells the vehicle or property. If you can't pay, the debt may be sent to a collector, which may result in collection calls and even a lawsuit.

Tired stressed woman working on finances in office.

If you've had a repossession or a foreclosure—or if you voluntarily returned property to a lender—your financial obligation might not be over just yet. You could owe a deficiency balance if the lender can't recoup the full amount that you owe.

When this amount goes unpaid, the lender may send the deficiency balance to collections, which can result in collection calls or even legal action. As a result, it's important to prepare yourself for what happens when you have a deficiency balance and take steps to protect yourself from the potential consequences.

What Is a Deficiency Balance?

When a lender repossesses a vehicle or forecloses on a home, it'll typically sell the property to recoup the remaining balance on your loan. If the proceeds from the sale aren't enough to cover your full balance, however, you'll end up with a deficiency balance.

A deficiency balance may be owed to a mortgage lender or auto lender in the following events:

  • Vehicle repossession
  • Home foreclosure
  • Voluntary surrender of a vehicle
  • Voluntary home foreclosure

In some cases, lenders may also add legal fees associated with the sale of the vehicle or property, which they may add to your balance.

What to Do When You Owe a Deficiency Balance

Even if you voluntarily turn over your property, you may have to pay a deficiency balance. If you can't pay, the lender will typically sell the debt to a collection agency. But either the lender or the collector can choose to file a lawsuit against you, which could result in wage garnishment, a levy against your bank account or a lien against your other property.

If you're faced with a deficiency balance, here are some ways you can respond:

Make a Lump-Sum Payment

If you can afford it, the simplest course of action is to pay off the deficiency balance with a lump-sum payment. This step will wipe out the debt and prevent any further damage to your credit score. It can, however, take a major financial toll that's hard to bounce back from. Avoid depleting your emergency fund to pay off a deficiency balance if you have other options you can consider.

Get on a Payment Plan

If you can't afford the amount due, communicate that to the lender immediately. You may be able to get on an affordable payment plan, which can keep the lender from selling the debt to a collection agency.

Negotiate a Settlement

You may also consider trying to settle the debt for less than what you owe. Depending on how much you offer, it could be worth more than what the lender would get from selling the debt to a collector.

You may even be able to get your lender to waive the balance as a part of your agreement to give up the home or vehicle, or if it's clear you don't have the assets to pay the debt. In some states, the law doesn't allow lenders to collect the deficiency balance if you voluntarily surrender your home.

If your debt has already been sold to a collection agency, you can also try to negotiate with the collector to pay less than what you owe to avoid a lawsuit.

Prepare to Defend Yourself

Some people who are sued for a deficiency balance may have a legal defense against paying. If you live solely off of federal benefits or simply have no way to afford repayment, a wage garnishment may not be allowed. You can also defend against judgment if you can prove that the lender didn't make an effort to sell your property for fair market value.

How Does a Deficiency Balance Affect Your Credit Score?

Owing a deficiency balance doesn't directly affect your credit score, but the circumstances leading up to the deficiency and what happens if you can't pay may have a severe negative impact. Here are some credit activities that hurt your score:

  • Delinquent loan payments: Your debt payment history is the biggest factor in calculating your credit score, so missing an auto loan payment or a mortgage payment can cause your score to take a big hit.

  • Loan default: Your credit score takes an additional hit when your loan enters default, which can happen once you're anywhere from 30 to 90 days late (or later, depending on the lender).

  • Repossession: Vehicle repossession has a serious negative impact on your score and stays on your credit file for seven years from the date you stopped paying your loan.
  • Foreclosure: As with a repossession, a foreclosure can have a drastic impact on your credit score.

  • Voluntary surrender or foreclosure: Even if you voluntarily return your car or home to your lender, your credit score will be impacted, but the hit may be slightly less severe than a repossession or foreclosure.

  • Collections: If your deficiency balance is sent to collections, you'll experience another drop in your credit score, and the collections account will stay on your reports for seven years from the date you originally fell behind on your debt payment.

How to Rebuild Your Credit

If you have a deficiency balance on an auto loan or a home loan, your credit score may have already sustained significant damage. But even if you're not out of the woods yet with the amount you owe, you can start taking steps to rebuild your credit. Here are some tips to help you get started:

  • Make payments on time: While you're dealing with the fallout of a repossession or foreclosure—whether voluntary or not—make sure you're still paying your other debt payments on time to avoid even more damage.
  • Keep your credit card balances low: The percentage of your credit limit that you're using at a given time—called your credit utilization rate—is an influential factor in your credit score. Try to avoid using credit cards to pay for things you can't afford and keep your balances as low as possible.
  • Ask family and friends for help: If you're unsure about how to pay for a deficiency balance, asking loved ones to help you pay it can stave off collectors and the damage they can do to your credit. You may also ask a family member or friend to help you rebuild your credit by adding you as an authorized user on their credit card account.
  • Consider credit counseling: If you're overwhelmed with your debt situation, you may consider consulting with a credit counselor, who can give you some advice on how to better manage your situation or even get you on a debt management plan to take care of your unsecured debt.

Monitor Your Credit to Track Your Progress

No matter where you are in the process of repossession or foreclosure, it's important to monitor your credit regularly to understand how these events affect your credit score. As you work to rebuild your credit, having access to your FICO® Score and credit report can help you pinpoint other areas of concern and take the right steps to improve your credit habits.

Over time, you can get alerts when changes are made to your credit report, allowing you to track your progress.