How Deficiency Balances Impact Your Credit and What to Do About It

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Understanding Deficiency Balances and Their Impact

If you’ve experienced a repossession or foreclosure, or if you’ve voluntarily returned property to a lender, your financial obligations might not be over. You could still owe a deficiency balance if the lender can’t recoup the full amount you owe.

When this amount remains unpaid, the lender may send the deficiency balance to collections, leading to collection calls or even legal action. It’s crucial to understand what happens when you have a deficiency balance and take steps to protect yourself from potential consequences.

What Is a Deficiency Balance?

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

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

• 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 to your balance.

What to Do When You Owe a Deficiency Balance

Even if you voluntarily turn over your property, you may still have to pay a deficiency balance. If you can’t pay, the lender will typically sell the debt to a collection agency. Both the lender and 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 eliminate the debt and prevent further damage to your credit score. However, avoid depleting your emergency fund if you have other options.

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

Consider trying to settle the debt for less than what you owe. Depending on how much you offer, it could be more than what the lender would get from selling the debt to a collector. In some states, the law doesn’t allow lenders to collect the deficiency balance if you voluntarily surrender your home.

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 federal benefits or 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
• Loan default
• Repossession
• Foreclosure
• Voluntary surrender or foreclosure
• Collections

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
• Keep your credit card balances low
• Ask family and friends for help
• Consider credit counseling

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.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you navigate through your financial challenges and find the best solutions for your situation.

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