What You Need to Know About Deficiency Balances
What is a Deficiency Balance?
When a vehicle is repossessed, or a property goes into short sale or foreclosure, it can result in a deficiency balance. A deficiency balance is the amount of the original loan that remains unpaid after the lender has taken back the property and sold it to cover the bulk of the loan balance. The original lender may also add the administrative costs of the repossession and resale of the property into a deficiency balance.
Who is Responsible for the Deficiency Balance?
The original borrower is responsible for paying the deficiency balance. However, some lenders may forgive or write off that balance if it’s clear the borrower has no assets to pay. In those cases, any amount greater than $600 is considered taxable income, and the borrower will receive a Form 1099-A or 1099-C reflecting the forgiven amount when tax season rolls around. If the lender does choose to pursue payment, the borrower can expect to hear from a debt collector until the deficiency balance is paid in full.
How Does a Deficiency Balance Affect a Borrower’s Credit Score?
As you might imagine, a repossession will negatively affect a borrower’s credit score. Once the deficiency balance is paid in full, the repossession will continue to show on the credit report for seven years. This will make it more difficult for the borrower to obtain additional credit with reasonable terms.
What’s the Best Way to Bounce Back?
Once a deficiency balance is paid off, the borrower can ask the credit bureaus to note the original loan as being ‘satisfied’ or ‘paid in full’ on the borrower’s credit report. This may lessen the impact of the repossession. Additionally, practicing good credit habits is the best way to begin rebuilding credit. That means paying all bills, on time, every month, maintaining a low credit utilization, and minimizing reliance on credit cards for everyday purchases.
If you are struggling with the effects of a deficiency balance on your credit report or need help managing your credit, our free Credit Counseling can help.