Repossession and Your Rights

Imagine it’s a nice Saturday morning and you’re having a cup of coffee on your front porch. when a tow truck suddenly parks in front of your car. A repo man hooks up your car and takes off without a word. Though this is frustrating, it is legal. It’s also preventable.

Repossession happens when lenders or collection agencies use their right to seize your property to pay a debt. But borrowers have rights too. Repossession laws and consumer protections keep lenders and their repossession companies and agents from acting improperly when seizing a vehicle. This article will describe the repossession process, how lenders operate, and how repossession affects borrowers. Learning more about this process can help you avoid repossession, its negative effects on your credit, and all the stress that comes along with it.

What Is Repossession?

Repossession occurs after a borrower defaults on a secured loan like an auto loan. Default means a borrower misses even one loan payment or makes late payments. With an auto loan, when a lender gives a borrower money to purchase a vehicle, the loan is secured by the vehicle, which acts as collateral. Since the lender has a security interest in the vehicle, they have the legal right to take the car if the borrower defaults. The lender recovers the collateral — in this case, the car — by repossessing it. This helps the lender recoup their losses if a borrower doesn’t make payments.

Most repossessions are called self-help because the lender can act on its own to address the borrower’s default without a court order. Once a default occurs, the lender hires a company that sends out a repossession agent, or repo man, to take the car back. Then the lender sells the car and uses the proceeds to repay the loan, along with repossession costs, attorney’s fees, and penalties owed.

The rules that determine when a lender can repossess the collateral largely depend on state law and the borrower’s loan contract. Some states require lenders or collection agencies to give borrowers notice prior to a repossession or to give them the right to cure the default (catch up on loan payments) before they can proceed with repossession.

Repossession substantially impacts a borrower’s credit score. If you’ve had a car repossessed, this negative event can stay on your credit report for up to seven years and will significantly reduce your chances of getting new credit or good interest rates, including for another car loan. This is why it’s smart to proactively avoid repossession.

What Kinds of Property Can Be Repossessed?

While cars are the most commonly repossessed secured assets, creditors and lenders can also repossess other items if you default on a loan. Some examples are jewelry, artwork, appliances, tools, and computers. In some cases, other valuable items can be repossessed to cover the amount the borrower owes to the lender, though seizure of unsecured property is rare. Foreclosure is similar to repossession. It happens when a borrower defaults on a mortgage. In this case, the lender takes back the property and sells it to address the default. Foreclosure allows lenders to get back some, if not all, of the money that they previously lent to the borrower for the purchase of their home (the asset).

What Is a Deficiency Balance?

When the lender sells the repossessed vehicle at a commercially reasonable price but it doesn’t cover the outstanding debt, the borrower may be left to pay a deficiency balance. After having your car repossessed, this can feel like a double whammy. The deficiency balance equals the outstanding balance on the loan and any repossession costs minus the sale price of the car. Repossession costs can include storage fees, penalties, towing costs, skip tracing costs, attorney’s fees, and court costs. 

When there is a deficiency balance, creditors are allowed to sue debtors for a deficiency judgment to collect it. This can happen after the repossession and sale of a car and any other secured assets. If this happens to you, you can present a legal defense in the deficiency hearing. The most common defense is that the lender didn’t sell the repossessed asset in a commercially reasonable manner. This could mean the sale wasn’t advertised or the sale price was way under market value.

The opposite of a deficiency balance is called a surplus. This is sort of a silver lining after a repossession. A surplus occurs when the proceeds from the sale of the secured asset after repossession are greater than the borrower’s outstanding debt, costs, and penalties. The creditor may be required to pay that surplus to the borrower.

Types of Repossession

When most people think about repossession, they think about an involuntary repossession. That’s when a repossession agent takes the secured asset after the borrower defaults, usually without notice or a repossession order from a court. But borrowers can also voluntarily repossess their vehicle.

Voluntary Repossession

Voluntary repossession is when a borrower makes arrangements with their lender to give back the collateral asset before a repo man seizes it. This may happen before or after the borrower defaults on the loan. Voluntary repossession, or voluntary surrender, is beneficial because it helps borrowers avoid paying repossession costs and towing fees. It’s also less damaging to a borrower’s credit score because it shows up on their credit report as a voluntary surrender rather than a repossession.

But voluntary repossession also has its drawbacks. For example, the borrower may still owe the lender a deficiency balance. Also, borrowers who voluntarily surrender a vehicle will still see their credit scores drop and may have trouble getting new credit as this derogatory mark stays on their credit report for seven years. If you’re considering voluntary repossession, first consider other options. You can contact your lender to see if they can help, sell the secured asset if it is worth more than the loan amount, or refinance your loan.

Involuntary Repossession

While voluntary repossession has its drawbacks, involuntary repossession is even worse. If the creditor sues the borrower for a deficiency judgment, they’ll also try to recover the costs of repossession and asset recovery, attorney’s fees, fines, and court costs. Also, borrowers with an involuntary repossession on their credit file will see their credit score drop dramatically, and the negative mark on their credit report will be long-lasting and painful.

Key Repossession Laws

While repossession is legal, repossession agents can’t breach the peace in the process. That means that a repo man cannot break into a locked building, closed garage, or locked gate. They can’t use a locksmith to cut a lock or tools to disable a security system. State laws also protect borrowers against forcible repossession. A repo man can’t assault or threaten the borrower. While state laws vary, essentially repossession agents can’t trespass, break property, or harm people in the course of their work. 

If a repossession agent attempts to seize your vehicle or other secured assets through threats, violence, or damage to property (like cutting a lock and chain), you should call the police and document these illegal activities. If you are feeling uncertain about the repossession process and your consumer rights, you should seek professional advice.

How Car Repossession Works

State laws differ on auto repossessions. Some states require lenders to give the borrower notice before an auto repossession can take place. Others don’t. 

Generally, creditors hire a repossession company after a borrower misses payments and defaults on their car loan. The company sends a repo man with a tow truck to the borrower’s home and/or work without notice. If the repo man is able to seize the car without a breach of the peace, they will tow the car to a storage facility, and then the car will be sold. If the borrower isn’t cooperating or they’re hiding the car, the repossession company may seek a replevin order. Replevin is a court order that compels a borrower to give back the car to the lender.

Lenders can’t keep or sell personal property found inside a repossessed vehicle. Additionally, some states require a creditor to send notice to the borrower after repossession, confirming that they did indeed seize the car. Again, state laws vary and it is a good idea to contact your state’s attorney general or a consumer protection agency to get more information about your state’s repossession process and laws.

What Happens After a Vehicle Is Repossessed?

After an auto repo, a lender can keep the repossessed car or sell it at a public auction to satisfy the borrower’s loan obligation. Borrowers have some options to get back the repossessed car, but they aren’t ideal. They include:

• Redemption: This involves paying a lump sum to the lender for the full amount of the outstanding balance of the loan and any additional costs.

• Reinstatement: This involves getting current on the loan and issuing payment for the past-due amounts.

• Repurchasing the car at the auction: This may be the cheapest way of getting the car back, but it also could backfire. Also, the auction price might be significantly more than the fair market value of the car.

If you aren’t sure what to do, you can get legal advice from a repossession lawyer.

Vehicle Repossessions and Bankruptcy

If you’re behind on your car payments and having other financial difficulties, it might make sense to file for bankruptcy. Deciding whether to file Chapter 7 or Chapter 13 bankruptcy will depend on your financial situation. A bankruptcy attorney can advise you of the pros and cons of each given your unique circumstances.

Bankruptcy can not only bring debt relief, it can also give you some breathing room. That’s because the instant you file, the court issues an automatic stay. This is like a protective wall that keeps creditors and collection agencies from pursuing collection activities against you, like repossessing your car or foreclosing on your home. Timing is important here. If you file for bankruptcy after a repossession, you may be able to get your car back, but only if you act quickly. That said, it might be better to get the full benefit of the bankruptcy filing and let the car go.

How to Avoid Repossession

When it comes to avoiding repossession, communication is key. If you know you’re going to fall behind on your payments, you should contact your lender right away. Remember that in many cases lenders have the right to repossess your vehicle after just one missed payment. The good news is that lenders are generally willing to work with proactive borrowers to help them avoid repossession. But once you become delinquent, this may be difficult to do

Let’s Summarize…

Now you know more about the repossession process, consumer protections, and what you can do to avoid repossession. If you’re struggling to make payments on a loan that’s secured by collateral, contact your lender as soon as possible. Doing what you can to avoid repossession will help you maintain a healthy credit score and decrease your stress. But if your car is repossessed, remember that you do have legal rights and protections.