Repossessions occur when consumers pledge their vehicles as collateral and subsequently default on their loans. Consumers can pledge their vehicles in exchange for short-term title loans, to finance their vehicles or under lease arrangements. State laws govern the rights that creditors and third-party repossession agencies have to repossess their collateral. In most states, creditors can sell their repossessed vehicles and sue borrowers for any remaining deficiency balance.
Repossession Basics
In most states, lenders can repossess their vehicles or contract with third-party repossession agencies to repossess their vehicles as soon as borrowers default on their loans. In these states, as soon as a borrower misses on payment, he may be liable for the remaining loan balance. Known as an acceleration clause, many installment agreements contain this provision. An acceleration clause in a contract allows a lender to accelerate the remaining payments and demand repayment of the entire loan, plus penalties, late fees and interest.
Commercially Reasonable Sales
Creditors in most states are required to conduct commercially reasonable sales. A commercially reasonable sale occurs if a lender conducts a public auction, sells a repossessed vehicle for a commercially reasonable amount and provides the borrower with notice of the sale. The legal requirement for lenders to conduct commercially reasonable sales are related to their rights to pursue deficiency judgments.
Deficiency Judgments
Most states allow lenders to sue borrowers for any difference between the sales price and original loan amount. Known as a deficiency judgment, a lender can sue the vehicle purchaser for any remaining loan balance. The sales price is the amount the lender receives after conducting a public auction. Since lenders can theoretically sell their vehicles for less than fair market value and sue borrowers for the deficiency, states require them to conduct commercially reasonable sales to prevent opportunities for abusive sales and lending practices. The Federal Trade Commission does not regulate repossessions.
Suits to Collect Deficiencies
Although legal terminology can vary in different states, to collect a deficiency judgment, a lender must file a summons and complaint in court. The local court sets a hearing date for the deficiency judgment hearing. The lender must serve the borrower with the complaint and summons.
Limitations and Defenses
State laws may allow a borrower to assert a defense based on a lender's violation of state law. For instance, in most states, lenders are required to conduct their repossessions without breaching the peace, using violence or threatening violence. Additionally, in most states, lenders must provide consumers with an opportunity to remove and retrieve their personal items remaining in their vehicles. Some states further allow buyers the legal right to redeem their property within a certain amount of time after paying any deficiencies. A lender's failure to comply with her state's consumer protection laws can lead to a dismissal of her deficiency judgment.
Considerations
Since state consumer protection laws can frequently change, do not use this information as a substitute for legal advice. Seek advice through an attorney licensed to practice law in your state.
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