When May a Dealer or Lender Repossess an Automobile?
A dealer may repossess a car only when the debtor is in default of the purchase agreement. Typically a default occurs when the buyer fails to make an installment payment. However, default is usually defined in the security agreement, and may include numerous other conditions which will constitute default. Thus, depending upon the terms of the agreement, a default may occur when:
- the buyer fails to maintain collision or comprehensive insurance protecting the car, as opposed to liability insurance, which protects the buyer against actions by third parties for injuries suffered in an accident;
- the buyer moves the car to a new location without the seller’s permission;
- loss or damage to the car occurs;
- debtor sells the car without permission from the seller.
If the debtor violates any of the conditions stated in the agreement, he may be in default even though he is not behind in his payments. And if he is in default, the seller may be able to lawfully repossess the car. Therefore, it is very important that the buyer understand what conditions have been placed in the agreement by the seller.
Must the Lender go to Court and Get a Court Order Before He Repossesses the Car?
Usually the answer is no. In a typical auto installment loan the car itself is the collateral for the loan. Loan agreements usually provide that in the event of a default by the buyer, the lender or seller may repossess the car without having to resort to judicial process. This means that the lender will not have to get a Court Order before repossessing the car.
However, if the right to repossess the car is not clearly stated in the loan agreement, the lender may not repossess the car. Typically this will occur when the buyer gets a personal loan from family or friends. If there is no written contract between the buyer and the seller, the seller cannot repossess the car without judicial process. If the buyer puts up some other form of collateral in support of the loan, such as a different car or his home, the seller cannot repossess without first going to Court and getting an order.
Why Does the Lender Demand that the Buyer Pay the Full Amount Owed on the Car, even Though the Buyer May Be Only One or Two Months Behind in his Payments?
Credit agreements usually specify that if the debtor is behind in his payments, or otherwise in breach of the agreement, the creditor may accelerate the debt. Acceleration makes the full unpaid balance of the loan due immediately. Since most debtors are unable to make full payment on the entire balance due, the lender may immediately proceed to repossess the car, and then sell it to satisfy the remaining obligation.
In order for a creditor to rely on an acceleration clause, it must be clearly stated in the credit agreement. Thus if the agreement does not specifically authorize acceleration, the seller probably may not demand full payment when only a partial default has occurred.
On the other hand, it is not uncommon for a creditor to regularly accept late payments, and say nothing of it to the buyer. If the seller then attempts to accelerate the debt, the debtor may be able to defend by claiming that the actions of the seller in the past constitute a waiver. Since the seller had not demanded strict compliance with the payment schedule in the past, he may not be allowed to do so now.
When and Where May a Repossession Take Place?
Generally the creditor in a secured installment agreement such as that involved in the purchase of a car can repossess the car as soon as the buyer is in default. Furthermore, in most installment agreements, the seller need not obtain a Court order before repossessing the car. This is commonly referred to as a self-help repossession.
When the creditor attempts a self-help repossession, he must be careful not to commit a breach of the peace. The creditor may not use force or threats, cannot enter the buyer’s home without consent, or take any property over the buyer’s objection. The creditor should not make harassing phone calls, or even threaten to repossess the car just because you are behind in payments.
Provided he does not commit a breach of the peace the creditor is permitted to repossess the car from most public places, including the street in front of the debtor’s home, public parking lots, or private parking lots away from home. In some instances, he may even take the car off of the debtor’s driveway. He may not, however, enter the debtor’s garage to remove the car.
If the debtor sees the creditor repossessing the car, the debtor has the right to object. The creditor is obligated to stop any further repossession action once the debtor objects. If he continues the repossession, the debtor should call the police. The debtor should not attempt to physically stop the repossession.
After the Car Has Been Repossessed, is the Buyer Allowed to get it Back?
Within 72 hours of the repossession, the seller must give to the buyer a written notice explaining to the buyer his right to redeem the car, and the amount the buyer must pay to redeem.
How Much Money Can the Seller Demand From the Buyer if the Buyer Wants to Get the Car Back?
If the seller has an acceleration clause in the agreement, he can demand that the buyer pay the complete balance due on the car, and not just the missed payments. The seller can also recover reasonable expenses incurred in repossessing the car, including towing charges, storage fees, and attorney’s fees.
What Can the Seller Do With the Car After Repossession if the Buyer Cannot Afford to Buy it Back?
In most instances the seller will sell the car. The seller must make sure that the sale is conducted in a “commercially reasonable” manner. He must try to get the highest price he can for the car. If necessary, he may clean up or repair the car. Failure to advertise the sale may make the sale commercially unreasonable.
The seller must send advance notice to the buyer of the sale date so the buyer can attend the sale and bid, if he so chooses.
What Happens if the Car Sells for Less than the Balance Owed by the Buyer?
Once the sale of the car has been conducted, the sale proceeds must be applied, in order, to the reasonable expenses of repossession, conducting the sale, and, finally, paying off the balance due on the car. If any money is left owing to the seller, the seller may sue the buyer for the amount still due. The amount left owing after the sale is referred to as the deficiency.
What Happens if the Car Sells for More than the Balance Due on the Car?
The buyer may be entitled to a refund of the surplus money. Remember, however, that in addition to the balance due on the car, the seller can recover reasonable fees and costs associated with the repossession and sale.
If the Car Was Substantially Paid for at the Time of the Repossession, and the Seller Offers to Accept the Car in Satisfaction of the Debt, with no Deficiency, Should the Buyer Accept the Offer?
Probably not. This is called a strict foreclosure. If the buyer has paid at least 60% of the cost, the law prohibits the seller from keeping the car in satisfaction of the debt. The law requires the seller to sell the car and apply the proceeds of the sale towards the deficiency. Since the car will probably sell for more than the balance due, it is probably in the best interest of the buyer to insist that the seller resell the car.
If the Debtor Knows He is in Default, and Wants to Turn the Car Over to the Seller, May he Do So?
The debtor who is in default may find it in his best interest to surrender the car to the seller before it is repossessed. This is particularly the case when the debtor knows that he is no longer able to afford the payments. Surrender of the car will at least avoid the additional costs associated with the repossession. It may also speed up the process of selling the car, thereby helping to assure that a reasonable price at resale is obtained.
If the debtor chooses to surrender the car, he should ask the seller to waive any deficiency or balance due. If the seller does agree to this condition, get it in writing.
If a Person’s Car Has Been Repossessed, or There Is a Threatened Repossession, Will the Legal Aid Society represent him?
Probably not. LAS generally does not represent individuals in consumer matters such as repossessions. If you feel you need an attorney, LAS may be able to refer you to a private attorney who can help you, or you may try contacting the Lawyer Referral Service program operated by your county Bar Association.