If you’re behind on a debt or loan payments, you might be worried about the creditor repossessing something you own, like your car. Repossession is what happens when a creditor takes property put up as collateral because you’ve defaulted on the debt. Strict rules control what a creditor can and can’t take if you default. While credit agreements differ and laws vary from state to state, generally, creditors can repossess:
• motor vehicles, including cars and motorcycles
• rent-to-own items, and
• any secured personal property you pledged as collateral for a debt.
They can’t, however, usually take:
• property you haven’t designated as collateral
• things you bought with a credit card, and
• property named as collateral in an unenforceable contract.
When you default on a secured loan, like by not making your car payments, the lender can take the vehicle (the collateral) from you. Taking the collateral is called “repossession.” Repossessions are usually “self-help,” which means the creditor takes the item without getting a court order ahead of time. Repossession is when an auto lender takes possession of your vehicle, sometimes without warning you in advance or having permission from the court. Vehicle repossession laws vary by state; your vehicle purchase contract should include details about how and when your auto lender can repossess your vehicle. Repossession typically occurs after you fall behind on your auto loan payments. Depending on your contract, your lender may be able to start the repossession process after the first missed payment.
Many states allow repossessors to enter private property to complete a repossession, so long as the taking is without breaching the peace. That is, the creditor can’t use or threaten to use physical force against you to repossess the property. If the creditor or its agent breaches the peace during a repossession, like by pushing you aside and breaking into your locked garage to repossess your vehicle, you can file a lawsuit against that creditor. But it’s usually legal for a repossessor to, for example, hotwire a car or use a duplicate key to take a car. If a peaceable retaking isn’t possible again, say you locked your car in the garage so the repo company can’t get it—the creditor may use a replevin process to get possession of the item. With replevin, the creditor goes to court to get an order requiring you to hand over the property.
What Items Can Be Repossessed?
If you fall behind in payments for a secured debt or fail to comply with an important term of the security agreement, you’ve defaulted. In some cases, like if you let insurance lapse or you become insolvent, the lender might have the right to declare a secured debt in default, even if you’re current on payments. Under most security agreements, the creditor may then take the property you pledged as collateral without going to court and getting a judgment beforehand.
Here are a few items that creditors can generally repossess if you default:
• Your Car Can Be Repossessed: Most auto loans, whether you got the loan through the dealer, a bank, a credit union, or another lender, give the creditor the right to repossess the vehicle if you default. The lender usually isn’t required to give advance notice before taking the car. After repossessing your motor vehicle, the lender will sell it to recover the money you owe. If the outstanding loan balance is more than the sale price, you might be held responsible for paying the deficiency, plus the creditor’s repossession expenses.
• You Can Also Lose Rent-to-Own Items to Repossession: Items that you rent with the option of purchasing—like furniture, electronics, and appliances—can be repossessed. But the creditor can’t just go into your home and take your sofa, television, or other rent-to-own items. The creditor has to get a court order or permission from someone in your household to enter your home. But if you leave the property sitting in the backyard, perhaps a new gas barbecue and lawn furniture, it’s likely fair game. However, the repossessor can’t break down a fence to get into your backyard or toss you off the lawn furniture to get it.
• Property Used as Collateral Can Be Repossessed: Again, a debt is “secured” if a specific piece of personal property (called “collateral”) is used to guarantee repayment. If you don’t repay the debt or are in default on a loan for some other reason, most states let the creditor take the secured property without first suing you and getting a court judgment. If you’re unsure about whether a particular debt is secured, check your credit agreement. The agreement will also detail what would put you in default on the loan, like being behind on your payments or not maintaining proper insurance.
What Items Can’t Be Repossessed?
Creditors who don’t have a security interest in an item of property can’t take it without a judge or court clerk’s approval. Be aware, however, that the creditor can always sue you in court to recover the money you owe. If the creditor wins the lawsuit, it might be able to garnish your wages, put a lien on property you own, or seize and sell your personal property.
Here’s a list of what creditors can’t repossess if you default on a loan:
• Creditors Can’t Repossess Property Not Specifically Named as Collateral: If something isn’t specifically named as collateral for a debt, it can’t be repossessed. For example, say you have an unsecured personal loan and a car loan. You default on the personal loan. As long as you continue to make payments on the car loan, the bank can’t repossess your car because it wasn’t explicitly named as collateral for the personal loan.
• Credit Card Purchases Can’t Be Repossessed: Credit card debt is unsecured, which means the credit agreement doesn’t name anything as collateral for the loan. So, items you purchased with a credit card can’t be repossessed.
• Creditors Can’t Repossess Property Named as Collateral in an Unenforceable Contract: A contract that doesn’t comply with your state’s legal requirements might be void and unenforceable. If the contract is unenforceable, the creditor might not be able to repossess collateral named in the agreement. A lawyer can review your contract for validity and advise you of your consumer rights.
How Can I Avoid Repossession?
If you’re behind on your payments for a secured debt, it’s a good idea to communicate with your lender. Your lender might be able to offer you a solution such as a reduction in payment amount or interest rate that can help you catch up on your payments and avoid repossession.
Two Types of Repossession
There are two major types of repossession: voluntary and involuntary.
Voluntary repossession is when you give your car back to the lender, usually because you can no longer afford to make the monthly payments. However, when people talk about repossession, they’re typically talking about involuntary repossession. This is when the lender comes to take back the car. The lender can sometimes take the car from your property without your permission. However, they cannot disturb you or your neighbors in the process. In some states they are prevented from “breaching the peace,” which includes:
• Threatening or using physical force
• Disturbing your neighbors
• Removing a vehicle from a closed garage without permission
• Continuing with repossession after you have refused to cooperate
If the lender breaches the peace during the repossession, you may be able to sue for damages. If your vehicle is repossessed, whether voluntarily or involuntarily, your auto loan is not canceled. You will still owe the balance due on your loan even after the vehicle is repossessed. Your auto lender can continue to collect on the auto loan by calling you, sending letters, or using a third-party debt collector. Your lender may sell or auction your vehicle to try to recover the coast of your loan. However, if the sale price is not enough to cover your loan, you are still responsible for paying the deficiency, or the difference between the sale amount and what you owe.
How Repossession Impacts Your Credit
Repossession hurts your credit score and can make your financial life more difficult for years to come. Any late payments leading up to the repossession will damage your credit score once they’re reported to credit bureaus. The repossession itself will be listed in the public records section of your credit report as well. If the lender obtains a deficiency judgment for the balance of the auto loan, that judgment will also go on your credit report. If the debt is sold to a collections agency, the new account will show up as a new entry on your credit report that will also lower your credit score. Repossession and the associated negative items will remain on your credit report for seven years, even for a voluntary repossession. You may be able to avoid repossession by catching up on your delinquent payments. Talk to your lender to find out how much you need to pay to bring your account current again. Late payment entries may still show up on your credit report. However, by catching up on your payments, you can avoid having your vehicle repossessed. If your loan payments are too high, consider refinancing into a new car loan with more affordable payments. The refinanced loan may lower your monthly payment with a longer repayment period, lower interest rate, or both. Because refinancing often requires you to have good credit, you should start trying to refinance your loan before you miss any payments. Missed payments may disqualify you for a refinance, or if you do qualify, the loan terms may not get you into a lower monthly payment.
Repairing Your Credit After Repossession
Having repossession will impact your credit significantly, but not forever. The impact on your credit score will lessen as time passes and as you make timely payments on your other credit obligations.
You can rebuild your credit score by:
• Paying off any outstanding debt on your car loan
• Keeping up with other debt payments, such as student loans
• Keeping low balances on credit cards and paying them off every month
• Continuing to make on-time payments for rent, utilities, and medical bills
As you make timely payments on your other accounts, this will offset the damage from the repossession. After seven years, the repossession will no longer show up on your credit report.
Make Up the Late Payments
Just because you are late on a payment does not automatically mean you are in default. Some agreements may state that you are in default if you are one day late with the payment. Other agreements may state that you are not in default unless you are 30 days late or more. Even if you are late, the loan might not be in default until the creditor tells you it is, usually in writing. If you are not yet in default according to your loan documents, you can head off repossession by bringing the loan current. Read your loan agreement carefully. When you do make up the late payments, make sure to include all applicable late fees and charges. If you do not, then you might be in default because you didn’t make the payments in the entire, correct amount. If you are habitually late with payments, you might be putting yourself at risk. On one hand, if the creditor consistently accepts payments, it might have legally waived its rights to declare a default. On the other hand, it is never a good idea to rely upon the creditor’s acceptance of future late payments because it may change its mind.
Reinstate the Loan
Even if you are in default, you might have the right to reinstate the loan. If you reinstate the loan, you can prevent repossession or, if the car was already repossessed, get the car back. With reinstatement, you bring the loan current by making up all of the past due payments, including applicable fees and late charges, in one lump sum. This is also called the right to cure the default. Not everyone has the right to reinstate, however. Some state laws provide the right to reinstate your car loan. Even if your state doesn’t provide for this right, your loan agreement might specifically state that it allows reinstatement. In many instances where reinstatement is allowed, you only get one bite at the apple. If you default again, you may no longer have the option of reinstating the loan. (Learn more about reinstating your car loan.)
Redeem the Car
After repossession, you usually have a right of redemption. This means that if you pay the entire outstanding balance due on the car loan, you can get the car back. The redemption amount, or “payoff,” often includes not just the outstanding principal and interest on the loan but also repo fees, storage costs, and perhaps even attorney fees. You don’t have a lot of time to redeem the car. Your right of redemption ends when the car is sold.
Cons: Redemption is not always realistic. If you could not afford to make the installment payments, then you probably can’t pay the loan off either. Also, redemption might not be in your best interest if the payoff is more than what the car is worth.
Pros: On the other hand, if the balance of the loan is relatively small, or if the payoff is less than what the car is worth so that you have significant equity in the car, you might be better off redeeming the car. This is especially true if the car would have been sold for less than what you could sell it for elsewhere.
Negotiate with the Creditor
Sometimes you can approach the creditor and negotiate an alternative way to get the car back or reduce or eliminate the debt. Some options include:
Sell the Car Yourself
Typically, a creditor will sell the car at a public auction or a private dealer sale, which don’t always realize the maximum value of the car. If you can sell the car to a buyer willing to offer more than what the creditor is likely to obtain at a dealer’s sale or auction, this may be the route to go. A creditor may be agreeable to this option because it saves on resale costs, such as advertising and storage fees. This can be a difficult option to exercise, as you only have a limited time to do so. The buyer must have the cash or financing readily available. More importantly, you need the creditor’s cooperation. The creditor can refuse to consent to the sale for the wrong reason, an arbitrary reason, or no reason at all. However, you may be able to use its refusal to cooperate as a basis for defending against any deficiency claim, especially if the creditor sold the car for less than what your private buyer was prepared to pay.
Surrender the Vehicle
If you are in default, habitually late on payments, or simply wish to get out from under the car loan, you may consider surrendering the vehicle to the creditor. Ideally, in exchange for your surrendering the car, the creditor will agree to waive or reduce the deficiency. The incentive for the creditor is the savings in time and money by not having to repossess the car itself. You should surrender the car only after you have reached an agreement (in writing) that settles the deficiency. If you surrender the car without some sort of waiver agreement with the creditor, then it may still pursue you for the entire deficiency balance. On the other hand, if the circumstances are such that the costs of repossession would be passed on to you anyway, then it might be better for you to surrender the car even without an agreement with the creditor, as a way of reducing your overall debt. Your personal, financial circumstances will ultimately determine whether surrendering the vehicle is in your best option.
Bring Your Complaints to the Bargaining Table
You don’t have to wait for the creditor to sue you before trying to settle. If the creditor violated your rights with respect to the repossession and sale of the property, you may informally use your defenses (and potential counterclaims) to persuade the creditor to give the car back, reinstate the loan, redeem the vehicle or forgive or reduce the amount of the deficiency balance.
Refinance the Car Loan
The creditor (or you) may offer to refinance the loan, usually for a longer term. Or you may find another lender willing to extend you credit to refinance this loan. While this is a tempting option, especially if the new installment payments are lower than the original payments, it might not be in your best interest in the long run. Some things to consider in refinancing the car loan include:
• Finance charges: Is the interest rate lower than the original loan?
• Value depreciation: Cars depreciate, usually rapidly. Is it worth it to refinance a loan for another three to five years if the car is already, say, four or five years old?
• Will you have to make an upfront payment on the new loan?
• What are the other costs of the refinance: penalties, fees, costs?
When you need legal help with a Repossession in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506