- Repossession occurs when you fail to make loan payments and your collateral is seized. Your lender can then sell your collateral to recoup the money you owe.
What is Repossession?
If you fail to make payments on a loan that has been secured by a motor vehicle or other form of collateral, your lender can seize the vehicle and sell it to recoup the money you owe.1 This process is called “repossession.”
How does Repossession work?
Loans that use collateral are referred to as “secured loans.” (Loans that do not use collateral, such as personal installment loans, are called “unsecured loans.”) If you fail to make your payments on a secured loan—also known as “defaulting” on the loan—your lender has the right to seize the collateral in order to make up the money you owe.
When the collateral is a car, truck, or other type of motor vehicle, this seizure process is called “repossession.” (For comparison: With mortgage loans, the seizure process is called “eviction.”) Laws governing repossession vary from state to state, which means that the process might be different depending on where you live.
If you fail to make your scheduled payments on an auto loan, your creditor has the legal right to repossess your car and either keep it or sell it off. (“Creditor” is a term for a person or business to whom a debt is owed.) In most states, a creditor can repossess your car as soon as a payment is late—there is no grace period during which your car is safe from repossession.
In some states, a lender must inform you that you are in default before repossessing your car. But in the majority of states, the creditor does not need to provide you notice and can repossess your car at any time. They may even be able to come onto your property without notice to do so.
The one thing a creditor cannot do when repossessing your car is commit a “breach of peace.”1
What is a breach of a peace?
The definition of “breach of piece” varies, but it most often includes the use of force or the threat of force.
If a breach of peace occurs during the repossession process, you probably won’t be able to get your vehicle back, but your creditor might have to compensate you for damages. They might also have to pay a fine.
A breach of peace can also be used to defend against a “deficiency judgment.”
What is a deficiency judgment?
After a creditor has repossessed your vehicle, they can sell the car in order to make up for the money they have lost on your loan. If the price they get for the car is less than the amount of money that you owe, they can file a “deficiency judgment” against you to recoup the remaining amount.2
A deficiency judgment can include more than the amount you owe on the loan itself. It can also include any fees involved in the storing and sale of your vehicle.
Deficiency judgments can only be issued if a repossession was carried out in following with the law and with proper procedure. This is why a breach of peace, which is against the law, can be used as a legal defense against a deficiency judgment.
In some states, lenders must also pay you the surplus if they sold your vehicle for more than was owed. Also, a creditor has no right to any of the personal possessions that were inside the car at the time is was repossessed.3
How does selling a Repossessed vehicle work?
A creditor does not have to sell your vehicle. They can also choose to keep it for their own use. However, most repossessed cars are put up for sale, as the creditor is looking to get their money back.
There are two ways that a creditor can sell your car: public and private. A public sale is basically an auction, where different parties can show up and bid on the car, with the highest bid winning. A private sale is made and negotiated directly between the creditor and the buyer.
Some states require that a creditor inform you when and where a public sale is happening so that you can go and try to buy back your car yourself. This is also known as “redeeming” your vehicle. It requires that you pay back the entire amount owed, including missed payments, late fees, storage costs, legal fees, etc.
When a repossessed vehicle is sold, it must be done so in a “commercially reasonable manner,” which means that the seller must make a genuine effort to get the price possible for the vehicle. For instance, if an employee at a lender sold a $5,000 car to their nephew for only $500, that would not be a commercially reasonable sale.
Failure to sell a repossessed vehicle in a commercially reasonable manner is also a failure to follow proper procedure, which means that it, too, can be used as a legal defense against a deficiency judgment. It could even be grounds for you to file a claim against your creditor for damages.
In some states, you can “reinstate” your car loan and reclaim your repossessed vehicle by paying only what you owe in late payments, plus the fees involved with repossessing and storing your vehicle.
What is voluntary Repossession?
Also known as a “voluntary surrender,” this is the term for what happens when you go to your creditor and turn in the car yourself. While this means that you are still defaulting on your loan, it makes the process less expensive for the creditor, which makes a deficiency judgment less likely.
A voluntary lender also shows a lender that you are taking responsibility for your inability to repay your loan. This will help preserve your relationship with the lender, which could help you if you want to apply for another loan from them down the line.4
Does Repossession affect my credit?
Since having your car repossessed shows that you were unable to pay back your auto loan, the repossession goes on your credit report as a derogatory mark. Derogatory marks negatively affect your score.
Even if your debt is fully paid off by the sale of your car—meaning that you no longer owe any money—the repossession will continue to negatively affect your score. It will stay on your credit report for seven years.
1 “Vehicle Repossession.” Federal Trade Commission, https://www.consumer.ftc.gov/articles/0144-vehicle-repossession. Accessed 14 March 2017.
2 Bulkat, B. “Car Repossession Laws: An Overview.” Nolo.com, http://www.nolo.com/legal-encyclopedia/car-repossession-laws-overview.html#. Accessed 14 March 2017.
3 “Repossession (Lawyer Manual).” Illinois Legal Aid Online, https://www.illinoislegalaid.org/legal-information/repossession-lawyer-manual. Accessed 15 March 2017.
4 “Voluntary Surrender vs. Repossession.” Experian.com, http://www.experian.com/blogs/ask-experian/difference-between-a-voluntary-surrender-and-repossession/. Accessed 14 March 2017.