Repossession is the process by which creditors can reclaim property from debtors (those that owe money) who have not kept up with their payments. This form of reclamation most commonly occurs in conjunction with loans for cars and other expensive equipment.
When a car or other equipment is purchased on credit, the creditor typically retains an interest, and connected rights, in the property until the last payment is made. This interest is called a "security interest." The extent of the creditor’s interest and rights are determined by the contract you signed with the creditor and your state’s laws.
If you "default" on your loan, the creditor can repossess the property. The meaning of "default" depends on your contract with the creditor, but it usually means that you are behind on your payments.
In most states, the property can be seized at any time of day at any location, even if it is located on certain parts of your property, without prior warning. The creditor may not, however, "breach the peace" in seizing the property. Typically, courts have found that "breaching the peace" means confronting the debtor or breaking the law, such as break and entering into your home.
If a creditor does breach the peace while repossessing the property, you can sue the creditor and collect a penalty fee, as well as compensation for any damage inflicted upon you or your property. It is also possible to stop a creditor from repossessing property by filing a claim of exemption with the court.
The creditor will either keep the repossessed property or sell the property off to pay the remainder of the debt. Even after repossession, the debtor still has some rights in the property. These rights, which vary from state to state, include:
- The right to be notified about what will happen to the property
- The right to demand that the property be sold, even if the creditor wants to keep it
- The right to be notified if the property will be sold at public auction so that the debtor can attend and participate if they want
- The right to be notified of the date the property was sold if sold privately
- The right to buy back, or "redeem," the property before it is sold by paying the unpaid balance plus repossession costs
If your creditor sold the property and it still does not cover the debt owed, then the creditor can sue the debtor for the remaining unpaid amount called a "deficiency." Most states allow creditors to sue for deficiencies provided the creditor:
- Did not breach the peace in repossessing the property; and
- Sold the property in a commonly accepted way (i.e. did not try to sell the property for an unreasonably low price).
Some states forbid creditors from suing for deficiencies. You should check with your consumer protection agency or local attorney to find out which rule your state follows.
There are many ways a creditor can make a mistake in repossessing property and be liable for their actions. Whether you are the creditor or debtor, a qualified attorney can help protect your interests. A lawyer will know which laws apply in your state and can spot the mistakes of both parties.