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Car Repossession: A Consumer Guide

 

A car is a major investment. Often, it is essential to the financial well-being of a household. When the economy is bad, as it is now, many cars get repossessed (taken back by the lender that gave the car loan).

This article will give you general information about the repossession of an auto you have purchased for personal use. It will explain how to avoid having your car repossessed and what to do if your car has been repossessed. Finally, it will focus on what to do if you are sued after your car has been repossessed.

Please note: The legal issues around car repossessions are complicated. You should try to get an attorney to represent you, especially if you have received legal documents called a summons and complaint. The National Association of Consumer Advocates provides a list of consumer attorneys. You may also be eligible for help from your regional Legal Services office or Legal Services of New Jersey’s Consumer Protection Unit (CPU). Contact the CPU at 1-888-LSNJ-LAW (1-888-576-5529) to see if you qualify for help.

How to Avoid Having Your Car Repossessed

When can a car be repossessed?

A car may be repossessed only if:

  • The creditor (the lender that gave the loan) has a valid security interest in the car (meaning that the lender has a signed a valid car loan agreement that permits it to take the car as collateral for the loan). This is similar to the way that a house is taken as collateral for a mortgage loan.

  • The car loan is in default. A loan is in default when you have failed to do something that the loan agreement requires you to do, such as make payments when due and insure the car.

Not every lender requires that the loan terms be strictly followed. But a lender is not required to delay repossession or accept partial payments.

How can I avoid repossession?

One way to lower the risk of default from a bounced check or a late payment is to pay one month in advance. This extra payment acts as a cushion if you have financial difficulties in the future. Also, if you want to keep your car, make car payments before you pay non-essential debts, such as credit card bills.

What if I can’t make my car payments?

If you are not able to make your car payments, you are in danger of defaulting on your car loan. You may be able to stop the lender from taking your car if you try some of the steps described below.

  1. Modification

    If it looks like you may have trouble making your car payments, you may ask the lender for a modification (written permanent change) or a workout (written temporary change) in your loan agreement. Ways to change the loan agreement include:
    • Lowering the interest rate;
    • Extending the loan term;
    • Canceling credit insurance (insurance you pay to cover your loan in case you are unable to pay because of unemployment, death, or disability);
    • Canceling gap insurance (insurance you pay that covers the balance due on your loan if your car is totally destroyed in an accident and the balance on your car loan exceeds the fair market value of the car that standard car insurance is willing to pay); and
    • Canceling a service contract.

    Make sure that any changes to the loan agreement are in writing, including only the terms that you agree to and can afford, and signed by both you and the lender. The changes are not binding on the lender unless they are in writing and signed by the lender.

  2. Refinance

    Another idea is to seek a more affordable loan through a car loan refinance with another lender.

  3. Cancellation and Voluntary Return

    Another option may be to cancel the contract for sale and return the car with a written agreement from the lender that you do not owe anything else on the loan. Some common legal reasons for canceling a contract are that the car failed inspection or it is not fit to use.

    When canceling the contract, you need to get a written agreement signed by the dealer, the lender, and you. The agreement should state that:
    • You are all agreeing to cancel the contract for sale.
    • You no longer have any obligation under the car loan.
    • The lender will either not report that you defaulted on the loan to the three credit reporting agencies (Equifax, Experian, and Transunion) or, if the negative report was already made, that it will clear (or remove) the negative report with the credit reporting agencies.

    It is very important that you put all of the information in writing. If you return your car without a written agreement that you no longer owe anything on the loan, the lender will consider the return a voluntary repossession and sue you in a collection action.

    Caution: It is a good idea to talk to a lawyer before canceling or entering any agreement, modification, or workout with the lender and/or dealer. If you make an agreement, you may be giving up other legal claims for damages, such as claims for fraud, consumer fraud, or breach of contract.

  4. Private Sale

    If your car loan is already in default, one option is to ask the lender if you may try to sell the car privately. If you sell the car for more money than the lender would get if it repossessed the car and sold it at auction, you will owe less to the lender.

  5. Bankruptcy

    Filing for bankruptcy also prevents repossession. Again, you should talk to an attorney because the legal issues are complex. If the car loan includes more than one buyer, then all buyers and co-signers must file for bankruptcy to protect the car. Another option is that one person files a Chapter 13 bankruptcy and pays off the past-due payments.

How can bankruptcy help with repossession?

If you file for bankruptcy, and if you qualify for an automatic stay, then creditors must stop all collection efforts. This means that the lender is prohibited from taking back the car unless the bankruptcy court permits it. In the case of secured debts, such as car loans, you may pay off the car in full or you may catch up with any past-due payments while the bankruptcy is pending.

Depending on the particular circumstances, you may choose a Chapter 7 or a Chapter 13 bankruptcy. In a Chapter 7 bankruptcy you may redeem the car, which means you pay the loan off in full, or you may seek a reduction in the amount needed to redeem the loan so that you pay off only the fair market value of the car. Also, a Chapter 7 bankruptcy is a good choice if you can afford to pay off the loan but you need about 30 days to do so.

If you file a Chapter 13 bankruptcy, you may reaffirm the car loan and pay the overdue payments through a repayment plan. Generally, the repayment plan includes monthly payments for a period of up to five years. Also in bankruptcy, you may litigate defenses or consumer claims against the lender.

To avoid repossession, you must file bankruptcy quickly. To file quickly, you need to get credit counseling and file just a few documents with the court. An “emergent” bankruptcy filing includes:

  • A certification of completion of credit counseling;
  • A three-page bankruptcy petition;
  • A notice to the creditors(called the schedule of creditors); and
  • A filing fee. (If your income is below 150% of the federal poverty guidelines, the filing fee is forgiven or waived.)

Within 14 days of filing for emergent relief, you must file the remaining bankruptcy papers. These include the remaining bankruptcy petition and attached documents, called schedules. Also, within 60 days of the bankruptcy filing, you must provide the lender with proof that the car remains insured. Bankruptcy will be discussed again below because it also helps you get back a car after it has been repossessed.

Repossesion

What documents do I need if a lender is going to repossess my car?

If you are facing repossession, you must plan ahead. Keep all documents related to the car purchase and the repossession. These documents include:

  • The original retail installment sales contract;
  • All documents provided by the dealer and lender;
  • All correspondence from the dealer and lender, including envelopes;
  • All documents relating to car repairs;
  • All inspection documents; and
  • All payments on the car loan.

These documents may help you establish legal claims against the car dealer and the lender. They may also help you defend yourself against the lender’s lawsuit to collect money from you (called a collection action or deficiency action). It is important not to leave these documents in the glove compartment of the car. If you do, you may lose them when the car is repossessed.

Does the lender have to warn me before repossessing the car?

A lender has no duty to warn you before taking back your car. If the lender has the right to repossesses the car, then it may take back the car without going to court first. This is called self-help repossession.

Note: There is an exception for cars owned by active duty service members. Active duty service members who have made at least one payment on a car loan cannot be subject to a lender’s self-help repossession.

When the lender repossesses your car, it must do so without breaching the peace. When courts review a repossession to determine if a breach of peace occurred, they will look at whether the owner was present, whether the repo company entered the home or garage without the permission of the owner, and whether the repo company used force or the threat of violence to repossess the car. It is generally illegal if the lender repossessed the car while it was parked in a locked garage. If the court decides that the lender breached the peace, the lender and/or the repossession company will be liable for damages caused by the wrongful repossession.

After Repossession

What happens after the car is repossessed? Is there a way to get my car back?

If your car is repossessed, there is a short time to get the car back along with your personal belongings that were inside it. After this time, the lender will usually sell the car at auction, throw out your personal property, and file a deficiency action against you. A deficiency action is a lawsuit to recover the deficiency (the amount that the lender claims you still owe because you did not complete your obligations under the sales contract).

Reinstatement

You may ask the lender to reinstate the car loan. Reinstating the car loan means the lender would return the car to you for only the cost of the overdue payments. However, once the loan is in default and the car has been repossessed, the lender usually accelerates the loan. Accelerating the loan means requiring you to pay the entire loan plus the costs of the repossession.

Bankruptcy

If you file a Chapter 13 bankruptcy and give notice of the filing to the lender immediately after the repossession, or if the lender doesn’t respond by returning your car and you file a Motion for Turnover in the Bankruptcy Court, then the lender should return your car, provided that (1) the car was not already sold to a third party; and (2) the car is essential to your financial recovery. If the lender was obligated to return your car and fails to return it, then the lender is liable to you (owes you) for damages.

How do I get my personal property from the car?

If your car is repossessed with personal property inside it, you have the right to get your belongings back. You should contact the repo company immediately by phone. Explain that you have not abandoned your property and that you want it back. To follow up, you should immediately send a letter by certified mail, return receipt requested, and keep a copy. The letter should be sent to the lender’s customer service department as well as to the repo company. The letter should state that you want to pick up your items and include:

  • Your name, address, and telephone number where you can be easily reached; and
  • Identifying information for the car, such as the date it was repossessed, the make, model, and year.

The letter should state a few different dates and times when you are available to pick up your belongings. If the repo company doesn’t allow you to retrieve your items, you may have a legal claim against it for damages. Also, you should not pay for the return of your belongings.

What does the lender have to do after the car is repossessed?

After repossession, the lender must provide two written notices.

First Notice: Redemption

The lender’s first notice states that it has the car and that the car will be sold. The notice must be provided to the owner of the car and all co-buyers or co-signers. It must be provided in a timely manner, giving you a reasonable time to redeem the car before its resale. The right to redeem the car means that you may get the car returned to you by paying the loan off in full along with the lender’s repossession costs. The notice must also give a contact number where you may call for the exact cost to redeem the car.

You must receive the first notice at least 10 days before the proposed sale. However, the right to redeem lasts until the car is resold. Also, the notice provides details about when and where the sale will be and whether the sale will be public or private. With this information, you may bid at the car auction. A repurchase may be cheaper than redeeming the car or trying to buy another one. If your bid is successful at auction, you may still owe the lender, but now the lender cannot threaten repossession because of late or missed payments. However, the lender can still sue you in a collection action for the amount it claims you owe on the car loan.

Second Notice: Deficiency

After the sale, the lender sends out a second notice. This notice must accurately state the amounts that the lender has credited to you because of the resale and the cancellation of the sales contract. Lenders often sell cars at a private auction that only wholesalers and dealers attend. Because the lenders put out little or no advertising about these sales, the sale prices are often very low, much lower than the fair market value of the car. If you feel that this is what the lender has done in the resale of your car, you may use this to defend the deficiency action that the lender files against you. Your claim against the lender will be that under the law—The Uniform Commercial Code, N.J.S.A. 12A: 9-610(b)—the lender is not entitled to all of the money it seeks because the sale was not “commercially reasonable” and, as a result, the sale price was unreasonably low. If your claim is successful, the court will award damages, under N.J.S.A. 12A:9-625, which will reduce or eliminate the amount you owe.

Another way to reduce the amount due is to challenge the accuracy of this second notice. It may inflate the amount you owe. For instance, if you had a service contract, gap insurance, or various forms of credit insurance on the car, those amounts should be removed from the amount the lender claims you still owe. Also, if you voluntarily returned the car instead of waiting for the repossession, the lender should reduce its repossession costs. However, after a default, there is no significant difference between returning your car voluntarily and waiting for the repossession company to take the car. In either case, you will still be legally obligated to pay the lender for the amount that remains due under the car loan.

What is a deficiency, and what can I do if the lender sues to collect it?

Even though a car is repossessed in excellent condition, and the lender sells it at auction, the lender may sue to collect the deficiency. The deficiency is the amount the lender claims you still owe because you did not complete your obligations under the sales contract. You can try to get the lender to agree to waive (forgive) the deficiency in your case. That means that the lender agrees, in writing, signed by the lender, not to pursue you in a collection lawsuit. It is a good idea to have a lawyer help you to get this waiver from the lender. If the lender is not willing to cancel the deficiency, the lender has four years from the date of default to sue you.


Car Dealer and Lender Must Follow Certain Laws

A car dealer and a lender must follow certain laws when a car is sold to a consumer and later if and when it is repossessed. These laws include:

  • Uniform Commercial Code,
  • Retail Installment Sales Act,
  • Truth in Lending Act, and
  • Consumer Fraud Act.

If these laws are not followed, you may have legal claims and defenses against the lender. Also, you may have claims against the dealer and the repo company. As always, do not wait too long to make your claims, because the law limits the time that you have to pursue your claims.

 

This article originally appeared in the July-August 2010 issue of Looking Out for Your Legal Rights®.

This information last reviewed 10/25/11.

 

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