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Defenses to Repossession

Key Takeaways:

  • Lenders with a legal security interest have the right to repossess property.
  • Wrongful repossession may provide some defenses to a repossession.
  • Bankruptcy, particularly Chapter 13, may help keep your property from getting repossessed.

Getting a loan can be tough. The process can be less painful if you give the lender collateral. That collateral, also known as a “security interest,” is usually what you bought with the loaned money. For example, a house is the collateral for a mortgage, and a car is the collateral for a car loan.

However, using collateral has a downside. If you fall behind on your payments, you might face repossession. Repossession gives creditors the right to take back that property.

This article will discuss some tools you can use to fight repossession, which is a serious legal issue. Find a lawyer near you to discuss all your legal options.

How Lending Works

When you borrow money, you usually sign a contract. The contract usually lists the rights and obligations of the person who borrowed the money (the debtor) and the person who lent the money (the creditor).

If you stop making your monthly payments as the contract requires, the security interest allows the creditor to get some of the loaned money back by repossessing the collateral. The creditor will take back the property, sell it, and use the funds from the sale to cover what’s left on the loan.

How Repossession Works

If a creditor wants to repossess your property, it will send a repossession agent to collect it. Even worse, in most states, you won’t get notice of the repossession. You could walk outside and find that your car is gone.

Even though most states do not require notice before repossession, all states require certain notices after repossession. Creditors in every state must notify you of the date and time of the proposed sale. Depending on your state, the creditor must also inform you of your right to either redemption or reinstatement.

In redemption, you keep your car by paying the entire loan balance. Reinstatement allows you to keep your vehicle after paying the past-due balance. But beware: redemption and reinstatement usually require you to pay any interest, late fees, and car repossession costs in addition to the loan balance or past-due payments.

The lender will sell your property if you don’t redeem or reinstate the loan. The sale must happen in a “commercially reasonable manner,” meaning the lender must design and advertise the sale in the best way to get fair market value for the items.

The sale does not end your financial obligations. The lender must apply the sale proceeds to the balance of your loan, but the lender can also charge you for any repossession costs, including attorney’s fees and storage fees. If the sale amount is insufficient to cover everything, the lender can collect the remainder from you.

So, for example, in vehicle repossession, if the sale only netted $10,000, but the car loan and fees add up to $15,000, you would still owe the lender $5,000. This is known as the deficiency balance or deficiency judgment.

Four Defenses to Repossession

You have the legal right to raise a valid defense that may delay or stop the repossession process. Here are four common defenses to repossession:

1. The Repo Agent Breached the Peace

A repossession agent cannot breach your peace when collecting, including using violence, threats, or similar tactics. Breaking into a closed garage to get a car is one example.

A breach of peace probably won’t get your car back. But depending on the severity of the breach, you might be entitled to compensation. Successfully raising this issue could also keep you from paying a deficiency judgment.

2. The Lender Did Not Have the Right to Repossess the Property

Some creditors repossess property before they have a right to do so. This is a wrongful repossession. Wrongful repossession may be a valid defense if:

  • Your loan did not give the lender a security interest in the property
  • You did not violate any terms of your loan that would allow the lender to repossess the property

For example, the lender may not be able to repossess the property if you make insurance payments and loan payments on time.

A successful wrongful repossession award can range from a small amount to three times the value of the repossessed property. In some cases, you could get your property back. An experienced attorney can help determine which remedies apply to your case under your state’s repossession laws.

3. The Lender Did Not Provide the Required Notice Prior to Repossession

In some states, lenders must provide you with written notice, called a notice of default. It contains essential information and required disclosures.

In some states, the notice will tell you about your right to “cure” the default. In these states, the lender must give you a certain number of days to pay the past-due amount before repossession happens. Failing to provide legally required notices or not giving you a chance to cure the default is wrongful repossession.

4. The Lender Violated Your Rights as an Active-Duty Serviceperson

The Servicemembers Civil Relief Act (SCRA) limits the ability of creditors to repossess the property of active-duty military personnel. Creditors must get a court order before attempting repossession.

At the court hearing, the judge may order a stay, let the repossession proceed, or order the lender to return some of your prior payments or pay you the difference between the value of the property and the remainder of the loan.

Using Bankruptcy to Fight Repossession

Bankruptcy provides many benefits for people facing financial difficulties.

After filing for Chapter 7 or Chapter 13 bankruptcy, the court will issue an automatic stay. All debt collection activities, including repossessions, must stop while the stay is in place. But the lender can file a motion to lift the stay.

Bankruptcy does offer more permanent solutions. A Chapter 13 bankruptcy allows you to reorganize your finances and come up with a payment plan. If you are at risk of losing personal property like a car, a Chapter 13 repayment plan might help you keep it.

In fact, if your car was repossessed but hasn’t been sold, a Chapter 13 filing might get your car back if your repayment plan includes catching up on your missed payments.

Get Help During Repossession

If and when repossession occurs, you should review all the documents and information available. If you did not get proper notice or suspect that you have suffered a wrongful repossession, get legal help right away. Protect your rights with an attorney near you who can give you legal advice tailored to your situation.

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