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When you buy a car, truck, or other vehicle on credit, you should be aware that, until you have made the last payment, your creditor retains important rights in the vehicle. These rights are established by the contract you signed and by the law of your state. Your failure to make timely payments on the vehicle carries serious consequences. Your creditor will then have the right to "repossess" -- take back -- your car without going to court or, in many states, without warning you in advance.
However, your creditor's right to repossess your car is subject to some limitations. In particular, state law places limits on how your creditor may repossess the vehicle and resell it to reduce or eliminate your debt. If any rules are violated, your creditor may lose other rights against you, or even be required to pay you damages. For further information about the rights discussed generally below, and about your state's specific repossession requirements, contact your state consumer protection agency or your private attorney.
SEIZING THE CAR
Normally, your creditor has legal authority to seize your vehicle as soon as you "default" on your loan. What constitutes default will be stated in your contract, but failure to make a payment on time would certainly be an example.
However, if your creditor has agreed to accept your late payments or to change your payment date, the terms of your original contract may no longer apply. Such a change in your credit contract may be made orally, in writing, or, sometimes, simply by your creditor's repeated acceptance of late payments without complaint.
Once you are in default, the laws of most states permit the creditor to repossess your car at any hour of the day or night, without prior notice, and to come onto your property to do so.
However, when seizing the vehicle, your creditor may not commit a "breach of the peace" by, for example, using physical force or threats of force. Taking your car over your protest or removing it from a closed garage without your permission also may constitute a breach of the peace, depending on the law in your state.
Should there be a breach of the peace in seizing your car, your creditor may be required to pay a penalty or, if any harm is done to you or your property, to compensate you. Also, because of a breach of peace, your creditor may lose the right to collect a "deficiency judgment." A deficiency judgment is the difference between what you owe on your loan and what your creditor receives when reselling your vehicle. A private attorney or your local legal aid society can give you guidance about how your state courts have dealt with these matters.
RESELLING THE CAR
Once your car has been repossessed, your creditor may decide to keep the car as compensation for your debt or to resell it in either a public or private sale. In any case, generally your creditor must notify you about what will happen to the car. Under most state laws, your creditor must tell you if it wants to keep the car because you have the right to demand that the car be sold instead. You may want to exercise this right if the car is worth more than what you owe on it. Most creditors prefer to sell the car, however, rather than keep it. If your creditor chooses to resell the car at public auction, state law usually requires you to be notified of the date so that, if you wish, you can attend and participate in the bidding. If the vehicle is to be sold privately, you are usually entitled to a notice of the date after which it will be sold.
In any of these circumstances, you may be entitled to "redeem" or buy back the vehicle by paying the full amount owed on it, plus the expenses connected with its repossession, such as storage and preparation for sale. Some states have consumer protection laws that also allow you to "reinstate" your loan. This means that you can reclaim your car by paying the amount you are behind on your loan together with your creditor's repossession expenses. Check with your state consumer protection office to learn what the laws are in your state.
Any resale of a repossessed car must be conducted in a "commercially reasonable manner." This does not mean that your creditor must get the highest possible price (or even a good price) for the vehicle. A resale price that is below fair market value, however, may indicate that the sale was not commercially reasonable. A sale made according to standard custom in a particular business or in an established market will be considered commercially reasonable in almost all cases. Failure to resell your car in a commercially reasonable manner may give you either a claim against your creditor for damages or a defense against a deficiency judgment. (For an explanation, see the next section.)
Whatever method is used to dispose of a repossessed car, a creditor may not keep or sell any personal property found inside. (This does not include most improvements made to the car itself, such as the addition of a stereo player or luggage rack.) Your creditor also may be required to use reasonable care to prevent others from removing your property from the repossessed car. If you find that your creditor cannot account for valuable articles left in your car, you may wish to speak with an attorney about your right to compensation.
PAYING THE DEFICIENCY
Any difference between what you owe on your loan and what your creditor gets for reselling the vehicle is a "deficiency." For example, if you owed $2,500 on the car and your creditor sells it for $1,500, the deficiency is $1,000. In most states, a creditor who has followed the proper procedures for repossession and sale is allowed to sue you for a "deficiency judgment" to collect the loan balance. Several states, however, have consumer protection laws that restrict creditors from suing for a deficiency when vehicles or other similar consumer goods are involved. Your state consumer protection agency will be able to tell you whether this is true in the state where you live.
If you are sued for a deficiency judgment, you will be notified about the date of the court hearing. It may be important for you to appear at this hearing, because it may be your only opportunity to use any legal defenses you may have. If your creditor breached the peace when seizing the vehicle or failed to resell the car in a commercially reasonable manner, these may be defenses against a deficiency judgment. An attorney will be able to tell you whether you have grounds to contest a deficiency judgment.
TALKING WITH YOUR CREDITOR
Because it is difficult to dispute a repossession once it has occurred, you should contact your creditor when you first realize you will be late with a payment. Many creditors will agree to a delay, if they believe you will be able to pay later.
Sometimes it may be possible to negotiate with your creditor to improve your position. If you do reach an agreement to modify your original contract, be sure it is in writing so that it cannot be questioned later. You may wish to hire an attorney or contact your local attorney referral service for low-cost legal help.
However, your creditor may refuse to accept late payments and may demand that you return the car. By agreeing to a "voluntary repossession," you may reduce your creditor's expenses in retaking the car, which you otherwise would be responsible for paying. But remember, even if you return the car voluntarily, you still are responsible for paying any deficiency on your loan, and your creditor still may enter the repossession on your credit report.
If you need help in dealing with your debts, you may want to contact a Consumer Credit Counseling Service (CCCS). This is a non-profit organization with more than 850 offices located in 50 states. CCCS counselors will try to arrange a repayment plan that is acceptable to you and your creditors. They also will help you set up a realistic budget and plan future expenses. These services are offered at little or no charge to you. You can find the CCCS office nearest you by checking the white pages of your local telephone directory or by contacting:
National Foundation for Consumer Credit, Inc.
8611 Second Avenue, Suite 100
Silver Spring, Maryland 20910
modified from Dec. '93 Federal Trade Commission material
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