If you fail to make payments on a car loan, or anticipate a problem paying in the near future, you should be familiar with the process of repossession and what rights you may have. This publication will cover your rights before and after repossession, starting with the security agreement you signed when you bought the car and ending with your rights after a creditor sale of your car.

Specifically, this publication will answer the following:

• How does the creditor have a security interest in your car and what does this mean?
• How can you default on a loan?
• When can you reinstate the contract or redeem the car?
• Do you have rights to be notified before repossession?
• How can you stop self-help repossession?
• What are your rights before and after the sale of your vehicle?

It is important to know that every state has a different mix of laws on this subject and the rights discussed in this publication may or may not be available in your particular state. You must check with an attorney in your state to see which of these rights is available to you.

Did You Sign a Valid Written Security Agreement?

A car can only be repossessed by the lender that took the car as collateral for your loan. None of your other creditors can repossess your car unless you have a security agreement that specifically states your car is collateral for that loan. For example, if you are delinquent on regular credit card debt, the credit card company cannot repossess your car to collect the credit card debt.

When you buy a car using a car loan, you sign a security agreement. For the agreement to be valid, it must describe the type of "collateral" (the car) and the value given, and you must have "rights to the collateral." (You have rights to the collateral if the car belongs to you, not to someone else.) Accordingly, if a parent buys a car for her daughter, the daughter has all rights to the collateral and must sign the security agreement. If the daughter does not sign the agreement, there is no valid security interest and the creditor may not be able to repossess the car.

It is important to check the agreement to see if there are any mistakes or omissions. If there is a mistake in the security agreement that makes the agreement invalid, the creditor cannot repossess the car, even if you defaulted on the loan. You should have received a copy of the agreement at the time you bought the car, but if you no longer have a copy of your security agreement, you can ask your creditor for a copy. Although you may not have a legal right to another copy of the agreement, you should contact your local attorney general or consumer affairs office if you believe there may be a problem with the agreement and your creditor won't give you a copy.

Did You Default on the Loan?

Before a lender can repossess your car, you must default on the loan. The usual way that a consumer defaults on a loan is by failing to make a monthly installment payment. (If you are in this situation or close to it, see the publication called "When You Can't Make Your Car Payments.") But there are other ways that you can default, and these are spelled out in the security agreement that you signed when you bought the car. Some examples include: failing to purchase insurance, losing or destroying the car, selling the car or moving the car to another location without the lender's permission. If you don't understand why or how you defaulted, you should look at your agreement to see what constitutes a default.

There are occasions where you may default under the agreement but your creditor still cannot repossess your car. Many states find that if the creditor has accepted late payments from you before, the creditor cannot later declare that you defaulted without giving you reasonable notice. In other words, the creditor would have to tell you that it would consider all future late payments as your defaulting on the loan.

In addition, there can be no default if the "underlying obligation is extinguished" (you paid off the loan), the contract is voided under the laws of your state or if you notified the creditor that you are withholding payments because of the creditor's breach of warranty. You should check your state laws for additional rights since your state may further restrict the grounds for default.

Did the Loan Accelerate?

Assuming you defaulted by not paying on the loan, it is important that you know whether or not your security agreement with the creditor has an "acceleration clause." Once a loan has accelerated, you can no longer "cure" the default by just paying the past due amount. Instead, the lender can demand the entire balance of the loan due or repossess the vehicle. Your state law determines whether or not your creditor must warn you beforehand that your loan will accelerate and whether or not your creditor must tell you that you have a "right to cure" the default.

The first thing you should do is check your security agreement to see if there is an acceleration clause. A loan will only accelerate if there is an acceleration clause between the debtor and the lender. If there is no acceleration clause in the agreement, the creditor can only demand that you pay the past due amount. The acceleration clause must be clear in the agreement and state that if the consumer meets one of the grounds for acceleration as defined in the agreement, the creditor may accelerate the debt. Grounds for acceleration can include such things as: your commencement of bankruptcy proceedings, your refusal to allow the creditor to inspect the car or your default on the loan, as defined in the agreement.

Upon acceleration, the full loan amount would become due immediately. It is unlikely that a consumer could come up with that sum in a short period of time and acceleration almost always results in default on the total balance of the loan. At that time, the lender can repossess and sell the car to recover the total remaining loan balance.

The creditor can even accelerate "at will" if he truly believes your prospect for payment is impaired. For instance, if the creditor believes the car has been abandoned, the creditor can accelerate at will to recover the total amount owed. Before a creditor can do this, he must perceive a deterioration of the consumer's financial condition since the loan was made. Check your agreement for a provision allowing acceleration at will.

Under the terms of your agreement, the creditor may not have to tell you that your loan is accelerating. Most agreements have a provision waiving the consumer's right to notice of acceleration.

Accordingly, a creditor can demand that you pay the full amount of the loan and could repossess the car without ever notifying you. Check your agreement. If there is no waiver, the creditor must notify you after default to tell you that the loan will accelerate, and give you a reasonable opportunity to pay the defaulted amount before acceleration.

Even if you waived notice of acceleration in the agreement, you still may get some help from your state laws. Some state laws - usually called "right to cure" laws - require notice before acceleration, and these laws override the waiver provisions of your agreement. Under a right to cure law, the creditor must allow you to pay back payments plus delinquent charges and reinstate the loan within a particular amount of time before the note will accelerate. This means that your creditor would have to give you notice before acceleration AND give you the chance to correct the situation.

If your state does not have a right to cure law and you waived your right to notice in your security agreement, your creditor still may have to tell you about your right to cure the default. The waiver may not stand if there is any inconsistency about a right to notice in other provisions of the agreement. For instance, the waiver would be invalid if there are provisions in your agreement that mention "on demand," implying that you have the right to notice of a right to cure.

State laws may further restrict grounds for default and acceleration and may specify the number of times that you may have the right to cure.

Was the Creditor's Self-Help Repossession Lawful?

If there was a valid security interest, you defaulted on the loan, and the loan accelerated, you risk creditor repossession. In most states, a lender can seize a car without first having to go to court. This is called "self-help repossession." Creditors must comply with many technical requirements to repossess your car in this manner. Some state requirements that may protect you against self-help repossession include:

• Express consent. Some states do not permit repossession without the consumer's express consent (usually in the signed agreement). You consent if you specifically knew of the creditor's right to repossession and specifically knew that the creditor could repossess your car without having to go to court first.
• Military personnel or dependents. If you are in the military or are a dependent, you are protected by the federal Soldiers' and Sailors' Civil Relief Act. This law, however, provides only temporary and partial relief. If you bought a car before you entered the military service and default on your car payment while in the military, your creditor must take you to court to repossess the car. However, your creditor can still use self-help repossession to repossess a car that you bought while you were in the military. But you still may be protected in another way: standard military policy requires that any repossessor entering a base must be accompanied by military police. If you are present during a self-help repossession, a court may find that the presence of a military official forced you to consent to repossession, which is wrongful repossession.
• Native Americans. Native Americans may be protected if tribal law prohibits self-help repossession.

Did the Creditor Breach the Peace During Self-Help Repossession?

A creditor cannot breach the peace when he repossesses a car. Breaching the peace includes many situations, such as:

• Touching or pushing you.
• Damaging your property during repossession.
• Tricking or lying to you, in some states. A few courts have held that laws cannot encourage lying and trickery to repossess collateral. Courts are divided as to whether a repossessor can trick you to take your car. In one instance, a creditor breached the peace when he pulled the debtor's car to the side of the road, rode back with the debtor to the dealership and seized the car while the debtor was inside. In another case, a creditor breached the peace when he lied and said he was a government official. However, some courts have found that there was no wrongful repossession when the creditor lied and said he was taking the car for repairs.
• Threatening you if you feel immediate fear. For example, a creditor's threat to seize your car at some future time does not put you in immediate fear, so there is no breach of peace.
• Ignoring your objections. If you, your relative or your friend objects to the repossession but the creditor still repossesses the car, he breaches the peace. You should object at the time the creditor takes the car. If you object after the creditor took the car, it is too late. If a sheriff or other government official is present, don't resist his seizure of the car, but verify the official's authenticity.
• Entering a closed garage. Even without physically breaking in, a creditor breaches the peace when he enters a closed garage. Generally, there is no breach of peace if the creditor takes the vehicle from the public street, a parking lot, a private driveway, an open garage or a carport. A creditor's trespass can be a breach if there is a potential for immediate violence.
• Police presence. If the creditor brings a police officer not through a paper of the court and the presence of the officer so intimidates the debtor as to have "forced" him to consent to repossession, the creditor breached the peace.

Your state laws may further limit who can engage in self-help repossession. For example, a state law may permit self-help repossession by licensed personnel, employees of the creditor or automobile dealers only.

If your creditor wrongfully repossesses your car or breaches the peace, depending on your state and its laws, the court may not allow the creditor to keep the car or to collect a deficiency, may stop the subsequent creditor sale of your car and may force the creditor to pay you for the market value of the vehicle at the time of seizure, or pay for damages for your loss of use, mental anguish or inconvenience. You could also be reimbursed for attorneys' fees.

Note: Unsecured Property Repossessed with the Car. Cellular phones, stereos and other items attached to your car can be repossessed only if the security agreement specifically covers these items. The creditor must return personal property and is liable for any loss of use of property or any damages to property while in the creditor's custody. If your creditor seized unsecured property with the car, you should inventory the missing property and demand its return.

If your creditor refuses, you can sue the creditor for the property's value, for your loss of use or for any damages to the property while it was in the creditor's custody.

Did the Creditor Properly Dispose of the Car After Repossession?

After repossession, there are six possible ways that the creditor can dispose of your car.

• Reinstatement. After repossession, your state law may give you the right to reinstate the contract by paying the amount past due. If this is the case, the creditor must give you notice of your right to reinstate and the amount due. You have a particular time period, usually 15 days following repossession, to reinstate the contract. You may only get one opportunity to reinstate a contract. If the creditor does not comply with reinstatement procedures, he may be barred from later obtaining a deficiency judgment and may even owe you money.
• Redemption. Every state gives you a chance to redeem your car by paying off the entire loan plus reasonable repossession and storage charges at any time before your creditor sells or otherwise disposes of the car, even if you had voluntarily surrendered the car. A written waiver of the right to redeem is ineffective unless you signed a written waiver AFTER you defaulted on the loan. Unfortunately, this right to redeem does not help most consumers who have their cars repossessed due to money troubles and cannot come up with a large lump sum of money. Before you redeem, you should know the loan amount, repossession fees, costs associated with the sale, and reasonable attorneys' fees and legal expenses. If the debt has accelerated, the creditor is not entitled to unearned interest or insurance payments that are not owed because the note has been paid off early.
  
  Remember: you may be better off buying your car at the repossession sale than redeeming. The sale price at a creditor sale may be less than the amount you owe. However, you will still be liable for any amount of your loan obligation and repossession costs that are greater than the sale price of the car (the deficiency).
• Strict Foreclosure. Your creditor could keep your car in satisfaction of your obligation, which is called "strict foreclosure." If your creditor elects strict foreclosure, you would not owe the creditor any payments, although your creditor can keep all prior amounts that you paid. If the creditor intends to elect strict foreclosure, he must tell you in writing. You can object to strict foreclosure in writing within a certain amount of time, depending on your state, usually within 21 days of the notice. You should object to strict foreclosure if you believe that you or the creditor could get a sale price that would cover the remaining amount that you owe plus any repossession, reconditioning and sale costs.
  
  If your creditor has repossessed your car but has not disposed of it in any way, it may no longer be worthwhile to sell the car. You can argue that the creditor, in effect, elected strict foreclosure because his holding onto your car for so long made a subsequent sale commercially unreasonable. This is called "constructive strict foreclosure." If you successfully argue constructive strict foreclosure, your creditor would not have a claim to any deficiency. Even if you live in a state that does not have laws on constructive strict foreclosure, many courts will treat the creditor's repossession as extinguishing the debt for the value of the car if they do not dispose of the car within a reasonable period. (See "delay of sale" under the discussion of Creditor Sale).
  
  If you have paid at least 60 percent toward the car, your creditor cannot elect strict foreclosure.
• Judicial Sale. A creditor could dispose of your car though judicial sale. A creditor will rarely do this since it adds extra court costs and a creditor can generally sell the car without having to go to court first.
• Consumer Sale. Your creditor may allow you to sell the car. You should take advantage of this if you believe that you can get a better price on your own. In fact, it may be unreasonable for a creditor NOT to let you sell the car if you can get a much higher price than your creditor.
• Creditor Sale. The final way that a creditor can dispose of your car is by selling the car at a public or private sale. During the sale of your car, the creditor must follow certain rules. If the creditor does not, you can sue the creditor to stop the sale and to recover money damages. Two of the most important rules are: (1) the creditor must give you notice of the sale, and (2) the sale must be "commercially reasonable." Both of these rules are discussed in detail below.

Notice of sale is very important as it tells you when you will no longer be able to redeem your car. If you do not act before the date of sale, you will lose the car. Notice of sale may be the first time that you hear from your creditor after repossession, if you waived your right to notice of acceleration or if your state does not have a "right to cure" law.

The creditor must give "reasonable notification," which means he must give you sufficient time to take appropriate steps to protect your interests. The timing of notice differs in each state, but creditors usually give notice of sale 10 days beforehand. The notice must be written and accurate in every respect, and most courts require that it specify whether it will be a public or private sale and give details of where and when the sale will take place.

Some courts have barred the creditor from collecting a deficiency judgment where the creditor failed to send the debtor notice even though the debtor actually knew about the sale from another source. Courts have also forced the creditor to pay the debtor the amount that the sale price is diminished because of inadequate notice.

Was the Creditor's Sale Commercially Reasonable?

The creditor sale must be "commercially reasonable" in every way. Commercial reasonableness is not defined, but it is more than creditor convenience. Commercial reasonableness includes the following:

• Creditor use of car. A creditor's use of the car before sale could be commercially unreasonable. When the car is in the creditor's custody, the creditor has a duty to use reasonable care. If the car is destroyed while in the creditor's possession, the creditor may no longer be entitled to any deficiency. In general, the creditor cannot drive the car unless it is to preserve the car's value - never for personal reasons.
• Creditor reconditioning the car. It may be commercially unreasonable for a creditor to sell the car "as-is" if preparing the car in some minimal way could significantly increase its value. The creditor may have to "recondition" the car, including polishing, cleaning, tune-ups and paint touch-ups. At the same time, you should make sure the creditor does not put too much work into reconditioning the car, because you will end up paying for all reasonable expenses of car preparation for sale. The amount of reconditioning should be proportionate to the value of the car or must result in a significant increase in the sale price.
• Creditor delay of sale. The creditor cannot unreasonably delay the sale of the car. If the creditor holds onto a car for too long, the creditor may be barred from collecting any deficiency and may have to accept the car as settlement for the rest of the amount due on the loan. (See "strict foreclosure" under Creditor Disposition). On the other hand, a sale that is too hasty could be commercially unreasonable if it results in inadequate advertising or in a failure to produce a sufficient number of bidders. If the debtor already paid 60 percent or more of the loan, the sale must be within 90 days. To determine whether a delay is commercially reasonable, check how much the car has depreciated during the delay, and consider the storage costs and other seasonal and regional variations.
• Creditor choice between public and private sale. The choice between a public and private sale must be commercially reasonable and must maximize sale proceeds. However, a low sale price by itself is probably not enough to prove that a sale was commercially unreasonable. You should check wholesale pricing guides, like the publication put out by the National Automobile Dealers Association, to determine whether a sale price was commercially reasonable.
  
  The creditor must make the car available for inspection before a public auction. If you see that a creditor's preparation for sale is clearly inadequate or if the creditor appears to be selling to itself at a low price, you can try to stop the sale. At a public sale, you can bid for your car. You can also offer to purchase your car at a private sale.

Is There Any Deficiency After Creditor Sale?

After sale of the car, the sale proceeds would first be applied to the reasonable expenses of repossession, then to reasonable expenses of the sale, then to satisfaction of the debt. Whatever is left over (the surplus) must go to the debtor. If there is not enough to cover all these expenses and the remaining debt, the debtor may owe the creditor the amount of the loan and expenses that exceed the sale price, called the deficiency. Under state laws, however, the creditor's right to a deficiency may be restricted. Some state laws preclude the creditor from getting a deficiency, or may limit the deficiency amount if the creditor elected "strict foreclosure," if there was a commercially unreasonable disposition of the car, or if the creditor did not comply with specific notice requirements under state law.

If you owe a deficiency, you should recalculate the deficiency amount to make sure it is correct. Make sure the following is accurate:

• The remainder due on the loan before adjustments. Obtain the original credit documents, recalculate the total amount due and make sure the credit rates are not higher than your state limits.
• Unearned interest rebates. The total payment of a pre-computed loan includes interest payments over the full loan term. When a creditor accelerates the loan payments, the creditor is seeking payment earlier than scheduled so the amount of interest that you owe decreases. The creditor should rebate this unearned interest to you, and the rebate should be computed based on a formula specified in the loan agreement or based on state law, whichever is more favorable to you, as of the date of acceleration.
• Interest and penalties after acceleration. After rebating the unearned interest, your state's laws or the credit agreement may authorize the creditor to charge interest on the amount due from the date of acceleration until you repay this amount. It depends on state law and the contract, but usually late payment charges will not be permitted after the time of acceleration or at the time a deficiency judgment is rendered. A creditor cannot charge both late-payment and extra-interest charges for the same period.
• Prepaid insurance premiums. You should cancel any prepaid insurance and get a rebate. Also, you should make sure that the creditor does not charge for reconditioning and repairing a car if it is covered by the car's service contract or extended warranty.
• Value of car. Make sure you are credited the sale price of the car at retail, not the estimated value.
• Expenses from repossession and sale. All expenses must be reasonable, including all repossession, storage, repair, reconditioning and advertising expenses. The creditor cannot charge you more than the amount the creditor was actually charged. Expenses for sale should be the same as for the creditor's non-repossessed cars. Any attorneys' fees and legal expenses must be reasonable and are governed by the credit agreement and by state law.