How Property Repossession Works
This article is presented for informational purposes only and is not intended as legal advice.
In the movies, we know the hero of the story is really down on his or her luck when they return home to find a small squadron of overall-wearing men removing expensive possessions from their home. There goes the television. And the couch. And a whole arsenal of other trinkets and treasures the main character could no longer afford.
Like practically everything you see in the movies, repossession is a little different in real life. Hopefully, it’s something you never have to deal with, but setbacks do happen, so it’s good to know what repossession is and what you can do about it.
What can be repossessed?
The item most often associated with repossession is your car. Homes are also subject to repossession, although we usually call that a foreclosure.
Essentially, any purchase made with a secured loan is subject to potential repossession if the terms of the loan are not met. A secured loan is any loan where real property is used as collateral, most often houses, cars, motorcycles, boats, etc. In essence, the lender has purchased the item for you and let you keep it while you pay them back. If you stop paying them back, then the lender will retake possession of the property.
If you purchased furniture or appliances from a rent-to-own store on an installment plan (where you are technically renting the item until the moment it is fully paid for), those items would be subject to repossession.
Purchases made with a credit card, however, are not secured, and therefore not subject to repossession. A credit card company could potentially take you to court over an unpaid credit card bill, but they could not repossess the actual items purchased with the card.
Will I know if my stuff is about to be repossessed?
Repossession shouldn’t be a surprise. You will generally have to be severely delinquent before a lender will begin the repossession process.
The lender will most likely notify you about the situation, but the specific mechanics behind that notification will depend on the state where the transaction took place and the terms of your contract. In most cases you will receive written notification informing you that you are in default and providing you with your options.
Can I just give it back and call it even?
You may have the ability to return the collateral, but the lender is not required to accept the returned item. In particular, if the collateral is now worth significantly less than the debt, they will likely refuse the return.
Even if the lender does accept the returned collateral, that’s very unlikely to be the end of things. The lender will then sell the collateral in order to recoup some of the loan. If the collateral is sold for less than the value of the loan, you will be responsible for the difference.
What should I do if I’m in default and can’t get caught up?
Stay in contact with your lender. In general, lenders would prefer to avoid repossession almost as much as you would. Consider the options your lender presents and be willing to negotiate – just make sure you get any agreement down in writing.
One option may be to work with the lender to secure a resale of the property and then acquire a new loan (either with the original lender or a new lender) to buy out the difference. This leaves you paying a loan on property you no longer own, but goes a long way towards minimizing the damage.
What if I don’t want to return the collateral?
What a repossession company can and cannot do in the pursuit of your delinquent merchandise is defined by the laws of each individual state. Whether or not they can legally hotwire your car or enter an unlocked garage depends on where you live.
What they cannot do in any state, however, is breach the peace. That’s a rather broad concept, but it basically means that a repo man cannot do anything that would knowingly harm or endanger someone in the course of their work.
That said, if someone has come to repossess your car or other merchandise, your best bet is to simply let them do their job. You gain very little by impeding them or delaying the inevitable.
What if the lender sold my repossessed collateral for way less than it’s worth?
When a lender sells a repossessed item for less than the outstanding debt, that amount of money is called a deficiency balance. The lender can still hold you accountable for that balance even after the defaulted item has been repossessed and sold.
In these situations, lenders are required to conduct sales that are “commercially reasonable.” What does commercially reasonable mean? Honestly, it’s pretty vague. Basically, the sale should represent a good faith effort to sell the item at a fair price.
If you feel the sale was not commercially reasonable and are faced with a sizable deficiency balance as a result, you could potentially argue that point in the event that you are sued for the balance. In any instance where legal action is a possibility, however, you should always consult with a qualified attorney.
If you’re concerned about repossession at all, even if your lender hasn’t taken any action, consider seeking help. Defaulting on loans of any variety can have major financial repercussions for years. There may be a solution.
If you need a place to start, our trained debt and budget counselors are available 24 hours a day, seven days a week, and are happy to help you sort through your finances and figure out your options.