When a car loan lender repossesses a vehicle and decides to sell it, the sale must be commercially reasonable. If the sale is not commercially reasonable, you can raise this as a defense if the lender tries to collect a deficiency balance from you. There is no hard and fast rule on what “commercially reasonable” means. What is commercially reasonable depends on a number of factors, described below.
(To learn more about car repossessions, including when your car can be repossessed, how they work, and more, see our Car Repossessions topic area.)
After a repossession, the creditors has some leeway in how it sells your car, so long as it does so in good faith (honestly and fairly), and in a commercially reasonable manner. You might think that if the creditor sells the car for a low price, the sale was not commercially reasonable. Certainly, if the creditor sells the car at a price that is significantly lower than what the car is worth, it may raise a red flag. However, just because the creditor could have received a better price if it sold the car differently is not enough to establish that the sale was improper.
The procedure, not the price, ultimately determines whether the sale is commercially reasonable. Whether a sale is commercially reasonable depends on four factors, the:
These factors are relative. The sales practices in your area determine what is commercially reasonable regarding manner, time, place, and terms. For example, a resale procedure used by a creditor may be commercially reasonable in Bucyrus, Ohio, but might not be commercially reasonable in Los Angeles.
It would seem that a public auction is one of the best ways to maximize the price of the resale because of the opportunity for competitive, open bidding. Yet a creditor will often sell the car privately, such as at a “dealer only” auction. Usually, it is commercially reasonable for a creditor to sell a car privately.
There are times, however, when a private or “dealer only” sale may not be commercially reasonable, such as in the following instances:
the creditor has the ability to sell the car on the retail market
the buyer is a friend, relative, associate or employee of the creditor
car resales in your area are conducted by public auction, not “dealer only” or other private sales
the creditor made little or no effort to attract buyers
the creditor sold the car as junk without obtaining an appraisal, or
the creditor buys back the vehicle then resells it a significantly higher price.
Even a public auction is not without problems. If a creditor fails to act in good faith or take reasonable steps to sell the car, the auction may be commercially unreasonable. Here are common issues that arise when creditors take cars to public auction:
When selling a car at public auction, the creditor must provide sufficient notice of the sale to potential buyers. The advertisement must contain a proper description of the car. The sale must be advertised publicly with the correct date and location of the auction. The creditor should give sufficient advance notice of the sale and publish the ad in a way that reaches a substantial number of potential buyers, such as in a large newspaper or trade publication with a large circulation.
Creditors must allow an opportunity for interested bidders to inspect the car. The car should be sold to the highest bidder. The minimum bid cannot be unreasonably low. The auctioneer should be professional and experienced in the auto resale market.
Notwithstanding whether the creditor sells the car at a private or public sale, there are some things it can and cannot do. Some additional factors that affect the commercial reasonableness of a private or public sale include:
A creditor cannot sell the car in a private or hidden location. It must make the car available for inspection to potential buyers. The creditor also cannot sell the car at a remote location unless doing so would fetch a higher price.
A creditor cannot sit on the car for as long as it wants and allow the car to decline in value. Vehicles depreciate with age. It is unfair for a creditor to allow interest on a potential deficiency balance grow while doing nothing to minimize its loss when it has the ability to do so. For these reasons, a creditor must sell the car as soon as it can, but not so soon as to infringe on your right to redemption, your right to get required notices, and the like.
If you can demonstrate that the creditor did not sell your car in a commercially reasonable manner, you can raise that as a defense against any lawsuit brought by a creditor looking to collect on the deficiency balance. In some instances, if you can prove the sale was not commercially reasonable, the court may reduce or even eliminate your obligation on the deficiency balance.
If the car loan lender sells your car and the amount it recovers is not enough to cover the balance of your loan plus the costs of sale, the remainder is called a deficiency balance. Often, the lender can try to collect the deficiency from you. To learn more, see Deficiency Balances After Repossession.
You may also file a counterclaim or your own complaint for any damages you may have sustained as a result of the creditor's actions. For more information or assistance, contact your state attorney general office or state consumer protection agency (see State Consumer Protection Offices to find yours), or consult with a local attorney.