Car Repossession Laws: An Overview

Learn about car repossessions: how they work, how to avoid them, and your options if it happens to your car.

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If you fail to make your car payments or otherwise default on your loan, you risk having your car repossessed by your lender.  Read on to learn more about how car repossessions work, how to avoid them, and what your options are if your car gets repossessed.

Why Is the Lender Allowed to Repossess Your Car?

When you finance or lease a car you normally give the lender a security interest in the vehicle.  Every state has its own rules regarding repossession but having a security interest generally means your lender can repossess the car without notice if you default on the loan.  Many things can constitute a default but the most common reasons are not making timely loan payments or not having car insurance.

How Do Car Repossessions Work?

In most states, car lenders can seize your vehicle without prior notice if you are in default. However, they cannot breach the peace while they do it.  Breaching the peace usually means using or threatening to use physical force against you to take the car back. But it can also simply involve repossessing the car from your closed garage. If your lender commits a breach of the peace, you may be entitled to damages or use it to defend against a deficiency lawsuit (discussed in more detail below).

What Will the Lender Do After Repossessing Your Car?

The lender can keep the car or sell it to satisfy your loan obligation.  Each state has its own rules regarding sale procedures and notice requirements. However, you usually have a right to know when and where the sale will take place. Also, your lender must sell the car in a commercially reasonable manner.  This generally means the lender has to follow standard sales practices but it is not required to obtain the highest possible price. You may have a claim for damages or a defense against a deficiency if the sale was not commercially reasonable.

What Is a Deficiency Balance?

Repossession is only one of the remedies available to your lender if you default on your loan. Having your car repossessed doesn’t get you off the hook for your obligation to pay the entire balance of the loan.  If the proceeds from the sale of the vehicle are not enough to cover the balance of your loan, the remaining portion is called the deficiency balance.  In most states, your lender can sue you to collect this deficiency.

However, as discussed above, there are defenses to a deficiency action. The most common defenses are:

  • the lender breached the peace when repossessing the car
  • the lender did not sell the car in a commercially reasonable manner, or
  • the lender lost the right to sue by waiting too long and letting the “statute of limitations” run.

How Can You Get Your Car Back?

You may still be able to get your car back if the lender has not sold it yet. Below, we discuss some of the options available to you for getting your car back.

Redeem the Car

Redeeming essentially means buying back the vehicle.  You can generally redeem your car if you pay the lender your entire loan balance including all arrears and repossession costs. However, most people usually don’t have the money required to redeem a car.

Buy It Back at the Auction

If your lender sells the car at an auction, you can bid on the vehicle to try to buy it back. However, even if you buy back the car, you will still remain liable for any resulting deficiency balance.

Reinstate the Loan

Some states allow you to reinstate your loan and get the car back if you can cure all of your arrears and pay for the repossession costs.  After you reinstate, you must continue to make regular payments on the loan.

File for Bankruptcy

If you file for bankruptcy prior to the sale, the automatic stay will prohibit the lender from selling the car without obtaining court permission.  Depending on the type of bankruptcy you file, this can buy you more time to gather the necessary money to get your car back or allow you to cure your arrears through the bankruptcy. (To learn more, see Your Car in Chapter 7 Bankruptcy and Your Car in Chapter 13 Bankruptcy.)

How Can You Avoid Getting Your Car Repossessed?

If you are behind on your loan payments, the best thing to do is to communicate with your lender.  Your lender may be able to offer you a solution such as a reduction in payment amount or interest rate that can help you catch up on your payments and avoid repossession.

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