Auto Repossession Default Primer
Auto Repossession Default Primer
We all know that if we fail to make payments as agreed on our auto the dealer’s ultimate recourse is repossession. But how far In arrears can we go? Exactly how does it work? What gives them the right to do this? What do I do if I’m under the gun? Bear in mind that laws vary widely from state to state. If you don’t know it already let’s be perfectly clear: Auto repossession will devastate your credit score! It will have an even more damaging effect on your specialized Auto FICO score used by car dealers. Having said that, you will find the following information useful.
There are basically 3 bodies of law that relate to this issue. Each state has a Retail Installment Sales Act (RISA). Federally, there is the Uniform Commercial Code (UCC) and the Fair Debt Collection Practices Act (FDCPA).
Auto Seller Retains Security Interest by Contract
When an automobile is purchased pursuant to an installment sales agreement a security interest in the seller’s favor is created by language within that contract. The buyer agrees to a lien in the seller’s favor which is recorded on the vehicle’s certificate of title and/or by filing of a UCC-1 financing statement in the office of the secretary of state. The UCC-1 financing statement operates in the same way as the deed to real property does when it is filed at the Registry of Deeds. It provides legal notice of the lien to third parties. It need only contain the names and addresses of the debtor and creditor and a general description of the property. This security agreement is “perfected” when the debtor signs the agreement containing a description of the vehicle, when value is given and when the debtor has rights in the collateral (vehicle).
Perfection of a security agreement is not necessary for collection of collateral upon default but it does ensure the original debtor’s priority in the event the debtor uses the same collateral as security in another transaction.
Disabling devices which give the lender the power to render the car undriveable upon default are becoming increasingly common. This is something the borrower has to consent to at the time of purchase. This feature may encourage a lender to make a loan they would otherwise not make. A disabling device certainly forces the borrower to give the car loan a priority when forced to choose between more than one obligation.
Defining Auto Repossession Default
The definition of what constitutes an auto repossession default is commonly found in the motor vehicle contract itself. If the contract does not define what will constitute an auto repossession default in a particular case, auto repossession default can only mean failure to make payments. Here is where it gets interesting.
What if the debtor fails to maintain collision insurance? What if he abuses the vehicle so badly it loses all value? What if it’s dented all over? Vandalized? Engine seized and frozen? What if the lender tolerates habitual late payments and then decides suddenly to strictly enforce his rights?
Acceptance of a late payment will operate as a waiver of default on that particular payment if there is no express disclaimer forbidding this in the contract. Unless the contract provides otherwise repeated acceptance of late payments may operate as precedent for future late payments. It will, at least arguably, impose a duty on the financier to notify the debtor that strict compliance will be required from this date forward.
Whether or not insurance is required is a matter of contract. Of course virtually all installment contracts require insurance of the collateral. The buyer is required to take reasonable care of the secured property. Other than that, if it loses value, he cannot be held at fault.
Auto Repossession Default Primer: Here he Comes! It’s the Repo Man with a Fat, Wet, Smelly Cheap Cigar and Tattoos on His Neck!
Auto Repossession Default is going down! What can I do? What should I do? What rights are left to me?
Most motor vehicle installment contracts provide that “unless otherwise agreed a secured party has the right upon default to take possession of the collateral and after default may sell, lease or otherwise dispose of any or all of the collateral”. The value received must be deducted from the balance owed.
State RISA contracts govern repossession sales resulting from “consumer transactions”. These are transactions in which the consumer has purchased the item for personal, family or household use. Our next column will take a deeper dive into this intriguing and important subject. Watch for Auto Repossession Default Primer…Part Two.