How Do I Repossess My Commercial Equipment After a Default? Answering Your Top Questions

When it comes to equipment financial transactions for machinery, agricultural materials, trucking and hauling, etc., everyone involved has the best of intentions. Unfortunately, some of your customers can go into default. As a next step, it is understandable that you want to repossess and sell the equipment to remediate the situation. While a repossession and sale can make you at least partially whole again, you may be wondering if you still have the right to collect on a deficiency balance. It’s a common question to ask!
 

Our shareholder and commercial collections expert Andrew Voorhees dives into the nuances of deficiency collections during our latest Collections Corner Episode 2. You can watch the full episode, available now, and dig into some of the top questions answered in the rest of this article. 
 

What does the UCC need to preserve your right to deficiency?
 

The Uniform Commercial Code (UCC) allows for the recovery of a deficiency balance in the absence of full recovery from a collateral sale. However, the UCC’s legal formalities must be observed to preserve your right. And this starts at the beginning of the transaction. This is very important to protect yourself in the event of a default. 
 

Some of these forms of protection include:
 

• A financial statement to fill out and file with the state in which you protect your security interest.

• A note or document of indebtedness that says what the borrower is to pay over time. This document should include the interest rate, what occurs if they do not pay or carry proper insurance coverage, and what happens if they file for bankruptcy. 

• A guarantor or someone personally bound to the financial agreement. This increases your chances of recovery if the individual or business goes into default. 
 

It is important to ensure that these forms of protection are signed and that they comply with the state in which you operate your business. The next prerequisite is to ensure you file your UCC financial statement as outlined by your state’s laws. 
 

Another often overlooked aspect of the original transaction is to get all of the proper information needed on your customer. This information, which can be collected through the credit application, includes important addresses of businesses, borrower contact information, place of business location, and key contacts. The information will help you down the road if or should you need to collect on a deficiency balance. 
 

Q: If I have a perfected security interest in the equipment, can I repossess it as a default remedy? 
 

A failure to pay the balance on the loan is one of the most common types of default that allows you to pursue repossession. Other types of default may include but are not limited to a failure to maintain proper insurance or maintenance, filing for bankruptcy and dissolution of the corporation. 
 

If you wish to repossess your equipment, there are a few ways to obtain the collateral.
These include: 
 

• Negotiate a voluntary repossession: A voluntary repossession is ideal if you wish to maintain a relationship with the borrower. You can get permission from them to come out and pick up the collateral so you can begin the process of reselling it at auction. 

 

• Self-help / breach of the peace: If there is difficulty in getting in touch with the borrower, you can hire a repossession company to obtain the equipment. However, you have to be careful not to breach the peace, meaning you do not gain permission to enter the borrower’s property. 

 

• Replevin: If you cannot negotiate voluntary repossession or regain the equipment without a breach of the peace, you need to file a complaint with the court. 
 

 

The UCC allows for the recovery of a deficiency balance in the absence of full recovery from a collateral sale. However, the UCC’s legal formalities must be observed to protect your right to any deficiency.
 

UCC 9-610 allows a creditor to dispose of secured collateral after a default. However, the disposition must be “commercially reasonable.” The UCC states: “Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable. If commercially reasonable, a secured party may dispose of collateral by public or private proceedings, by one or more contracts, as a unit or in parcels, at any time and place, and on any terms.”  In other words, the UCC is highly concerned with the process of obtaining the sale versus the outcome, or the amount gained in the resale of the equipment. 
 

While the UCC allows disposition of the collateral at a public or private sale, it also requires that proper notices be sent to all obligors on the debt (UCC 9-611). Additionally, the UCC requires that the notice be sent in a timely manner. UCC 9-612 requires that “a notification of disposition sent after default and ten days or more before the earliest time of disposition set forth in the notification is sent within a reasonable time before the disposition.”
 

 

The UCC allows for disposition of the collateral at a public or private sale. However, it also requires that proper notices be sent to all borrowers or guarantors on the debt (UCC 9-611). Additionally, the UCC requires that the notice be sent promptly. UCC 9-612 requires that “[a] notification of disposition sent after default and ten days or more before the earliest time of disposition set forth in the notification is sent within a reasonable time before the disposition.”

 

Even if you provide timely notice of disposition to all obligated parties, you must also provide the proper information issued by the UCC. UCC 9-613 outlines the proper form and contents of the notification to obligated parties. That section provides that, in a non-consumer goods transaction such as equipment, the contents of the notification are sufficient if it:
 

a. Describes the debtor and the secured party;

b. Describes the collateral that is the subject of the intended disposition;

c. States the method of intended disposition;

d. States that the debtor is entitled to an accounting of the unpaid indebtedness and states the charge, if any, for an accounting;

e. States the time and place, by identifying the place of business or address or by providing other information that, in each case, reasonably describes the location, of a public disposition or the time after which any other disposition is to be made.”
 

UCC 9-613 also provides a good example of a proper notification if you need a further reference. 
 

 

No, that is not required under the UCC. You only need to send the notice to the best address receiving regular and certified mail.
 

Watch the full webinar 
 

To learn more about the ins and outs of deficiency collections, watch the entire episode. If you have additional questions or would like to learn more about our commercial collections solutions, feel free to contact Andrew at any time!