Ways to Avoid Repossession Issues

Weltman published an article in 2010 with 10 great tips for collateral recovery, and because wrongful repossession is one of the leading reasons that creditors get sued, it is time for an update. Here are some ways that you can avoid repossession issues.

1. Confirm that the debtor is in default.  The Uniform Commercial Code provides that a creditor may take possession only upon default by the debtor and such default events are defined in the financing agreement.  The most common default, failure to make payments, may be waived by accepting late payments, requiring the creditor to provide reasonable notice of its intent to insist on prompt payments in the future.
2. Verify lien is properly perfected.  A creditor’s security interest is acquired according to the terms of a security agreement that specifically grants the creditor a security interest in the collateral. The secured interest becomes perfected by either filing a UCC financing statement or when the creditor’s interest is noted on the title.  Although perfection of the security interest is not necessary for repossession of collateral, it protects the creditor’s priority in the event that the debtor grants a security in the same collateral to another party or against a bankruptcy trustee.
3. Confirm the loan documents are in order.  Clear and complete copies of the promissory note, security agreement and any personal guarantees are important.  Further, various jurisdictions require different notifications, such as a right to cure notification. Finally, the contract often requires specific notifications to be sent beyond those required by statute.
4. Keep current addresses for liable parties on file.  The best time to capture this information is while the debtor is current.  Monitor for address changes on payments, other loan applications and correspondence from the debtor.  It is significantly more difficult to obtain this information after a debtor goes into default.
5. Determine whether the collateral’s value is worth the cost of repossession or legal action.  UCC article 9 provides that a creditor’s remedies are cumulative, allowing the creditor the option to repossess or sue for damages for the unpaid balance on the promissory note. If the collateral’s value is not sufficient to support repossession, a better option may be to file suit for money damages only.
6. Determine whether the debtor is on active service in the armed forces.  The Servicemembers Civil Relief Act of 2003 prevents creditors from repossessing collateral without a court order while the debtor is on active duty in the military service.
7. If you authorize legal action, communicate and follow up with your law firm regularly.  Understanding your rights and remedies increases your chances of recovery and regular communication helps keep the process moving forward.
8. Appreciate the rules of the jurisdiction.  The majority of states’ repossession laws uniformly govern time limits and procedures associated with repossession. An issue arises when the lender is in one state, the debtor in a second and the collateral in a third. Navigating these multiple jurisdictions present unique challenges.
9. Maintain access to a bonding company.  In an action to recover collateral, the creditor has the option to seek immediate possession or wait for a final adjudication of the case to obtain possession.  Seeking immediate possession deprives the holder of the use of the collateral pending trial and puts pressure on the debtor to settle the matter.  Where immediate possession is sought, the creditor is often required to post a bond to protect the defendant against wrongful detention.
10. If you attempt self-help repossession, use a reputable agent.  Damages for wrongful repossession can be significant and often result from a repossession agent’s breach of the peace or use of violence or force to recover collateral.  If a repossession agent uses force or inappropriate behavior to take possession of the collateral, the creditor may be liable for damages.  In April 2013, the Consumer Financial Protection Bureau issued its first bulletin recognizing that while creditors have legitimate business reasons to outsource functions to service providers, the outsourcing does not absolve creditors of responsibility for complying with consumer financial laws.