Voluntary Car Repossession Laws
The Uniform Commercial Code (UCC) is a model law that was drafted by a group of legal and financial experts. Most states have adopted some form of the UCC. Article 9 of the UCC governs secured transactions, such as when a lender loans money to purchase a car and in exchange the borrower grants the lender a security interest in the car. The security interest is what gives a lender the right to repossess a car if the loan is not paid on time. While Article 9 of the UCC governs when and how a lender can exercise the right to repossession, Article 9 does not specifically address voluntary repossession. Voluntary repossession, then, is more a matter of contract law.
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Article 9 Repossession
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Under Article 9 a lender can repossess a car if a borrower is in default on loan payments. Article 9 does not define default; instead, the contract should have a definition of default. Generally speaking, a default usually means being late on a payment by at least 30 to 90 days. When a borrower goes into default the lender can repossess and resell the car, even if he does not voluntarily give up the car.
Voluntary Repossession
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Voluntary repossession is, in practical effect, nearly the same thing as a forced repossession. While Article 9 of the UCC does not specifically address voluntary repossession, there is little difference in the outcome. The only real difference with a voluntary repossession is that the borrower delivers the car to the lender, whereas with an involuntary repossession, the lender has to come pick the car up at the borrower's home or work.
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Still Liable on the Loan
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Whether a borrower voluntarily allows repossession or the lender forces a borrower to repossess, the borrower still owes the same amount of money on the loan. Some people mistakenly believe that when a lender voluntarily repossesses their car, they are no longer liable on the loan. That is not true. If a person owes $15,000 on a car loan and he voluntarily gives the car to the lender, he still owes $15,000. Similarly, if the lender repossesses the car against the borrower's will, he still owes $15,000.
Resell and Deficiency Judgments
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When a lender gets possession of a borrower's car the lender will resell the car, probably at a public auction. Most likely, the lender will get less than the full value of the car. The lender will then take the proceeds from the sale and pay off as much of the loan as possible. Whatever amount is left over is called a deficiency. The borrower is still liable for the deficiency.
An example will illustrate the process. A person owes $15,000 and gives the car to the lender. The lender sells the car for $11,000, then uses that money to cancel $11,000 of the borrower's debt. The borrower still owes a deficiency of $4,000 ($15,000-$4,000). He owes the deficiency whether he voluntarily repossesses or the lender forces repossession. So voluntary repossession does not help a borrower.
Alternative to Voluntary Repossession
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The only way voluntary repossession can help is if a lender agrees to waive any right to a deficiency, but most lenders will not agree to that condition. Instead a borrower should sell the car on his own, because he will probably get more money than the lender would get at a public auction. So in our example, a borrower might be able to sell the car for $13,500. Now the deficiency is only $1,500 instead of $4,000.
Remember, though, that a borrower probably needs to get a lender's permission before selling the car. If a borrower needs a lender's permission, he should call the lender to discuss options. Banks and credit unions are not in the business of buying and selling cars, so they don't want to deal with the hassle of repossessing and reselling a car. So, if a borrower offers to do that work for them, they may authorize him to sell the car, and they might even waive the deficiency.
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