Laws on Repossessing
Repossession laws apply to any transaction where borrowed money is secured by a piece of property, such as a car, tractor, oven or manufacturing belt. If the borrower ever defaults on the secured obligation, then the lender can repossess and resell the security and use the sales proceeds to pay off the defaulted loan.
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Generally
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Any property that is pledges as security, or collateral, for a loan is in danger of being repossessed and sold if the borrower defaults on the loan. Here is how a secured transaction works: lender gives borrower a loan, say $10,000. Borrower uses the $10,000 to buy a new oven for borrower's restaurant business. Borrower signs a security agreement which provides that, if borrower defaults on the loan, then lender can remove the oven and sell it, then use the money from the sale to pay off the loan balance.
Purpose
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The purpose of repossession laws is to balance two competing interests. The first interest belongs to the lender, who makes a loan relying on the property as security in the event of default. When the borrower pledges collateral, the lender reduces its risk, which means the borrower is more likely to get a loan at a better interest rate. So the law provides a way for the lender to enforce the security interest. The other competing interest, though, belongs to the borrower. The borrower who defaults is in danger of losing the property.
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Types
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Repossessions can occur on all kinds of property. The most common type of secured consumer transaction is the auto loan, where a bank or credit union loans money to a borrower to purchase a new car. If the borrower defaults on the loan, the bank repossesses and resells the car to pay off the loan. In the business world, secured transactions are common for securing business lines of credit. Farmers, for example, will secure money with farm equipment, such as tractors, generators and pick-up trucks.
Timing
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Repossession kicks in as soon as the borrower defaults. Some state laws require some kind of notice to the borrower before the lender can repossess the property, but most states allow repossession without prior notice, so long as the borrower is in default. Default is not defined by the law, but instead is defined in the loan documents. Typically, default means falling at least 30 to 90 days late on one or more payments.
Considerations
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Most states allow lenders to carry out their own repossessions. This means the lender does not need to involve any law enforcement, such as a judge or sheriff. On a car loan, for example, the lender can simply hire a tow truck to show up at your house and take your car.
Warning
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In nearly every state, a lender must stop all repossession efforts if a "breach of peace" occurs. The law does not define "breach of peace" but it is generally understood to mean any type of contentious or adversarial encounter. This means if you see your car is being repossessed and you run outside and tell the tow truck operator to stop, a breach of peace has probably occurred. At this point, the lender will need to go to court and get judicial and law enforcement help to finish repossessing the car.
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