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INTRODUCTION

When you buy a car, truck, or other vehicle on credit, until you have made the last payment your creditor retains important rights in the vehicle. These rights are established by the contract you signed and by the law of your state. Your failure to make timely payments on the vehicle carries serious consequences. Your creditor may then have the right to repossess or take back your car without going to court or, in many states, without warning you in advance.

However, your creditor's right to repossess your car is subject to some limitations. In particular, state law places limits on how your creditor may repossess the vehicle and resell it to reduce or eliminate your debt. If any rules are violated, your creditor may lose other rights against you, or even be required to pay you damages. For further information about the rights discussed generally below, and about your state's specific repossession requirements, contact your state consumer protection agency or a private attorney.

SECURITY INTEREST

The basis for any repossession is the existence of a security interest in collateral. Under normal circumstances, when you buy on credit you buy on an unsecured basis. Typically, a creditor's remedy when a customer refuses to pay is to initiate a lawsuit, obtain a judgment, and garnish or levy the customer's wages, bank account, or property. However, in some instances a creditor will modify his or her loan documents to provide for a security agreement. This is a special paragraph in which the customer grants the creditor the right to repossess specific collateral if the customer falls into default.

There are three primary elements of a security agreement. First, there must be a written document which contains special language granting the creditor rights in the collateral. For car loans, this is typically contained in the Retail Installment Sales Contract. Second, the agreement must be signed by the customer. Third, the agreement must SPECIFICALLY describe the collateral. If there is a VIN or Serial number for the collateral, it must be listed in the security agreement.

SEIZING THE CAR

Normally, your creditor has legal authority to seize your vehicle as soon as you "default" on your loan. What constitutes a default will be stated in your contract, but failure to make a payment on time is one example.

Once you are in default, the laws of most states permit the creditor to repossess your car without prior notice, at any hour of the day or night, and to come onto your driveway to do so.

When seizing the vehicle, your creditor may not commit a "breach of the peace." For example, using physical force or threats of force to seize the vehicle. Taking your car over your protest, removing it from a closed garage without your permission, falsely representing that you will be arrested if you don't release the car to the repossession man, or by trespassing beyond your driveway, may also constitute a breach of the peace, depending on the law in your state.

Should there be a breach of the peace in seizing your car, your creditor may be required to pay a penalty or, if any harm is done to you or your property, to compensate you. Also, because of a breach of peace, your creditor may lose the right to collect a "deficiency judgment." A deficiency judgment is the difference between what you owe on your loan and what your creditor receives when reselling your vehicle.

In addition, if your creditor has agreed to accept late payments or to change your payment date, the terms of your original contract may no longer apply. Such a change in your credit contract may be made orally, in writing, or sometimes, simply by your creditor's repeated acceptance of late payment without complaint. If a creditor has accepted late payments in the past, a creditor is required to tell the customer in writing that the creditor will no longer accept late payments and if any future payments are late the creditor will repossess the vehicle. If the creditor repossesses the vehicle without sending this letter, the creditor may have wrongfully repossessed the vehicle.

In Wisconsin, there are special additional protections for consumers. Where a creditor wishes to repossess collateral of a Wisconsin resident, in many instances, the creditor must first go to circuit court and obtain a repossession Order. Once the creditor has this order, it can then begin repossession activities. However, the creditor is still limited to repossessions which do not breach the peace.

RESELLING THE CAR

Once your car has been repossessed, your creditor will generally resell your car in either a public or private sale. In any case, generally your creditor must notify you about what will happen to the car. If your creditor chooses to resell the car at public auction, state law usually requires you to be notified of the date so that, if you wish, you can attend and participate in the bidding. If the vehicle is to be sold privately, you are usually entitled to a notice of the date after which it will be sold.

In this circumstance, you may be entitled to "redeem" or buy back the vehicle by paying the full amount owed on it, plus the expenses connected with its repossession, such as storage and preparation for sale. Some states have consumer protection laws that also allow you to "reinstate" your loan. This means that you can reclaim your car by paying the amount you are behind on your loan together with your creditor's repossession expenses.

Any resale of a repossessed car must be conducted in a "commercially reasonable manner." This does not mean that your creditor must get the highest possible price (or even a good price) for the vehicle. A resale price that is below fair market value, however, may indicate that the sale was not commercially reasonable. A sale made according to the standard custom in a particular business or in an established market will be considered commercially reasonable in almost all cases. Failure to resell your car in a commercially reasonable manner may give you either a claim against your creditor for damages or a defense against a deficiency judgment. (For an explanation, see the next section.)

Whatever method is used to dispose of a repossessed car, a creditor may not keep or sell any personal property found inside. (This does not include most improvements made to the car itself, such as the addition of a stereo or luggage rack.) Your creditor also may be required to use reasonable care to prevent others from removing your property from the repossessed car. If you find that your creditor cannot account for valuable articles left in your car, you may sue to recover just compensation.

PAYING THE DEFICIENCY

Any difference between what you owe on your loan and what your creditor gets for reselling the vehicle is a "deficiency." For example, if you owed $2,500.00 on the car and your creditor sells it for $1,500.00, the deficiency is $1,000. In most states, a creditor who has followed the proper procedures for repossession and sale is allowed to sue you for a "deficiency judgment to collect the loan balance. Several states, however, have consumer protection laws that restrict creditors from suing for a deficiency when vehicles or other similar consumer goods are involved. If you are sued for a deficiency judgment, you will be notified about the date of the court hearing. It may be important for you to appear at this hearing, because it may be your only opportunity to use any legal defenses you may have. If your creditor breached the peace when seizing the vehicle or failed to resell the car in a commercially reasonable manner, these may be defenses against a deficiency judgment. An attorney will be able to tell you whether you have grounds to contest a deficiency judgment.

SUING FOR DAMAGES

If a creditor has wrongfully repossessed your vehicle, you may be entitled to sue the creditor for damages. Under certain circumstances, damages include items such as the loss of the use of the car, recovery of the equity you have in the car, recovery of lost personal property taken with the car, outrage, emotional distress, certain statutory damages, and in some cases, punitive damages. In many instances, the creditor will also be forced to pay your reasonable attorney's fees and costs.

CONCLUSION

If you believe your car has been wrongfully repossessed, you should see an attorney immediately regarding your rights. In some instances, an attorney will be able to assist you in retrieving your vehicle. In other instances, the attorney may assist you in suing for damages.