Secured loans require the borrower to give something of value to the lender, so if the borrower fails to repay the lender, the lender can use the item to pay the debt. A common secured loan is a car loan in which the vehicle is the item of value. The lender can take the car if the borrower does not repay the loan on time. For vehicles, this process is called repossession. When a house or real estate is the item of value, the process is called foreclosure.
Secured loans are in contrast to unsecured loans. Unsecured loans do not require the borrower to give anything of value to the lender. The lender lends the money in exchange for the borrower’s personal promise to repay the loan. A common unsecured loan is a credit card. Borrowers use the card to pay for items now and pay the balance by the end of the billing cycle. Another popular unsecured loan is a student loan. A lender gives the borrower money for school in exchange for a personal promise to repay the balance and interest by a certain date.
A borrower failing to repay a secured loan as promised usually results in a repossession or foreclosure. The creditor’s right to repossess must clearly be stated in the contract. A creditor can repossess real property, a vehicle, watercraft, furniture, jewelry, tools, a merchant’s inventory, or any other other property secured by the loan. The item is called the “security.”
Repossession: Let’s look at repossession of something other than real estate first. A repossession can occur without a “breach of the peace.” This means a creditor must have the homeowner or tenant’s permission before he or she can enter a home, garage, or enclosure. The creditor can repossess a vehicle from a driveway, public street, or yard. In some states, your hindering a repossession is a crime and you can be arrested if you hide the item the creditor wishes to repossess.
In some states, if you are present and object, the creditor must take the matter to court to obtain a court order allowing the repossession. A creditor may not use threats or force. The creditor may not use fraud or deception (such as displaying bogus court papers), or threaten to have you arrested if your state allows your peaceful objection.
If the creditor files a lawsuit against you to repossess the security, the action will almost certainly be called “replevin.” This is a lawsuit that demands you to return the security or make it available for repossession. If the creditor wins a replevin lawsuit, you must surrender the security, pay money to the creditor, or both. You may also be liable for court costs, repossession fees, and attorney fees. The creditor may instead choose to sue you for the balance of the debt and bypass repossession.
When the creditor repossesses the security, it will sell it at an auction. Depending on your state’s laws, you may receive a notice of the auction. The creditor will apply the sale price to the balance of the debt. If the sale price is less than the amount due on the loan, the creditor can sue you for the rest. The amount due is called a “deficiency balance.” If the sale of the security nets more than the balance due, the creditor must provide you an accounting and pay you the surplus. The creditor can also demand you pay the costs of repossession, court costs, and attorney fees.
In some cases, state law will prevent the creditor from collecting the deficiency balance. This occurs in states with anti-deficiency laws that outlaw collecting deficiency balances less than a certain amount. Anti-deficiency rules also apply in situations where the creditor keeps the property and does not sell it. Consult with a lawyer in your state who has consumer law experience to learn how your state law applies to the the specifics of your situation, and especially if you receive notice of a lawsuit. Deficiency balances are unsecured debt, and can be negotiated depending on a creditor’s policy regarding collecting deficiency balances.
As mentioned, a deficiency balance is debt the creditor may have a right to collect. It may sell the deficiency balance account to a collection agent, or collect the debt on its own. Both the original creditor or the collection agent may file an action against you in court if negotiations between you and the original creditor or collection agent fail.
Foreclosure: The steps to a foreclosure are roughly the same as a repossession. However, because the stakes are higher and the amounts of money are greater, state legislatures have written laws setting the timelines and numbers and types of notices a creditor must give the borrower before a foreclosure may occur. Also, instead of a repo man snatching a car in the middle of the night, a sheriff must conduct the eviction to be sure the state’s rules for doing so are followed properly.
Bills.com offers articles describing the various types of foreclosure and more to the point, your options to stop a foreclosure. Homeowners facing foreclosure should consult with a lawyer who has experience in mortgage law to learn their alternatives to foreclosure.
Some states have anti-deficiency and non-recourse laws that protect former homeowners from creditors who wish to collect deficiency balances.
Federal laws set disclosure rules for secured loans, for the most part. By contrast, state laws set repossession and foreclosure rules. Details vary from state to state. Bills.com offers information on Statute of Limitations Laws by State and Collection Laws & Exemptions by State.
Lenders of unsecured loans must make disclosures in compliance with the Truth In Lending Act (TILA), which encompasses the Fair Debt Collection Practices Act (15 U.S.C. § 1601) and Regulation Z (12 C.F.R. Part 226), and local laws and regulations.
Many states follow a standardized set of rules called the Uniform Commercial Code (UCC) for secured transactions and repossession. The UCC is highly technical and as a result is difficult to understand. UCC Article 9 contains rules for secured transactions. Consult with a lawyer in your state to learn how your state statutes and case law applies to your circumstances.