Sometimes a car buyer cannot make payments. He or she stops paying the amount the contract requires. The borrower (person buying the vehicle) is said to "default" on the purchase agreement. The creditor (the person or business you bought the car from) is able to repossess the vehicle without going to court after a borrower defaults. The creditor may have the right to repossess and sell the car, but has to follow the purchase agreement and Iowa law.
What does it take to be "in default?"
ALL of the conditions below must be met:
- The buyer was more than ten days late or violated the terms of the agreement in an important way; AND
- The creditor served a twenty-day written notice of the "right to cure" the missed payment or violated terms of the agreement on the borrower and any cosigners within the last year. (This is not required every time a payment is late or agreement term is violated but a notice must have been served once within the last 365 days); AND
- The borrower and any cosigners failed to pay the missed payment(s) or take other corrective action within the twenty-day time limit.
What is a "Notice to Cure" and what must it state?
It must be a written notice from the creditor. This notice must contain certain information. It has to briefly identify the credit transaction. The notice must tell the borrower that payment has not been made and state the amount that is past due or necessary action to cure the default.
The notice must also say if the payment or necessary action is not made within 20 days, the creditor has the right to accelerate the entire debt and require that it be paid in full. Until the end of the 20 days, the borrower can choose whichever of two steps involves less money to cure the default:
- He or she can pay all unpaid installments due at the time, without acceleration, plus late payment charges; OR
- The borrower can pay the amount stated in the notice to cure or take the action necessary to cure the default.
Taking either of these steps will restore the borrower's rights as if there was never a default.
Are there limits to what a creditor can do?
Until all the requirements to declare default are met, the creditor cannot take any steps to:
- Speed up how fast the unpaid balance matures;
- Repossess the car (other than a voluntary surrender by the borrower); or
- Otherwise enforce the debt.
If the "requirements to declare default" ARE met, what can the creditor do?
Repossession can occur at any time after conditions for declaring default are met.
What is "Self-Help Repossession?"
This type of repossession does not need to involve a court. It must meet certain conditions.
What conditions must be met?
It cannot involve a breach of the peace. The general rule is that a creditor cannot use force or threats and cannot seize the borrower's property if the borrower objects. Violence is not required to breach the peace. If a breach of the peace occurs, the creditor cannot use repossession.
What if a person has personal property in the car?
Any of the borrower's personal property within the car must be returned to the borrower upon demand. The creditor has no right to require a payment from the borrower for the return of personal possessions.
What happens after a creditor repossesses the car?
The creditor can choose one of three options:
- Allow the borrower to get the vehicle back by paying all amounts owed (including repossession costs) before the car is sold or otherwise disposed by the creditor;
- Keep the vehicle to satisfy the debt in full; or
- Sell the vehicle at a public or private sale and apply the money from the sale to the debt.
What rules must a creditor who chooses to sell the car follow?
After repossession, the creditor must give advance written notice of the sale to the borrower and all cosigners. The sale notice must contain certain information. A creditor failing to provide the borrower and any cosigners with proper written notice of the sale cannot hold the borrower or cosigners responsible for any unpaid debt after the sale. The sale must seek the best price possible at the time in the usual market for the repossessed car. If the repossessed car is not sold in a commercially reasonable manner, the borrower has rights to recover money damages against the creditor. The repossession and sale of a car is "commercially reasonable" if the creditor can show that it met all the legal requirements for declaring default, repossessing and selling the vehicle. The fact that a greater amount could have been obtained by the creditor if it had repossessed and sold the car at a different time, in a different place or manner does not show that the creditor was commercially unreasonable.
What happens to the money from sale of the car?
Money from the sale of the car is applied first to the costs of repossession and the sale. Then the money is applied to pay off the borrower's debt.
What if sale of the car brings MORE than the debt owed?
If any money is left over, it must be given to the borrower. After the sale, the creditor must provide the borrower with a written notice showing how the money from the sale was applied to the debt, and if there is a surplus (money owed to the borrower) or deficiency (money owed to the creditor).
What if sale of the car does NOT cover the debt?
Then the creditor may file a lawsuit against the borrower and/or cosigners and ask the court for a judgment for any unpaid balance of the debt. This is called a "deficiency judgment." The borrower and cosigners may be able to counterclaim against the creditor for damages if the creditor failed to follow the law when it repossessed and sold the vehicle.
Helping low-income and elderly Iowans having legal problems with consumer issues is a priority for Iowa Legal Aid. If you need a lawyer but can't afford one, call Iowa Legal Aid at 1-800-532-1275 for assistance.