Repossession: The Rules a Creditor Must Follow to Take Your Personal Property

A "creditor" is someone you owe money.  Sometimes a creditor can "repossess" your personal property if you do not pay what you owe them.  Repossession means that the creditor will take your property and keep it, sell it, or give it back once you pay what you owe.  However, they must strictly follow the rules.

A creditor must have a "security interest" in your personal property before they can take it.

A creditor does not need to sue you to take your property, but they must have a "security interest" in the property they take.  

• A "security interest" is a creditor’s right to take specific property if you do not pay what you owe them. 
• To create a security interest, you must agree in writing to give the creditor a security interest in specific property.
• Once the creditor has a security interest in your personal property, that property is called "collateral."
  • For example, when a creditor lends you money to buy a car, part of the agreement can make that car collateral.
• This means that if you don't pay, the creditor can only repossess the car that was made collateral.
• The creditor cannot take other property such as your motorcycle, your stove, or anything else you own, because they do not have a security interest in those things.

The creditor can only repossess your personal property if you are in default.

A creditor cannot repossess your property unless you are in default. Default is more than just not paying.  In order to be in default all of the following must happen:

• Your payment must be more than 10 days late (or you violated other parts of the agreement in an important way); AND
• The creditor must have sent you a proper 20-day written notice of your "right to cure" the missed payment (or fix the other part of the agreement that you violated), unless they have sent a similar notice within the last year; AND
• You do not pay the missed payments or fix the violations within 20-days.

Unless all three of these are true, you are not in default, and the creditor cannot legally repossess your property.

The creditor cannot use repossession if it "breaches the peace."

When a creditor takes your property without the help of the court, it is called "self-help."

• A creditor is allowed to use repossession as self-help, but only if the creditor does not "breach the peace."
• This means the creditor cannot break the law when they try to take your property.
• They cannot trespass, damage your other property, assault you, or threaten physical violence.
•  If the creditor breaches the peace, their repossession is illegal.

If the creditor does take your property, they must give you the chance to get any personal belongings out first. For example, if your car is repossessed, the creditor must allow you to get anything out of the car that belongs to you, such as a purse or wallet.

The rules that apply after the creditor has repossessed its collateral

Once a creditor has repossessed your personal property, the creditor has three options. First, they can give the collateral back to you after you pay everything owed.

Second, they can keep your property. If they do keep your property and do not try to sell it, you do not owe them any more on the debt.

Finally, the creditor can sell your property.

• If the creditor sells your personal property, they must give you a proper notice that states the date of the sale and whether it will be public or private.
• The creditor must try to get the best possible price.
• The money they get from the sale is first used to pay the cost of repossession and the sale.
• After that, the creditor takes the money to pay the debt you owe them.
• If there is money left over after the creditor is paid, the creditor must give the extra money to you.
• If the sale brings in less than what you owe the creditor, they can sue you in court to get a judgment against you for the amount you still owe. This amount still owed is called a "deficiency."
• If the creditor did not give you a proper notice or did not conduct the sale properly, they cannot collect a deficiency from you.

If a creditor breaks the rules

If the creditor does not follow the rules for repossession, you may have grounds to get money damages from them, and in some cases you will have a defense to a deficiency lawsuit.