Car Repossessions

The Basics

A lender can repossess a car without going to court. If a consumer has a car loan, the lender can retake possession of the consumer’s car after a default by “self-help” repossession. That means the lender does not need to file a lawsuit, but can just send the repossession company to pick up the car upon a default.

The right to self-help repossession is very limited. Self-help repossession, while legal, is a drastic remedy and the law imposes very strict requirements on creditors and repossessors who repossess a car. The stringent requirements are well justified, as today’s news is replete with stories about how unscrupulous lenders and repossessors can be in retaking possession of property.

Unlawful Repossessions

A wrongful repossession occurs when a creditor repossesses property without an actual default under the security agreement. Though a lender can repossess a car without filing a lawsuit, there must be a “default” under the terms of the finance contract. The most common default is a failure to make a payment by the date it is due, though there can be other reasons for a default, such as a failure to carry appropriate insurance. A lawyer should review any finance contract and repossession carefully, and ensure that the lender has retaken possession of the car only after there actually was a default. Sometimes a lender will agree to a new payment date, but then repossess the car before that new, agreed-upon date. In that case, there likely was no default.

A wrongful repossession occurs when there is a breach of the peace. Not only must there be a default under the finance contract, the repossession must be completed without a “breach of the peace”. Examples of a breach of the peace include the following conduct in connection with a repossession:

  • repossessing property over the consumer’s objection;
  • using or threatening to use force;
  • threatening arrest or other involvement by law enforcement;
  • forcing a person to stop his or her car;
  • breaking through a closed or locked barrier (e.g., a garage), or damaging the vehicle.

In Los Angeles, there are many apartment buildings with gated and locked garages on the street level, and a secret code is required to enter the garage. If the repossessor somehow gains access to the garage without permission, it is a breach of the peace and an unlawful repossession.

The Required Notices After Repossession

In California, a consumer generally has two rights following a car repossession.

The first right is to “reinstate” the contract by paying all amounts past due, plus any applicable delinquency charges, collection and repossession costs. Depending on the basis for the repossession, the consumer may be required to satisfy any liens or encumbrances on the car or obtain insurance. Upon reinstatement, the car will be returned to the consumer and he or she will  begin paying on the contract as if there was no default and repossession.

The second right is for the consumer to “redeem” the vehicle. This generally means that the consumer will have to pay in full the balance due under the loan, plus any applicable delinquency charges, collection and repossession costs. There can be a credit to the consumer for any unearned finance charge or canceled insurance, depending on the terms of the purchase contract. Upon redemption, the car is returned to the consumer and he or she owns it, having paid off the loan.

Reinstating the contract generally costs the consumer much less than redeeming the vehicle, and thus is the more desirable and sometimes only option based on the consumer’s financial situation. There are certain, limited circumstances under which a creditor can deny a consumer the right to reinstate the contract, leaving redemption as the only option.

Creditors must provide consumers with detailed written notice of their right to reinstatement and/or redemption. The written notice must be accurate and include complete disclosure of all charges and other information necessary for the consumer to reinstate the contract or redeem the vehicle.

If you cannot afford to reinstate or redeem the vehicle, it will be sold at auction and the creditor will apply the proceeds of the sale to your loan balance. You will owe the rest, which is called a “deficiency balance”. Always have an attorney review the notice you receive after your car has been repossessed. California law is very strict as to what must be contained in it.

Damages And Other Relief

A consumer may not owe a deficiency balance. If the creditor does not provide the required notice in the proper form after repossession, the consumer will not owe a deficiency balance (the amount remaining on the contract after the sale of the vehicle).

A consumer may be able to get damages. A consumer can assert several claims for damages when his or her car is repossessed in breach of the peace and/or the creditor does not provide the required notice after repossession. Among other things, the consumer can sue for violations of the California and federal fair debt collection laws because they both preclude repossession of collateral when there is no present right to do so. There is no present right to repossess property when it would result in a breach of the peace. A consumer who prevails on a claim under the California or federal fair debt collection laws can recover actual damages (including the value of the car), statutory damages and his or her attorneys’ fees and costs. The consumer can also sue for conversion (i.e., civil theft). Conversion gives the consumer the right to recover either the fair market value of the car, or an amount sufficient to compensate the consumer for his or her loss of use of the car (e.g., the rental costs of a similar car). Importantly, the consumer can seek punitive damages with a conversion claim.