Banking & Finance Law
Repossession and Foreclosure of Personal Property
In today’s age of high prices for everything from cars to furniture, from flat screen TVs to washing machines, many businesses find it necessary to allow their customers to buy things on credit. Some businesses choose not to offer credit cards or credit lines but instead allow a customer to purchase a particular item on credit which allows the business to keep a security interest in the item.
Creditors May Benefit from Having a Security Interest in Personal Property
That security interest in the item can become very valuable to the creditor if the customer defaults on the loan. If a creditor has a security interest in a personal piece of property then:
· The creditor has a priority claim to that piece of property in a bankruptcy proceeding. Typically, in a bankruptcy proceeding, secured loans are satisfied prior to unsecured loans. That means that if your company made a loan to a consumer so that the consumer could buy a large flat screen TV and the loan is secured by that TV then the bankruptcy court cannot require the debtor to sell the TV and distribute the proceeds to all of the creditors. Instead, you have a priority interest in the TV and you may either repossess the TV or the debtor may be ordered to sell the TV and to satisfy his or her loan to you before using any of the proceeds to satisfy other claims.
· The creditor can repossess the property if the loan is not repaid according to the terms of the contract. Often, the situation presents itself where the debtor does not file bankruptcy but is also not paying the debt he owes to you. In that case, you may be able to repossess the property that secures the loan. Your loan documents should specify when and how a repossession can take place.
When Can the Property be Repossessed?
The answer to that question is dependent on the terms of the loan contract. Some contracts have a grace period that allows borrowers a certain amount of time to pay the creditor past due amounts before a repossession can take place. Some contracts also have specific exceptions for health problems or accidents which prevent the borrower from making regular payments.
How Can the Property be Repossessed?
It is important to follow both state law and the terms of your contract if you want to repossess personal property. For example, you typically cannot enter the debtor’s home without permission unless you have a court document that allows you to do so. Also, you typically must provide the debtor with advance written notice of your intention to repossess the property. If you do not provide the required notice then the debtor may be provided with an opportunity to get the property back from you in exchange for the money that is owed.
Property repossession is not the goal of creditors. They are in business to sell goods for money; not to repossess the very good which they sold. However, if a buyer cannot meet his or her obligations to repay his debt then often a creditor has no choice but to repossess the property in an effort to regain some of his or her financial loss.