Security interest, perfection, and repossession are governed by the following Statutes:
- Uniform Commercial Code (UCC), Article 9: 810 ILCS 5/9-501 et. seq.
- Illinois Vehicle Code, Article II 625 ILCS 5/3
- Motor Vehicle Retail Installment Sales Act (MVRISA): 815 ILCS 375/20
- Rules of Secretary of State governing repossession titles and procedures: 92 Ill.Admin.Code §1010.160
In order for repossession to occur, the lien holder must make sure that there is a valid security interest in the collateral and in the case of vehicles, clear title. A creditor must register notice of security interest with the Secretary of State for vehicle liens.
Valid security interest required
A repossession is lawful only when the creditor has a valid security interest in the consumer's vehicle. This requires that the security interest be clearly written in a retail installment contract or in a financing agreement and in the case of vehicles, noted on the certificate of title or approved form provided by the Secretary of State. “There must be some language reflecting the debtor’s intent to grant a security interest.” In re Sabol, 337 B.R. 195, 198 (Bk. Ct. C.D. Ill. 2006). If there is no valid security interest, a creditor cannot repossess property.
The debtor loses possession of the property, which can only be regained through redemption procedures, or if the repossession is unlawful (see below). The creditor may or may not re-sell the property, but if there is a re-sale, the creditor can go after the debtor for any deficiency in the remaining debt. 810 ILCS 5/9-615(d). In addition, the creditor can charge the debtor the cost of repossession, which may include costs to prepare the property for resale, towing charges, storage charges, and the like. 810 ILCS 5/9-615(a).
If a repossession is unlawful, the consumer has the right to get the property back and to be paid money damages. There are a variety of situations which could make the repossession unlawful:
- The debtor was not in default at the time of repossession either because the debtor did not owe any payments or still had time to make the payments. Check for a history of the creditor accepting late payments or an agreement to allow a late payment (there may be an estoppel argument if no subsequent warning)
- The debtor did not put up the property as collateral on the contract, or if for some other reason the creditor does not have a valid security interest under the law. For example, the repossessed car may not be in the debtor’s name, or the creditor took the car as collateral on an earlier loan, but not on the present defaulted loan
- The repo man breached the peace when taking the car. This can happen when they take the car over the debtor’s objections made in person at the time of the repo, or by using force or threats, or by breaking into a locked garage or otherwise destroying the personal property of the debtor. See Pantoja-Cahue v. Ford Motor Credit Company, 375 Ill. App. 3d 49 (1st Dist. 2007).
- Wrongful repossession may be pleaded as the tort of conversion, a violation of the Illinois Commercial Code, or an unfair practice under the Illinois Consumer Fraud Act
Preventing a car from being repossessed
- Keep up with payments. Contrary to popular belief, a secured creditor can repossess a vehicle even if the debtor is behind on one payment. Other than basic necessities, secured interests should be a higher priority in paying bills than unsecured debts;
- Debtors also can negotiate a work-out plan with the creditor, but in doing so, the debtor should be mindful of possible increased costs, such as higher interest rates or amounts. It is also important to get any work-out agreement in writing. Sometimes, the creditor will agree to accept late payments and then repossess prior to the agreed date. This deceptive practice is called "gab and grab" and may violate the Illinois Consumer Fraud Act. 815 ILCS 505/;
- Debtors can try to sell the car before it gets repossessed, but typically, the debt is more than the car is worth, so the debtor will have to pay something above what they get from the sale in order to satisfy the lien;
- The debtor can offer to return the car to the creditor, but this should be done only if the debtor gets a written agreement saying that the debtor does not owe anything more on the debt, or some other favorable arrangement for the debtor;
- Repossessions in breach of the peace are unlawful, and thus, a debtor can prevent one by firmly objecting in person when the repo man shows up or by keeping the car in a locked garage or behind a locked gate. Note that repossession agents frequently will repossess a vehicle from the debtor’s place of work;
- Assuming a bankruptcy is otherwise warranted, the filing of a bankruptcy before the repossession triggers an automatic stay which prevents a creditor from taking action against property;
- Of course, the debtor can also try to hide the car, but this is often not very practical. Some debtors temporarily “trade” vehicles with close friends or relatives until they are able to negotiate a resolution with the auto dealer or finance company. No Illinois law prohibits the concealment of property under a lien. However, if the creditor cannot locate the car, it may file a detinue action to recover it.
Getting back personal property left in the car
The debtor should get back any personal property left in the car. Unless the creditor also had a security interest in the property inside the car, which is not likely, a repossession agent is required to:
- Inventory the personal property, and
- Give written notice of intent to dispose of the personal property after 45 days and the location where the property can be retrieved. 225 ILCS 422/110
The lender or its agent generally may not charge a fee to retreive personal property, but if they demand a small fee (e.g., $25), it may be advisable to pay it in order to expeditiously get the property back. If the repossession agent refuses to return the property on demand of the debtor or the debtor's agent, that constitutes theft or conversion, the debtor has a claim against the lender for the value of the unreturned property. Fleming-Dudley v. Legal Investigations, Inc., 2007 WL 952026 (N.D. Ill. 2007). The request should be in writing and specify the items of property to be returned. If a repo is likely, but hasn't happened yet, advise the client not to keep personal belongings in the car.
Getting a repossessed car back
In Illinois, there are 2 ways for consumers to redeem their cars:
- Method One: Reinstatement, the 30% Rule, 625 ILCS 5/3-114(f-7): Applies only to vehicles, and only where, at the time of repossession, the debtor has paid at least 30% of the deferred payment price or total of payments due (including the down payment and any trade-in in the 30%). The "deferred payment price" is similar to the TILA "total sale price" 815 ILCS 375/2.10. The total of payments due should be the same as the TILA "total of payments." If so, the debtor must be sent a notice which gives the debtor 21 days to redeem. The notice must be mailed to the debtor within 3 days after repossession. Consumers who have paid the minimum 30% can get their cars back and reinstate the sales or loan contract if they pay the overdue payments, late charges and repossession costs, and cure any other defaults. A debtor can redeem a vehicle with this method only once during the lifetime of the contract. Also, it is unclear if certain types of defaults, such as use of vehicle for illegal purposes, can be cured.
- Method Two: Redemption Under 810 ILCS 5/9-623(c)(2): Applies to all consumers. A debtor can redeem any repossessed property at any time before the creditor actually disposes of it. However, the debtor must give the full amount of the balance of the contract, including all accelerated payments, plus the repossession and storage charges. Debtors usually won’t be able to do this unless they take out another loan or ask a friend or relative to purchase the car, assuming its worth what is left on the loan.
Stopping the creditor from reselling the car
After the repossession, a creditor in Illinois must send a notice to the consumer stating that the creditor intends to apply to the Secretary of State for a repossession certificate of title 625 ILCS 5/3-114(f-7)(1-4). With that notice must be an "Affidavit of Defense" form for the consumer to list any defenses which the debtor may have either to the repossession or to the amount of money which the creditor is claiming is due. If the debtor mails this Affidavit to the creditor by certified mail within 21 days, the creditor cannot immediately obtain the title from the Secretary of State. Instead, “the lienholder must apply to a court of competent jurisdiction to determine if the lienholder is entitled to possession of the vehicle.” 625 ILCS 5/3-114 (f-5) (2).
Without the title, the creditor/lienholder cannot re-sell the car. The creditor will then have to either file a lawsuit, usually a detinue or declaratory judgment action against the debtor to settle the matter, at which time the debtors defenses will be adjudicated. If the creditor files such a lawsuit, the debtor may end up owing more money for the creditor's legal fees if the court determines there was no basis for the defense. The creditor may seek to negotiate a settlement with the debtor instead of filing suit. Any negotiated settlement should be in writing. If the creditor does nothing after receiving an Affidavit of Defense, the debtor will have to go to court to ask for an award of damages or for the car back.
Resale and deficiencies
Creditors usually try to re-sell a repossessed car in order to collect on the car loan debt owed. If the amount the creditor receives at the resale pays off only part of the amount owed, the creditor usually will go after the debtor for the rest, called the deficiency. Debtors are often sued to recover the deficiency balance.
Because the creditor must meet many technical legal requirements in connection with the resale, there may be many legal claims and defenses available if the creditor slips up. If the creditor is seeking a deficiency, always check for the following:
- Was the repossession unlawful?
- Has the creditor kept the collateral or has he re-sold it?
- Has the debtor received a proper written notice of the intended re-sale?
- Was the sale conducted in a commercially reasonable manner?
- Are there any other defenses?
If the creditor decides to resell the car, then the creditor must send the debtor a proper written notice about the intended resale, which can be either public or private. For a public sale, such as an auction, the notice must include the time, date and place of the sale. For a private sale, the creditor must state the date after which the sale will be held. The requirements of the notice are set out at 810 ILCS 5/9-613 and 5/9-614.
The purpose of the notice is to give the debtor a chance to redeem the vehicle before resale, to give the debtor a chance to find potential buyers for the vehicle, and to give the debtor a chance to observe every aspect of the sale to make sure the vehicle is sold for a fair price.
Other Requirements of the Notice:
- It must tell the debtor about their redemption rights
- It must give enough time to redeem or to find other buyers before the resale
- It must be given not only to the primary debtor but also to cosigners and guarantors
- It must be correctly addressed
- If it states the wrong information on the notice, such as wrong date or sale location, the notice is no good
- It must be clearly written
- If the creditor learns that the debtor did not receive the notice and takes no steps to correct it, the notice is no good
- A debtor must be sent a new notice if the sale gets rescheduled
The law requires that all aspects of the resale must be commercially reasonable. This means that the manner, method, time, place, and terms of the resale must all be reasonable by commonly accepted commercial practices. The creditor must use every reasonable means and their best efforts to obtain the full value of the car or other property. However, just because the sale brought a low price for the car does not prove that the sale was unreasonable. But, if there is a big difference between the price obtained at resale and the true value of the car, a judge might look very closely at all aspects of the sale to see if it was fair.
Consider looking at references from the public library like the "red book" or "blue book", which is published at regular intervals to discover the book value of the car at any given point in time. However, you must also consider the actual condition of the subject vehicle when estimating value.
The creditor is not allowed to bid upon or purchase the property. More than one bid must be solicited. A non-arms length sale to a related entity or the originating dealer may not comply. If the notice of resale informs the debtor that the sale is to be private, it must be a private sale.
This is usually an auction, and the most common method of disposition. Here, the creditor is allowed to bid upon and purchase the property. More than one bid must be obtained. It requires appropriate advertising or other publicity to attract bidders. The secured property must be available for inspection by the public before and during the sale. The sale must occur at a convenient location and be accessible to all members of the community. It should not take place in bad weather. If the notice informs the debtor that the sale is to be public, it must be a public sale.
Automobile "dealers only" sale.
This kind of sale may be unreasonable because the consumer is denied the chance to take part in the sale. Also, if the creditor has a retail store (such as a car dealer) available to it, the property should be sold through the store on a retail basis. Sales at wholesale and to dealers will usually bring a much lower price.
- The creditor should prepare or recondition the property in order to bring the best price at the sale
- The creditor has the duty to use care in preserving the property from the time it is repossessed until the time it is sold
- The sale must be made to a purchaser who bids in good faith. There can be no collusion or alliances between the creditor and the purchaser
- The sale should not be held too quickly after the repossession, but it should not be delayed too long (60 days may be too long). If the sale is too late, the debtor can claim that the creditor decided to keep the property, and the debtor should not be liable for a deficiency
- If the creditor had access to a retail outlet (Ford Motor Credit has access to Ford dealerships) then the repossessed vehicle should be sold at a retail outlet to ensure a commercially reasonable sale. Ford Motor Credit Co. v. Jackson, 126 Ill. App. 3d 124, (3d Dist. 1984).
Creditor keeps but doesn't sell repossessed car
After a repo, a creditor must decide whether to keep the property or resell it. If creditor decides to keep it, or doesn’t resell it according to law, then they cannot go after the debtor for any deficiency. If a creditor uses a repossessed vehicle, the law says he has kept it.
Other defenses to deficiency
- If the automobile was a lemon or had significant problems with its operation, the debtor may have a breach of warranty defense
- If the creditor promises to forgive the debt if you voluntarily return the car, that is an accord and satisfaction, preventing any deficiency
- Check to see if a deficiency lawsuit was filed more than four years from the date of default. If so, the debtor has a statute of limitations defense
Defenses and counterclaims if improper notice or commercially unreasonable resale
The defense. If you can show either that the creditor failed to give a proper resale notice or failed to resell in a commercially reasonable manner, the debtor has a defense to a suit or claim for deficiency. In this case, the law presumes that the value of the car is equal to the outstanding debt. Under this presumption, no deficiency would be owed. But, if the creditor can show in court that the value of the car when repossessed was less than the remaining debt and can show the resale was commercially reasonable, then the debtor still owes the deficiency. See 810 ILCS 5/9-625.
The counterclaim. Again, if there is either an improper resale notice or a resale that is not commercially reasonable, then 810 ILCS 5/9-625 of the Uniform Commercial Code permits the debtor to sue for actual damages and statutory damages against the creditor. Statutory damages are equal to the finance charge plus 10% of the cash price of the secured property. The counterclaim is available for an improper notice even if the resale was otherwise commercially reasonable. If there are multiple debtors, such as a husband and wife, each may be able to get damages assessed against the creditor. Such a counterclaim frequently may be as much as the deficiency, and the parties may both just walk away as a "wash."
Creditor threatens to take household goods
For a variety of reasons, it is unlikely that a creditor is going to repossess a debtor’s household goods, furniture, or personal items. This is true even if the creditor gets a court judgment on the debt. If a creditor threatens to take something valuable, like a color TV or jewelry, or something of personal value such as a family photo album, the debtor should not necessarily be concerned unless the property is leased or purchased under contract from a “rent-to-own” company. "Rent-to-own" companies will frequently repossess household goods under contract.
Reasons why creditors do not repossess household goods:
- Most of them are not valuable enough to make it worth it for the creditor to incur the cost necessary to take them, such as repossession costs, storage and selling expenses;
- A debtor does not have to let a repo man into the home, and they cannot break in; and
- The Federal Trade Commission has a rule that prohibits creditors from taking non-purchase money security interests in most household goods (there is no such prohibition on taking goods for which the creditor has a purchase money security interest, i.e., where the goods themselves are purchased on credit and the debtor puts up those same goods as collateral). If there is no security interest in the goods, before taking any household goods, the creditor must get a court judgment and a turnover order directing the county Sheriff to seize the goods from your home.
If there is no security interest in the goods, before taking any household goods, the creditor must get a court judgment and a turnover order directing the county Sheriff to seize the goods from your home.
Protecting household goods
To prevent repossession, the debtor should not let the repo man into the house. The debtor should be advised to politely, but firmly, tell the repo man that he or she will not consent to their entering the home. The debtor should also advise their landlord and family members not to let them in, either. Any attempt to come into the home without an invitation is unlawful. They should call the police (and a lawyer).