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Things to consider when hoping to stop repossession

When financial challenges arise or things like unemployment suddenly occur, people's lives can be turned completely upside down. Many people do not have significant savings, so even a slight decrease in the income that was expected can wreak havoc on a budget and create serious problems. For many people struggling with insufficient income to meet their monthly financial obligations, one of their first concerns may be how to stop repossession of their vehicles. While bankruptcy can provide protection against repossession in some situations, there are also legal limitations on a creditor's rights when it comes to repossession of vehicles.

In general, a creditor has the legal right to seize or repossess a vehicle as soon as the debtor defaults on the lease or loan. However, there are two limitations on this general right. The right to immediately seize a vehicle comes from the terms of the lease or loan contract, which should clearly define default and nonpayment. So, if the owner of the vehicle can prove that he or she has not defaulted according to the definition in the contract, the creditor may not have the legal right to seize the vehicle. Second, if the creditor--at any point after the date on which the contract was initially executed--agrees to modify the terms of the contract, the original terms (including those governing default and seizure) may no longer apply.

The law also limits the way a creditor may seize a vehicle, prohibiting a seizure that results in a "breach of the peace."

Consumers should understand that they also still have options even after a creditor has legally repossessed a vehicle. A creditor has the freedom to decide what to do with the vehicle once it has been seized and repossessed, but many state laws require creditors to inform the previous owner if the car is going to be sold at auction or in a private sale. There are generally two ways that a consumer can regain possession of a seized vehicle. If the consumer buys back the vehicle, it means that he or she pays the entire debt owed, which generally includes not only past due payments but also the remaining balance, as well as repossession costs. In a reinstatement situation, the consumer must pay only the delinquent payments and repossession costs.

Source: Federal Trade Commission, "Consumer Information: Vehicle Repossession," Nov. 2008

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