When a debtor fails to pay installments on a car loan, an auto lender may have no choice but to repossess the vehicle. Alternatives would be to refinance the loan or to allow the debtor to repay the money owed in a lump sum at a later date. However, the debtor must have a history of reliably making payments before the lender considers those options. Repossession is the surest way to recover money after the debtor defaults on a loan, though the lender may still not recover the entire loss. When repossessing a vehicle, you must follow a legal process that gives the debtor notice and a chance to repay you.

What Allows Repossession

Your right to repossess the vehicle should be clearly stated in the loan contract. Loan agreements typically include security interests, which are properties that can be used as collateral in case the debtor fails to pay the loan. In a contract for a vehicle payment plan, the vehicle is the security interest. When a debtor does not make a scheduled payment, he or she has violated the contract. The security interest identified in the contract will legally allow you to repossess the vehicle as collateral.

The creditor industry scored a victory in May when the U.S. Supreme Court ruled that creditors are not violating the Fair Debt Collection Practices Act when they file a stale claim during a debtor’s chapter 13 bankruptcy proceedings. The 5-3 decision overturned a lower court ruling that such claims were unfair and deceptive. The decision removes some of the burden on creditors for determining when the statute of limitations for claiming a debt has expired, and protects them from debtor lawsuits that claim they violated the FDCPA.

Stale Claims

Creditors may have an unlimited time to attempt to collect a debt, but there is a limited time period during which they can use court action. When a creditor attempts to use legal action to collect on a debt that has passed that deadline, it is known as a stale claim. The statute of limitations varies by state, and creditors with debtors in multiple states may find it difficult to keep track of the different deadlines. In Illinois, the deadlines for court action are:

For mortgage lenders, property foreclosure is a complex yet effective method of retrieving debt when borrowers fail to make mortgage payments. A successful foreclosure can allow the creditor to sell the property and recover a large share of the borrower’s debt. In Illinois, all foreclosures must go through a court. A judicial foreclosure allows legal protections for both sides but can draw out the process. A creditor must follow a set of legal procedures in order for a court to approve the foreclosure.

When to Foreclose

If you are a mortgage lender, you may start considering foreclosure when a borrower misses a scheduled mortgage payment. However, you must give the borrower amble opportunities to pay the mortgage before you can request foreclosure in court:

Bankruptcy is one of a debtor’s most powerful tools to avoid paying off debt owed to a creditor. If granted bankruptcy, debtors may be able to absolve themselves from responsibility for some of their debts. When a debtor files for bankruptcy, the court can place an automatic stay on the creditor’s debt collection efforts until it decides on the bankruptcy case. Creditors can object to the automatic stay or the bankruptcy claim. Creditors have two types of bankruptcy they most often deal with, each having a different effect on their ability to collect debts.

Chapter 7

Chapter 7 bankruptcy is considered favorable for debtors who do not own many high-value assets. In order to qualify for this form of bankruptcy, the debtor:

When Illinois creditors use court action to retrieve debts, they can collect from debtor wages or other assets. With some exemptions, creditors can claim part or all of a variety of assets and properties. Non-wage garnishment can give creditors access to assets of greater value than what can be deducted from a debtor’s wages, as long as the assets are not exempt.

Bank Accounts

Banks are the most common source for non-wage garnishment. Once a court affirms that a debtor is liable, the creditor can serve the debtor and the debtor’s bank with a garnishment notice. Once it receives the notice, the bank must freeze the debtor’s accounts until a court rules on the garnishment. Banks will typically receive the notice a couple of days before the debtor to prevent the debtor from avoiding garnishment by withdrawing money from an account.

Of the many means creditors can use to collect debt, wage deduction is considered the final option when all other methods have failed. The process involves working with the debtor’s employer to have money deducted from the debtor’s wages to pay to the creditor. It is often called wage garnishment, but garnishment can actually refer to a separate legal action that takes money from debtor monetary sources other than wages, such as bank accounts and money owed to the debtor. If a creditor is seeking money through a wage deduction, there are legal procedures they must follow.

Filing for Wage Deduction

Before filing a Wage Deduction Affidavit in court, the creditor must notify the involved parties:

A crucial step to ensure your foreclosure complaint is filed quickly is to provide your attorney with the necessary documents for review.  The documents your attorney needs are:

• Any demand letters, notices, or pre-foreclosure correspondence sent to the mortgagor(s);
• A copy of the executed Note/Credit Agreement and Disclosure;
• A copy of the executed and recorded Mortgage/Deed of Trust;
• All endorsements or allonges;
• All assignments of mortgage, whether or not they were recorded;
• Any documents showing acquisition or merger;
• Any modifications or change in terms agreements;
• Title report, if ordered;
• Appraisal, if available; and
• Current payoff, including principal balance, per diem, past due payment/maturity date, and interest rate.

Also, it is important to advise your attorney whether you have possession of the original Note/Credit Agreement and Disclosure and Mortgage/Deed of Trust.  This ensures you are prepared in the event that the mortgagor(s) raises this issue during the foreclosure proceeding in an answer or discovery.

One of the first steps creditors take when owed money by a debtor is to try to collect the debt themselves without going to court. The creditor may contact the debtor directly or hire a debt collection agency. While debt collection agencies can be effective, there are federal laws in place to protect debtors against what are seen as unfair practices by collection agencies.

The Fair Debt Collection Practices Act outlines how debt collection agencies may contact and interact with debtors. If a court finds an agency in violation of the act, the agency may owe damages to the debtor. The Act does not apply to the creditor, but the result of a collection agency violating the Act may be the failure to retrieve the money the creditor is owed.

Creditors should understand what debt collection agencies can and cannot do. Choosing an agency that violates the law will delay and complicate the collection process, likely requiring further legal action.