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Debt Collection and Repossession Rights

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  • 0:07 Secured Loans
  • 1:31 Repossession
  • 3:38 Foreclosure
  • 5:15 Lesson Summary
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Lesson Transcript
Instructor: Ashley Dugger

Ashley is an attorney. She has taught and written various introductory law courses.

When a debtor fails to make payments on a secured loan, the creditor can usually reclaim the collateral. This lesson explains when a creditor has a right to repossession or foreclosure.

Secured Loans

I'm opening my own business! It will be a pet grooming business. I'm going to have a storefront for grooming and selling pet supplies. I'm also going to have a specially equipped van so that I can provide mobile pet grooming services. Therefore, I'm buying a building and a van. I'm taking loans in order to buy these items.

Buildings and vehicles are normally purchased using a secured loan. A secured loan is debt that is secured, or guaranteed, by collateral. Collateral is property pledged by the debtor to his or her creditor in order to ensure the debtor's payment of the debt.

Many times, the item being purchased is used as the collateral for the secured loan. When I buy my building, I'll use the building as collateral for my mortgage loan. When I buy my van, I'll use the van as collateral for my car loan. Each of those lending institutions will then hold a lien on my items.

If I fail to make payments on the building, the lender can seize the building in order to pay off the mortgage loan. If I fail to make payments on the van, the lender can seize it in order to pay off my car loan. Let's take a look at each of these types of property seizure.

Repossession

If I fail to make payments on the van, the lender can seize the van in order to pay off my car loan. This type of seizure is called repossession. Repossession occurs when a creditor claims an asset from a debtor who has failed to make his or her loan payments.

When I purchase my business van, I'm going to purchase it using a car loan from my bank. My bank is the creditor, and I'm the debtor. The van will serve as collateral for my secured loan. I'll make monthly loan payments on the van. Though I have the right to possess and use the van, the van doesn't fully belong to me until I've completely paid for it. In the meantime, the bank holds a lien on my van and will possess the title to my van.

If I fail to make my monthly payments, it's known as a default, and the bank then has the legal right to repossess my van. I can be considered to be in default even if I've only missed one payment. The bank can send a representative to take the van from me, though not while I'm in it. Repossession can legally take place anywhere the collateral is out in the open. The repossession team can take the van from my private property but can't commit a burglary to repossess the van. This means the team can't break and enter my locked garage.

Once the creditor repossesses the collateral, the creditor will normally resell the item in order to recover the amount still owed on the loan. The proceeds of the sale will be credited toward the amount I still owe. However, I'll still be responsible for any remaining amount as well as any fees associated with the repossession and sale. For example, let's say I owe $10,000 on the van when I default on the loan. The bank repossesses and sells the van but for $6,000. I still owe the bank $4,000 for the van, plus the cost of the repossession.

Foreclosure

Now, let's take a look at my loan for the building. This loan is a mortgage because it's a loan for real property that's secured by the real property for which I'm taking the loan. When I purchase my building, I'm going to purchase it using a mortgage loan from my bank. My bank is the creditor, and I'm the debtor. The building will serve as collateral for this secured loan. I'll make monthly mortgage payments on the building.

If I fail to make payments on the building, the lender can seize the building in order to pay off my mortgage. This type of seizure is called foreclosure. Foreclosure occurs when a creditor claims property from a debtor who has failed to make his or her mortgage payments. Foreclosure proceedings are normally initiated once a debtor is three to four months late making payments.

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