Options for Dealing With the Voluntary Return of Collateral
Dealer Question: I've recently had a number of my BHPH customers drop off their cars.
By Michael W. Dunagan
Dealer Question: I've recently had a number of my BHPH customers drop off their cars. I'm told that they have purchased a newer (or new) car and been advised to simply return the old car to me instead of trading it in. They have apparently been told that there will be no repercussions if they do so. What are my options in these cases?
Answer: In the days before credit became cheap and second-chance lenders and credit sellers began financing deeper into the sub-prime pool, the voluntary return of a vehicle was usually the result of a job loss or financial problem that prevented the debtor from making car payments. The voluntary return was considered to be a good thing, since it eliminated the need to repossess the car and the attendant risks and costs associated with the repossession process. Further, if the debtor signed a voluntary waiver of rights, the creditor's obligation to send repossession notices, to hold the car during the waiting period, and to account for the resale proceeds, were eliminated.
And when a BHPH customer traded the car to another dealer, and the original dealer got a pay-off check, at least the principal balance was paid off, generating more operating capital.
The problem comes, however, when the customer has no intention of trading in the car, and instead returns the car to the lien holder with the expectation that the lien holder will simply write the balance off the books. And it's especially galling when it appears the debtor was counseled to do so.
In this scenario, the lien holder does have options and should analyze the legal implications of the debtor's action. First, the return of the vehicle and the expressed intention to no longer make payments is a default on the contract. The return of the vehicle does not automatically extinguish the debtor's obligations. Second, the return of the vehicle is a repossession, even if the return is voluntary. Third, the creditor must choose among the various options available for handling disposition of the collateral as any secured creditor would after a repossession. Forth, depending on the type of disposition method chosen, the creditor may be able to proceed with an attempt to collect any resulting deficiency remaining after applying the proceeds of resale of the collateral against the balance owed.
In my book, Texas Automobile Repossession: A Lien Holder's Legal Guide, I outline in detail the options a creditor has for disposing of collateral. The rules of repossession and post-repossession procedures come from the Uniform Commercial Code, which has been adopted in Texas as the Texas Business and Commerce Code. There's not enough space here to cover all the options, but a quick summary of the disposition choices is offered:
1. The Signed Waiver. By signing a post-default agreement to waive notice and agree to the creditor's acceptance of the collateral in satisfaction of the indebtedness, the debtor consents to the creditor's immediate reclamation of the vehicle in exchange for the creditor's forgiveness of the balance owed. Many BHPH dealers seek these agreements after repossessions as a way to speed up the process of placing vehicles into inventory and eliminating sending notices.
2. Strict Foreclosure. The use of strict foreclosure (or acceptance of collateral in satisfaction of the indebtedness) is initiated by sending the appropriate notice to the debtor and waiting 20 days. If no written objection is received from the debtor, the strict foreclosure becomes final and the collateral reverts to the ownership of the creditor. Again, the balance owed is forgiven. (There are some limitations to the use of strict foreclosure based on the amount the debtor has already paid on the account. See Texas Automobile Repossession: A Lien Holder's Legal Guide for details.)
3. Private Sale. If the creditor wishes to preserve any deficiency that exists after the disposition of the collateral, he or she must use the private sale method of disposition. (There is a procedure for a Public Sale, but it is generally unsuitable for use by dealers and most other car creditors.) Use of a private sale requires sending a lengthy notice containing a list of information mandated by the Uniform Commercial Code. It is also necessary to dispose of the collateral in a “commercially reasonable” manner, and to account to the debtor for any surplus or deficiency that remains after the resale. There are limitations on how the collateral can be sold and to whom it can be sold in meeting the “commercially reasonable” requirement.
If, after going through the necessary steps, there is a deficiency, the creditor can report the deficiency to credit reporting agencies and can seek to collect the deficiency through the civil legal process that is available to all creditors. But, if the resale results in a surplus over the amount owed, the secured creditor has to pay the surplus to the debtor.
Realistically, a car creditor should not carry high hopes of collecting a deficiency judgment from a subprime customer. Texas law makes it extremely hard to collect civil judgments. But obtaining a judgment and reporting bad credit may give the creditor some leverage in collection attempts.
The private sale procedure involves more work for the car creditor. That's one of the reasons that strict foreclosure has become so popular in the last decade or two, especially among BHPH dealers. But the extra work may be justified if a car creditor wants to make a point to a defaulting debtor who wants to be able to simply walk away from the obligation. And the other dealer who recommended that the customer return the vehicle with an assurance that there would be no negative consequences may have an angry buyer on his hands.