Repossession of Collateral

May a secured creditor use self-help to repossess collateral such as a vehicle?

Yes.  The secured creditor, may use self-help repossession to recover the collateral. UCC 9-609, MCL 440.9609 provides that following a default, a secured party may take possession of the collateral if it proceeds without breach of the peace.

That said, I recommend the following:

1.     Contact the debtor and request permission to repossess the collateral. A debtor in financial trouble may consider this to be a satisfactory arrangement, particularly if return of the collateral will relieve the debtor from the debt. That is a matter of negotiation.

2.     Do not permit the debtor to be repeatedly delinquent in making payments and then suddenly decide to pursue self-help repossession without notice to the debtor. Although there are few appellate decisions governing this situation, the secured lender would be wise to make it very clear to the debtor that if one more installment payment is missed by x number of days, all remedies available under the contract, including acceleration of the remaining debt and all collection remedies (including repossession), may be exercised.

                                               i.     Note:  The UCC provides for a four-year statute of limitations instead of the six-year period for most contract actions. See UCC 2-725, MCL 440.2725.

3.     Notify the debtor by first class mail AND certified or registered mail. Before self-help repossession occurs, the secured creditor must notify the debtor that the loan is in default and that all terms of the agreement will be enforced, including acceleration of the remaining balance if the delinquent payment is not brought up to date immediately. Then, after allowing sufficient time for payment to be made, self-help repossession may go forward.

4.     Repossess the collateral without breaching the peace.  That is, preferably take it when the debtor is not around. The agent who is conducting the repossession is not allowed to break into any structure. Instead, he or she must be able to peacefully secure possession of the collateral either by being invited onto the premises or by finding the collateral outside (such as a vehicle on a driveway).

                                               i.     Note well:  Carrying out the repossession is generally considered to breach the peace if the debtor objects to the repossession of the collateral. To return to the example of a secured lender repossessing a vehicle in a driveway, assume that a tow truck is backed up to the vehicle and the vehicle is in the process of being lifted and towed. If the debtor runs out of the house, verbally objects to the car’s being taken, and physically attempts to block the tow truck, the lender should stop. If the lender continues the repossession at this point, it could very easily be considered a breach of peace. The lender should remove the car from the tow truck and simply drive away. The next step for the creditor is a judicial remedy: claim and delivery.

5.     Strictly comply with the terms of the security agreement. Even if the debtor voluntarily surrenders the collateral, the secured creditor must strictly comply with the terms of the security agreement when it disposes of the collateral. The creditor must inform the debtor if recovery of the collateral is to be used as a complete repayment of the debt. Likewise, if the creditor intends to liquidate the collateral and then sue the debtor for any deficiency balance, the security agreement should also be followed to the letter.

6.     Inventory the vehicle and return any personal property to the debtor.  Any personal property contained in a vehicle or any other repossessed collateral must be returned to the debtor. A prudent secured lender will immediately take an inventory of any property that has become attached to the collateral and is not strictly a part of it so that it can be itemized and returned to the debtor. It is not uncommon for a debtor to claim that expensive property is a part of the collateral that has been repossessed by a secured lender. For example, debtors have been known to claim that an expensive ring or watch was in the glove compartment of a repossessed vehicle.

7.     A detailed inventory and proof that a search was conducted may help to avoid groundless allegations. A repossession agent should be advised to take a sufficient number of photographs or digital pictures of the repossessed property.

8.     File the Certificate of Repositions with the Secretary of State.

9.     Before disposing of the collateral, provide the debtor with the required disposition of collateral notice required by MCL 440.9613.   I have attached a sample letter containing the required text.

SAMPLE

[For a public disposition:]

We will sell [or lease or license, as applicable] the [describe collateral] [to the highest qualified bidder] in public as follows:

We will sell [or lease or license, as applicable] the [describe collateral] privately sometime after [day and date].

You are entitled to an accounting of the unpaid indebtedness secured by the property that we intend to sell [or lease or license, as applicable] [for a charge of $_____________]. You may request an accounting by calling us at [telephone number].