3. WHAT HAPPENS TO THE COLLATERAL AFTER REPOSSESSION (LIQUIDATING THE COLLATERAL) ?

There is a provision in the law that gives consumers the right to “redeem” (get back) the collateral by paying the balance in full plus the costs associated with the repossession.  This right is rarely exercised. (The consumer who cannot make the monthly payment certainly cannot come up with enough money to pay in full.)  In most cases, the creditor ends up selling the goods.

Section 9-610 governs the creditor’s responsibilities in selling the collateral. The key sections are sub-sections (a), (b) and (c).  Note that sub-section (c) permits the secured party to purchase the collateral...

  • ...at a public disposition (e.g., an auction); or
  • ...at a private disposition (e.g., a sale to which only selected purchasers are invited to bid) only if "the collateral is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations."  For example, certain commodities can be purchased by the secured party at a private sale because there is a nationwide, recognized price for them.  The purpose of this limitation is to protect the debtor's interest by preventing the secured party from selling repossessed collateral to itself or others at less than fair market value.
The major issue in most cases is whether the sale of the collateral was “commercially reasonable” (sub-section (b)).  Whether a sale is "commercially reasonable" is a question of fact for the jury to decide in any case where the creditor’s actions are questioned.  What does the term “commercially reasonable” mean?  It is not specifically defined in the UCC.  However, section 9-627 does provide some guidance on the commercial reasonableness of creditors' actions.

<>Ideally, after repossessing a car, the creditor would turn it over to the dealer to re-sell, at retail, from the dealer’s lot.  Doing so would probably result in the highest possible price for the vehicle, thereby minimizing the consumer’s loss.

Is that the reality?  Not according to the FTC staff report, in your reading, which states that "most repossessed collateral is sold by the repossessing creditor for less than wholesale.”  The NCLC report, also in your reading, states that “67% of motor vehicle sales brought prices below fair wholesale market value.”

The experience in Vermont is consistent with the findings of both reports.  The majority of repo’d cars are sent to automobile auctions.  There they are sold to other dealers for less than their market value.  So the consumer almost always ends up owing a "deficiency"--meaning that the car was sold for less than what the consumer still owed on it and the consumer must pay the difference.

Why does this happen so regularly?  According to the FTC report, there is no incentive for the creditor to maximize the consumer’s return  The creditor does not get  to keep any "surplus"--meaning that the car was sold for more than the outstanding debt--and it can sue to collect any deficiency.

In the past, the procedures sometimes used by creditors were very unfair to the consumer.  Here are the facts of a case I investigated a number of years ago:

The consumer purchased a new Chrysler from a dealer in Newport, Vt.  At the end of two years he still owed $2,100 to his bank in Burlington.  He had numerous mechanical problems with the car and was having some financial problems, so he agreed to a "voluntary repossession" (i.e., he either drove the car to the dealership and dropped off the keys or told the creditor where the vehicle could be found and asked it to pick up the vehicle).  He figured--incorrectly--that he would walk away from the deal owing nothing--a common misconception about voluntary repossession.

The bank conducted a "private sale" and bought the car itself for $1,500--the wholesale “blue book” value of the vehicle.  The dealer then paid the bank the $2,100 it was owed.  Meanwhile, the dealer put $300 in repairs into the car, put it on its lot, and subsequently sold it for $2,700.  The dealer then sought to collect from the consumer $600--the difference between the $1500 “sale” and the $2,100 owed.
 

 
Something to think about:
What’s wrong with the scenario described in the last two paragraphs of this section?  Which was the sale that should have determined the consumer’s surplus or deficiency--the private sale to the bank or the subsequent sale from the dealer's lot?  Should the consumer owe a deficiency or get a surplus, and how much?