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UCC Lien Holder Rights: What Can They Do If I Default?

Defaulting on a loan can be scary. Your lender may have the right to take certain actions, like repossessing your home or car that secured the loan. This article looks at what rights lenders, also called “lien holders,” have under the Uniform Commercial Code (UCC) if you default.

What is a UCC lien?

When you take out a loan to buy something valuable like a house or car, you usually sign a security agreement. This gives the lender a “lien” or legal right to take the property if you don’t repay the loan. Liens that give lenders rights over personal property like cars are called UCC liens because they’re based on UCC rules.

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Repossession

If you default, the biggest right your lender has is to repossess, or take back, the home, car or other collateral you put up for the loan. State laws might require a notice before repossessing your property. But once proper notice is given, the lender can seize the property, sell it, and use the money from the sale to pay off your loan.

Lenders don’t need a court order to repossess peacefully. But they can’t trespass or breach the peace doing so. No threatening force or violence! If you refuse to give up the keys or leave the property, the lender has to go to court .

What happens after repossession?

With a car: The lender usually sends you a notice saying they will sell the car at auction unless you pay off the loan first. With a home: Foreclosure laws in your state apply. Usually the lender has to give you time to catch up payments before taking the home.

Lenders must send you notice saying if the sale price was less than what you owed, you still owe them the difference. And if the sale brought in more than you owed, you might get those “surplus funds.” Make sure you get any leftover money!

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Deficiency judgment

If selling your repossessed home or car didn’t bring in enough to cover what you owe the lender, most states allow lenders to sue you for a “deficiency judgment” to collect the remainder. So they can garnish your wages or put liens on your other property .

A few states don’t allow deficiency judgments after some types of loans, like “purchase money” auto loans or mortgages. You’d have to check your state laws. Getting a lawyer would help understand what defenses you have.

What if I file bankruptcy?

Bankruptcy usually makes lenders stop collection efforts, including repossession or deficiency lawsuits. But bankruptcy law allows lenders to ask the court to lift the “stay” and let them repossess property if you’re not making payments.

You also usually have to give secured property back to lenders or pay them its value, even in bankruptcy. Talk to a bankruptcy lawyer to understand how this works.

Alternatives to repossession

No one wants their property taken. Before defaulting, talk to your lender about alternatives like:

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• Reinstatement: Paying the loan fully up-to-date
• Forbearance: Temporary reduced or suspended payments
• Modification: Permanently changed payment amount
• Selling the property yourself
• Voluntary repossession: Giving back the property

If you explain your situation, lenders may work with you. But they don’t have to agree. Still, it never hurts to ask! Be proactive so you understand your rights.