How to Get Paid When Customers Default

When is an Auto Loan in Default in Texas?

A customer comes to your lot and contracts to purchase one of the vehicles in your inventory. The good news for them is, you offer in-house financing! The customer qualifies and drives away having put very little money down on the car. The car acts as collateral on the loan, and you, as a lender, hold a security interest called a “lien” on the car.

A couple of months down the road, the customer misses a payment. The day after that payment was due, the customer had defaulted on the loan.

From here on, the law varies from state-to-state - if you are not located in Texas please consult with a local creditor’s rights attorney for the specifics applying to your situation in your jurisdiction.

What Rights Does the Auto Lender Have in Texas?

Do You Provide Your Own Financing?

If the answer is yes, then you and you alone are responsible for pursuing your rights against the collateral (the car) and/or the customer. If you’ve contracted with a white-label financing firm, collections might be included in your contract.

Assuming that you provide financing in-house, under Texas law, you have the right to repossess the collateral upon default without petitioning the court. Let’s say you’ve repossessed the vehicle. You can now sell it and apply the proceeds to the customer’s account, but you must wait 10 days from the date of repossession.

In most cases there will be an account deficiency, meaning, the car sold for less than the loan balance and whatever you’ve had to add to that in fees that you are entitled to, contractually (costs of repossession, costs of sale, any legal fees). You now have the right to sue the customer for collection of that deficiency balance. You can also sell the debt to a debt collection agency, who will then take over collection efforts.

What Rights Does the Customer Have?

• The car must be repossessed without breach of the peace;
• The lender must provide written notice of the customer’s right to redeem the car, prior to auction;
• The car must be sold in a commercially-reasonable way after the 10-day redemption period expires;
• The lender must provide the customer written notice of any surplus or deficiency on their account.

What Responsibilities Does the Lender Have?

First, any lender must protect its interest by adhering strictly to the procedural requirements of repossession and sale of the car and documenting each step. That way, if the lender (or purchaser of the deficiency balance debt) later institutes legal proceedings, the evidence showing default and compliance with the law will be available.

If a lender fails to follow the procedure under state or federal law, the customer may have a counterclaim against the lender. For this reason, it is important to keep copies of all notices sent to the customer.

The federal Fair Debt Collections Protection Act (the FDCPA) controls a lender’s actions during collections and is mirrored by the Texas Debt Collection Act, which prohibits a creditor from using abusive collection tactics, including:

• Threats of violence;
• Use of profane or obscene language;
• False accusations of fraud;
• Threats of arrest;
• Threats of repossession of property;
• Harassment by phone with repeated or anonymous phone calls.

And a creditor may not employ fraudulent collection tactics such as:

• Use of a false name;
• Lying about the amount of debt or whether a lawsuit has been filed;
• Mailing documents that look like they are from a court;
• Failing to disclose the owner of the debt.

This behavior may also violate the Texas Deceptive Trade Practices/Consumer Protection act, which authorizes the State Attorney General to act on lenders; behalf.

The Statute of Limitation on Debt in Texas

Texas imposes a four-year statute of limitations on debt - meaning, creditors cannot sue to collect after this time period expires.

Note that debt buyer’s rights were recently restricted by Texas House Bill 996, which prohibits collection lawsuits by debt buyers where the debt has been charged off and the statute of limitations expired, even if the customer had made a payment in the meantime or otherwise reaffirmed the debt orally or in writing.

Bankruptcy and Car Loans in Texas

If a customer is struggling financially and is either in default on the loan or the car has already been repossessed, he or she may be considering filing a bankruptcy petition. How you as the lender are affected will depend upon whether the customer wants to keep the car, and whether he or she files under Chapter 7 or Chapter 13 bankruptcy.

Either way, the customer and the car are both protected by the automatic stay once the bankruptcy petition is filed. The automatic stay “stays” or stops any collection efforts, including letters, phone calls, car repossession, and lawsuit.

If the customer filed Chapter 7 bankruptcy, he or she:

May “surrender” the car to you and have the deficiency balance on the account discharged as unsecured;

May “redeem” the car, meaning pay off the car in a lump sum in the amount that represents current market value (often much less than the remaining loan balance).

If the customer filed Chapter 13 bankruptcy, he or she:

May “surrender” the car and have the deficiency balance discharged;

May pay off the loan arrears over their 3- or 5-year plan, and keep the car if they continue to make the regular monthly loan payment directly to you outside the plan;

If the car is worth less than the loan balance, it may “cram down” the car to market value and pay it off over their 3- or 5-year plan.

And in either case, if the customer files a bankruptcy petition during the 10-day redemption period, the customer can get the car back after repossession. Something to keep in mind. For more information, access the myAutoloan auto loan page.