Texas Laws on Voluntary Repossession

If someone owes money on a vehicle but can't pay, the lender has the legal right to send a tow truck driver to repossess it and to sell it at public auction to recoup the outstanding debt. But what if the borrower simply turns the vehicle over to the lender?

While this isn't technically a repossession, it is frequently termed a "voluntary" repossession. Some states may have laws specifying the procedure to be followed in a voluntary repossession, but Texas does not. However, general debtor/creditor laws answer most consumer questions about voluntary repossessions in Texas.

Sometimes a buyer bites off more than they can chew financially when it comes to a car loan. The desire for a particular car or truck can overwhelm natural prudence that suggests they can't afford the monthly loan payments. Or the buyer may lose their job or suddenly incur other debts that makes once-reasonable car payments no longer possible. In either case, the buyer/borrower can no longer make their auto loan payments.

In these circumstances, the buyer may relinquish the car to the lender. This voluntary surrender means that the vehicle is left in the possession of the lender, but that doesn't alter the buyer's responsibility under the loan contract. The lender has the right to sell the vehicle at auction, and if it receives enough money for the vehicle to pay off the debt, plus the costs of the sale, the borrower is off the hook. If the vehicle sells for less than that amount, the lender can look to the borrower for the remainder due on the loan.

The Uniform Commercial Code is a model statute adopted in most states, including Texas. Article 9 of the UCC specifies the procedures for repossession of vehicles in cases when a borrower defaults on their vehicle loan. This has been enacted in Texas as Business & Commerce Code Section 9.609. It provides that a creditor has the right to seize a defaulted vehicle without a court order if they are able to do so without committing a breach of peace.

The Texas repossession statute specifies the type of notice that the lender must give to the borrower after repossession and before sale. It also outlines the sales procedure and what happens in case the vehicle is sold for less than the outstanding loan balance, plus fees associated with repossession, storage and sale.

Most of the Texas repossession laws address the right of the lender to use self-help to take the vehicle back from the borrower. Obviously, these are not applicable to voluntary repossession, but the laws about selling the repossessed vehicle at auction and the right to a deficiency judgment do apply.

The procedure for voluntary repossession in Texas starts with surrender of the vehicle to the lender. Generally, the borrower should notify the lender that they can no longer make payments and wish to return the car before it is repossessed. The parties agree where and when the vehicle is to be surrendered, and the borrower hands over the vehicle and keys. The lender has the borrower sign documents stating their intention.

At this point, the lender arranges for the vehicle to be sold at auction. Texas rules require the auction to be held at a time and place that is judged reasonable. If the vehicle sells for well under fair market value, it may be deemed an unreasonable sale.

If the sale is reasonable, the lender will notify the borrower of any remaining amount due under the loan agreement. This includes a deficiency amount if the sale amount was less than the outstanding loan, plus the costs of the sale. In that case, the borrower would owe the lender this amount.

If a car owner surrenders the vehicle to the lender, and the car is sold, the lender can file a lawsuit to collect any deficiency amount remaining after the sale. Lenders who sue borrowers for deficiency balances after voluntary repossession can also collect other fees associated with the repossession of the vehicle, including legal fees if that was specified in the loan contract. Most collateral loan contracts do entitle the lender to seek attorney fees if they are obliged to bring suit to collect money due under that agreement.

For instance, if a car is surrendered to the lender with an outstanding loan balance of $25,000 and it sells for $16,000, the borrower still owes the lender $9,000, regardless of the fact that the car now belongs to someone else. If the lender is forced to sue the buyer to get a deficiency judgment, and incurs $10,000 in attorney fees to do so, they may be able to get a judgment against the borrower for $19,000.

Note that consumers who agree to a voluntary repossession of their car save the lender the costs of having to repossess it. Those repossession costs will not be attributed to the borrower.

While a borrower unable to make their car payments may feel that they have made the responsible choice to surrender the vehicle to the lender, voluntary repossession leaves negative marks on the borrower's credit report. All repossessions, voluntary or involuntary, have a negative effect on the borrower's credit report.

Typically, the main negative credit marks caused by voluntary surrender involve missed or late payments, repossession and collections. A borrower usually has several missed or late payments before surrendering the vehicle, and each one can lower credit scores by many points. The repossession will also be reported to the credit bureaus and is likely to show up on your report. Finally, if the lender sues the borrower for a deficiency or sends the debt to a collection agency, this can also impact the borrower's credit score. These items stay on a credit report for seven years.

Given the credit hit a borrower will take by surrendering a vehicle to a lender, it makes sense for a struggling borrower to consider other options. One option is to work with the lender to find another solution to the issue. Lenders may be flexible since they do not want to repossess and sell a vehicle. They may be willing to work out another plan, negotiate a better interest rate or lower the monthly payments.

A lender may also be willing to allow the borrower to sell the car privately for more money. Selling at auction is not likely to get as much as a private sale. Reselling for more means that a deficiency balance would be more affordable. Alternatively, a borrower may be able to lower their monthly debt payments by consolidating several loans or debts into one. That is one way to get a lower interest rate or a longer payment term.

While the lender will ultimately sell the vehicle after repossession, they may not get the most favorable price. Working with the lender, a borrower may be able to sell the car privately and recoup a greater percentage of the outstanding loan, making it easier to pay off the remaining balance.