Secured Transactions

If a debtor defaults on his obligations under a secured transaction, the secured party may foreclose on the security interest. Foreclosure can be accomplished in different ways. The secured party may calculate the amount of the debt owed and sue the debtor without taking possession of the property. Alternatively, unless the parties have agreed otherwise, the secured party may take possession of the collateral property and either keep it or sell it. In either case, if the value received by the secured party does not fully satisfy the debt, the secured party may sue the debtor for the deficiency.

In most states a secured party may take possession of the collateral without judicial involvement if this can be accomplished without a breach of the peace. For example, the secured party may repossess a vehicle if it is parked outdoors. If, however, the agent of the secured party must break into a garage to repossess the vehicle, such action would be a breach of the peace because it would require breaking and entering, a criminal offense.

If a consumer has defaulted on a secured transaction but has paid 60 percent or more on the debt, most states prohibit a secured party from taking the security and keeping the windfall. In such cases the secured party may either sue in court for the money outstanding or take the property and return part of the money. In other situations a secured party may be entitled to any excess value or income that results from the debtor's default.

The retention of collateral by a secured party after the debtor's default is called strict foreclosure. If a secured party decides to keep collateral in satisfaction of a debt, the secured party must send written notice to the debtor. In transactions involving collateral other than consumer goods, a secured party may be obliged to send notice of the strict foreclosure to any other parties who have security in the collateral property. If a party objects to the strict foreclosure, the secured party must sell or otherwise dispose of the collateral. If no other party objects to the strict foreclosure, the secured party may keep the collateral.

A secured party who sells or leases collateral after a debtor defaults may charge the debtor for reasonable expenses incurred in the sale or lease. This can include attorneys' fees and court costs. The money made from a sale of collateral rarely satisfies a debt because such sales do not bring favorable prices. If there is a surplus of money after the collateral is sold, all expenses are accounted for, and the sale or lease is applied to the debt, other parties holding a security interest in the collateral must be paid with the surplus money.

Unless the parties have agreed otherwise, a debtor who is in possession of the collateral and who has defaulted on the obligations in a secured transaction has the right to redeem the collateral before the secured party takes action. To avoid foreclosure of the security interest by the secured party, the debtor may pay the unpaid balance of the debt secured by the collateral, as well as any reasonable expenses incurred by the secured party in taking, holding, and preparing the foreclosure. This does not mean the debtor must pay the entire amount of the debt; rather, the debtor must make those payments that are in default. Some security agreements have an acceleration clause that makes all payments due immediately upon default, but a court may hold that such a clause should not be enforced if the debtor has brought the payments up to date before the secured party has acted on the delinquency. A secured party who violates default provisions may be liable to the debtor for losses resulting from that conduct.