Leased Car Repossession: What to Know and How to Prevent It

As the cost of purchasing and financing vehicles continues to rise, so does the risk of leased car repossession. According to a report by the Consumer Financial Protection Bureau (CFPB), the rate of vehicle repossessions at the end of 2022 surpassed pre-pandemic levels, with 0.75% of all outstanding vehicle loans assigned to repossession. This increase in repossessions has serious financial consequences for both lenders and borrowers. In this article, we will explore the primary factors contributing to the rise in leased car repossession, the legal and regulatory environments in various states, and the strategies consumers can employ to prevent or delay car repossession.

Primary Factors Contributing to the Rise in Leased Car Repossession

1. Increasing Cost of Vehicles: The average price for new vehicles hit an all-time high of $49,939 in December 2022, up a sharp 32% from $37,851 in January 2020. The average monthly payment for new vehicles has consequently increased, hitting a record high of $736 by mid-2023, compared with only $568 in November of 2019. These rising costs make it difficult for borrowers to keep up with their payments, increasing the risk of repossession.
2. Supply Chain Disruptions and Higher Interest Rates: Supply chain shocks and higher interest rates have driven up the costs of purchasing and financing vehicles. Lenders are increasingly more likely to use third parties, called forwarders, to manage the repossession process. The use of a third party generally increases consumer costs, contributing to the rise in repossessions.
3. Growing Use of Third-Party Repossession Companies: The use of third-party repossession companies, or "forwarders," has increased from 31% in January 2018 to 66% in December 2022. The shift has a direct impact on consumers, as the average repossession costs charged tended to be higher when a forwarder was involved.

Legal and Regulatory Environments in Various States

The legal and regulatory environments in various states impact the repossession process for leased vehicles by determining when and how a lender can repossess a vehicle, as well as the protections consumers have against unfair practices. Some states allow lenders to repossess a vehicle immediately after a missed payment, while others provide a grace period for borrowers to catch up on payments. In some states, lenders must provide a "right to cure" notice before repossessing a vehicle, giving the borrower a specific amount of time to bring their loan current and avoid repossession.

Most states require that the repossession process be conducted peacefully, without breaching the peace. This means that repossession agents cannot use force, enter a locked garage, or move other vehicles to access the targeted car. Additionally, federal laws, such as the Dodd-Frank Act, protect consumers from unfair and deceptive practices by dealers and lenders. The Consumer Financial Protection Bureau (CFPB) oversees the auto lending industry and has issued guidance on repossession practices.

Strategies to Prevent or Delay Car Repossession

1. Bankruptcy Filing: Filing for bankruptcy can be an effective strategy for preventing repossession, as it triggers an automatic stay, halting all collection activities, including repossession. This is true in both Chapter 7 and Chapter 13 bankruptcies. In Chapter 7 bankruptcy, assets are liquidated to pay off debts. If the borrower has fallen behind on car payments, they may lose the vehicle, but reaffirming the car loan can prevent this. In Chapter 13 bankruptcy, the borrower reorganizes their debts and creates a payment plan, allowing them to catch up on missed car payments over time and avoid repossession.
2. Statute of Limitations on Car Repossession: Every state has its own statute of limitations on car repossession, dictating how long a lender has to repossess a vehicle after a borrower defaults on their loan. If the lender fails to repossess the car within this timeframe, they lose the legal right to do so. Most states have a statute of limitations ranging from three to five years for written contracts, such as car loans. If the lender fails to repossess the car within this period, the borrower may be able to keep the vehicle without facing further legal action.
3. "Right to Cure" Period: In some states, lenders must provide a "right to cure" notice before repossessing a vehicle. This notice gives the borrower a specific amount of time, typically 10-30 days, to bring their loan current and avoid repossession. Understanding whether your state has a right to cure period and how long it lasts can be a critical loophole in buying yourself more time to make payments and prevent repossession.
4. Contesting the Sale of the Repossessed Vehicle: Even after a car is repossessed, borrowers still have certain rights. If the lender sells the vehicle for significantly less than its fair market value, the borrower can contest the sale. By challenging the sale price, the borrower may be able to reduce or eliminate the remaining debt they owe after the sale, known as the deficiency balance.
5. Finding Financial Assistance for Car Repossession: When facing repossession, some borrowers may be eligible for financial assistance for car repossession. Government programs, nonprofit organizations, and even some lenders may offer assistance. The U.S. Department of Housing and Urban Development (HUD) offers a program called "Emergency Rental Assistance Program" that can help borrowers with their car payments in certain circumstances.
6. Negotiating with the Creditor: Sometimes, consumers can approach the creditor and negotiate an alternative way to get the car back or reduce or eliminate the debt. This can be effective in situations where the borrower has a valid reason for falling behind on payments, such as a temporary financial hardship. The creditor might agree to a payment plan or accept a lump sum payment to settle the debt and avoid repossession.
7. Loan Refinancing: If a borrower can refinance their loan, they can potentially prevent vehicle repossession. This is typically done with a new loan that has better terms, such as a lower interest rate or longer repayment period. Refinancing can help lower monthly payments, making it easier for the borrower to keep up with their financial obligations and avoid repossession.
8. Getting a Co-signer on the Loan: A co-signer can help a borrower qualify for a loan or improve the terms of an existing loan. If the borrower falls behind on payments, the co-signer can step in and make the payments to prevent repossession. A co-signer with a good credit score and sufficient income can help the borrower secure a loan with better terms, making it easier to keep up with payments and avoid repossession.

In conclusion, the rise in leased car repossession is driven by various factors, including the increasing cost of vehicles, supply chain disruptions, and the growing use of third-party repossession companies. Consumers should be aware of their state's specific laws and regulations regarding repossession and the available strategies to prevent or delay car repossession. By understanding the legal and financial landscape, consumers can better protect themselves and their financial future.