Repossession and Sale of Collateral (DC)
Last Reviewed December, 2021
This section covers Repossession of Collateral, other than a loan directly secured on real estate or a direct motor vehicle installment loan. The following should be read in conjunction with Uniform Commercial Code UCC Article 9/ D.C. Code Ann. Title 28, Subtitle 1 - Art. 9, Secured Transaction provisions. The Uniform Commercial Code and the corresponding (almost identical) DC Code, provide the basic rules for the repossession and disposition of collateral while the D.C. Municipal Regulations and D.C. Code Title 28 – Chapter 38, detailed in the Summary, provide some more specific rules.
For Maryland credit unions: Repossession and Sale of Collateral (Maryland)
Repossession and Sale of Collateral (DC): Summary
Under District of Columbia Code, if after any contractual default by the buyer, the holder can repossess through judicial or self-help repossession. During the thirty-day period after a default consisting of a failure to pay money the creditor may not because of the default (A) accelerate the unpaid balance of the obligation, (B) bring action against the debtor, or (C) proceed against the collateral.[D.C. Code Ann. § 28–3812(b)(1)] A debtor may cure a default by paying the total unpaid sum, without acceleration, at any time before the creditor has first (A) notified the debtor that he has elected to accelerate the unpaid balance of the obligation because of default, (B) brought action against the debtor, or (C) proceeded against the collateral.[D.C. Code Ann. § 28–3812(b)(2)] A debtor may redeem collateral a creditor at any time within fifteen days of the creditor’s taking possession of the collateral, or until the creditor has either disposed of the collateral, entered into a contract for its disposition, or gained the right to retain the collateral in satisfaction of the debtor’s obligation.[D.C. Code Ann. § 28–3812(c)(1)]
The parties may agree to have the credit, or an agent of the creditor (of which the creditor is civilly liable for their actions) to “self-help” repossess the collateral. If the creditor and debtor agree to take this route, without breach of the peace1 and with consent of the debtor.[D.C. Code Ann. § 28–3812(d)] If the party conducting the repossession (or an agent thereof) breaches the peace, or even questionably breaches the peace, they can be held responsible for damages in court.
There are a number of Code provisions that refer to consumer credit sales of goods or services and to direct installment loans served by interests in goods, but it is not likely that they would be needed very often in the financial industry. If an issue does arise that falls into these categories, please refer to D.C. Code Ann. § 28–3812(e)(1).
Keeping in mind that the D.C. Code requires prior consent from the debtor to take possession of collateral, generally, the repossession of a car from a public street, parking lot, or private driveway will normally not constitute a breach of the peace. However, once the debtor objects, any further action by the creditor may constitute a breach of the peace. In addition to actions that reasonable minds can agree breach the peace, courts have also found that the use of a law enforcement officer in repossessing collateral in the absence of judicial process constitutes a breach of the peace and can therefore expose the creditor to damages. As a general rule, if there is any conflict when attempting to repossess collateral, it is wise to pursue judicial remedies.
Additional requirements for Vehicle Repossessions:
Specific to the District of Columbia, within one hour after repossession of a motor vehicle, the individual who performed the repossession shall notify the Metropolitan Police Department of the repossession and shall provide the following data:
- The name and address of the registered owner;
- The name and address of the repossessor;
- The name and address of the holder;
- The tag number and description of the vehicle;
- The location from which the vehicle was repossessed;
- Where the vehicle is located;
- The date and time of repossession; and
- Other information required by the Metropolitan Police Department.[16 DCMR §16-340.4]
Failure to follow these requirements will constitute and unfair trade practice and the creditor would be subject to liability.
PACER Usage in Repossession
To avoid a potential problem with a violation of the Automatic Stay with a member who you believe may be ready to file for bankruptcy, check PACER to see if there has been a bankruptcy filing by your member immediately before your repossession agent picks up the vehicle.
Also recheck with PACER right before it is sold. If collateral is sold prior to a bankruptcy filing, it is not property of a bankruptcy estate.
Liens must be perfected within 30 days otherwise the loan can become an unsecured loan. Tow services/storage lots charges can take precedence over your lien if you are slow to perfect.
The Rapson Rule
Your credit union’s approach to insider discounts on repossessed collateral, commonly referred to as “sweetheart sales”, could expose your credit union to risk. According to the 2001 revision of the Uniform Commercial Code and the associated “Rapson Rule,” (UCC Permanent Editorial Board member Donald J. Rapson) your credit union is responsible for insider discount costs or subject to litigation.
Prior to the Rapson Rule, sweetheart sales allowed insiders to purchase repossessed collateral at a price below the wholesale value, leaving the deficiency (the uncollected balance after the collateral’s resale) to the original debtor. Insiders, as defined in UCC § 9-102 include:
"Person related to," with respect to an individual, means:
- the spouse of the individual;
- a brother, brother-in-law, sister, or sister-in-law of the individual;
- an ancestor or lineal descendant of the individual or the individual's spouse; or
- any other relative, by blood or marriage, of the individual or the individual's spouse who shares the same home with the individual.
In a typical scenario, a vehicle is repossessed by a credit union and an insider offers the Collections Department an amount lower than retail value. Due to the insider’s influence at the credit union, the insider’s offer is accepted and the original debtor’s deficiency liability increases.
The Rapson Rule allows lenders to resell any repossessed collateral at any price to any insider. However, a sweetheart sale now has a cost, because the Rapson Rule protects the original debtor from discount deficiencies. The original debtor’s deficiency balance is based on the amount of proceeds that would have been realized in a disposition to an unrelated transferee UCC § 9-615 (f). Ultimately, the lender is now responsible for the cost of the insider discounts.
Your credit union should develop a written policy that prohibits the resale of repossessed collateral to insiders unless the sale is at full retail price. Implementing this policy will help limit your credit union’s responsibility for insider discount costs and avoid unnecessary litigation.
1Generally referred to as any situation in which conflict arises