Defaults Flashcards
What is default?
It is when the debtor has breached the contract - not really defined in Article 9, it is whatever is in the contract.
Once a debtor has defaulted, what can an Article 9 secured creditor do?
- Self-help repossession;
- Repossession by judicial action;
- Strict foreclosure;
- Sale;
- The action for a deficiency judgment.
What are the rules surrounding self-help repossession?
A creditor may use self-help repossession, as long as it does not breach the peace. A breach of the peach occurs when the secured party’s actions are likely to cause violence.
This is a debtor protective standard. Thus, the relevant question is not whether or not an actual fight broke out, but whether the secured party did something provocative or likely to cause violence.
A repossession made over any protest by the debtor, however mild the protest, constitutes a breach of the peace. If the repossesor misuses the color of law, by for example impersonating a law enforcement officer, he or she has used constructive force, and therefore has breached the peace.
What happens if a creditor breaks the rules surrounding self-help repossession?
Civil and criminal penalties attach to creditor’s misconduct:
- Repossession when the collateral is in debtor’s home - home enjoys a zone of privacy. Creditor may not enter debtor’s home without voluntary and contemporaneous consent.
- Respossession when the collateral is outside the home - there is more latitude for the creditors. Creditor may take the collateral so long as there is no debtor objection.
What is repossession by judicial action?
If the secured party chooses not to resort to self-help repossession, he or she may get a judicial writ (a writ of replevin), ordering the sheriff to obtain possession of the collateral and deliver it to the secured party.
What is strict foreclosure?
Strict foreclosure occurs when the secured party retains the collateral in full satisfaction of the debt still owed. In other words, the creditor lawfully retains the collateral and the debt in turn is cancelled.
How does a creditor strictly foreclose?
The secured party must send a written proposal to retain the collateral in satisfaction of the debt.
The proposal is sent to debtor and secondary obligor, if the collateral is consumer goods.
When the collateral is not consumer goods, the notice is sent to debtor and other secured parties who have told the foreclosing creditor of their security interest in the collateral, as well as perfected creditors and secondary obligors.
If any of the notified parties objects within 20 days after the notice is sent, strict foreclosure will not be allowed. Instead, the collateral must be disposed of by sale.
What is the 60% rule with consumer goods?
If the collateral is consumer goods and the debtor has paid 60% of the loan in the event of a non-PMSI or 60% of the cash price in the event of a PMSI, strict foreclosure is not allowed. Instead, the secured party must sell the collateral within 90 days or be liable in conversion.
How does a sale of collateral work?
The secured party may sell the collateral and apply the sale proceeds to the debt. The secured party chooses whether the sale will be public (i.e. a public auction) or private.
Every aspect of the sale must be commercially reasonable.
Prior to the sale, reasonable notice must be sent.
What happens when the collateral does not pay off the debt owed?
The secured party can proceed against the debtor for a deficiency judgment.
What is the debtor’s limited right of redemption?
The debtor’s right to redeem the collateral is cut off once the secured party has resold or completed a strict foreclosure.
To redeem, the debtor must pay the missed payment(s) plus accrued interest and creditor’s reasonable expenses, including attorney’s fees.
If the security agreement contains an acceleration clause (which permits the creditor to declare the full balance due in the even of default), to redeem, the debtor must pay off the entire debt plus interest plus expenses.
