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I'm not a legal professional or student, curiosity brought me here.

I'm trying to figure out how ownership applies items that are financed, and to items that are used as collateral to obtain that financing. I thought that if I got a mortgage, or something like a title loan, than the lender maintains ownership of the property/collateral until the financial obligation is payed off. Recently someone told me that it's more complicated than that and I'm trying to get my head around it.

I think I understand how the police would eventually get involved in the mortgage situation, but what about the one with collateral used to secure a loan? I know that in the case of a car, the lender can repossess to vehicle if they are able to, but at what point does not paying a secured become a criminal matter? Would it be possible for that lender to obtain a warrant of forfeiture and get the local police involved?

Any answers or sources I could use to find them myself would be really helpful. Ultimately I am just trying to understand who owns collateral in a secured loan.

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    I've answered based upon U.S. law. This is an area in which countries outside the Anglo-American common law tradition would be very different and where there would be meaningful differences between U.S. and non-U.S. law. – ohwilleke Apr 14 '17 at 23:26
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Overview

In the United States, there is a division between loans with real property collateral (called "mortgages" in most of the country, "deeds of trust" in much of the Western United States, and something else entirely in Louisiana and Puerto Rico if you are using the technical terminology), and loans with collateral that is not real property (sometimes called "chattle mortgages" or "consensual liens" but usually just called "security interests").

A creditor with a secured debt must generally "perfect" those rights by publicly filing them (in the real estate records of the county where the real estate is located in the case of real property and usually with the state secretary of state in the case of personal property) for those rights to be fully effective vis-a-vis third parties. This reflects policy concerns about "secret liens" being used to make people seem like they have more assets from which unsecured creditors can collect their debts than they appear, effectively defrauding unsecured creditors making decisions to extend credit on the basis of the assets that the debtor appears to own (which involves cases where suing the penniless debtor for fraud is usually futile in the short term).

The law governing the vast majority of security interests in every U.S. state is Article 9 of the Uniform Commercial Code (UCC 9)[Note 1], which adopts what is known as a "lien theory". Indeed, even if the transaction is structured so that the lender is formally the owner of the property, under UCC 9, the debtor remains the true owner of the property legally and the substantive law is the same as it would be if the rights were structured as a lien.

This means that personal property security interests, like real property mortgages, are treated as a legal right of a creditor in the collateral providing the creditor only with the rights set forth in the statute, that leaves the debtor as the owner of the collateral. Usually more contractual creditor rights are spelled out in a written contract called a security agreement.[Note 2]

Generally speaking, any kind of property can be subject to a security interest, but in the case of household goods, only "purchase money security interests" that finance the purchase price of the goods are allowed. Household goods can't be used as collateral for other loans. (This is due to law outside the Uniform Commercial Code.)

[Note 1]: The Uniform Commercial Code is a model statute promulgated by a non-profit state legislator's group which states are free to enact or not as they deem fit, with or without modification. The linked version if the most recent, 2010, version of the model statute which is enacted in some form in every U.S. state, sometimes with slight modification in terms of statutory form, for legislative cross-references, or for unique state practices in some area for that state innovates.

[Note 2]: There are some "lies to children" buried in this explanation that gloss over some technical nuances of the law to simplify the concepts that usually apply. For example, while I use the terms "debtor" and "creditor", it is possible for someone who doesn't have a direct obligation to the creditor to allow property owned by them to be used as collateral in much the same way that someone who is not obligated directly on a debt might still be a guarantor of that debt.

at what point does not paying a secured become a criminal matter?

Not paying a secured debt, even if law enforcement is involved in repossessing the collateral as described below, is not a crime. This is a "civil" duty of law enforcement, not a criminal one.

You can commit crimes involving secured loans, however. The most common would be to intentionally destroy or conceal or abscond with or illegally sell the collateral without the creditor's permission. This would be investigated and handled like any other property crime. It is just another version of the crimes of theft and vandalism.

It is also possible to commit rather elaborate fraud crimes involving secured loans, usually involving complicated related party transactions and fraudulent appraisers. But, that is beyond the scope of this post and there is really no merit in explaining in depth here how to commit these crimes.

It is hard to know how common these crimes are because they are lumped in with arson, theft and fraud in most crime statistics, the vast majority of which don't involve security interests or collateral.

Security Interests In Bankruptcy And Probate

Security interests (both in real property and in other property) (sometimes also called "liens" or "encumbrances" which are broader terms that include involuntary security interests such as tax liens, as well as voluntarily entered into security interests), also have significance even when they aren't actually enforced in the course of a foreclosure or non-judicial repossession action, because a security interest is legally a form of "property right" as opposed to a "contract right."

This means that the rights of a secured creditor in collateral for the debt owed to the creditor has priority over all kinds of unsecured claims based upon contract rights or tort liability or even criminal restitution or fine liability, in bankruptcy. The bankruptcy can wipe out the rights of a secured creditor to remedies other than taking the collateral (e.g. to obtain a money judgment in court and garnish wages), but the rights in the collateral have priority. Bankruptcy will temporarily prevent secured creditors from enforcing their rights for a few months due to something called the "automatic stay", but once the automatic stay expires or the secured creditor obtains permission from the bankruptcy court to go forward, the secured creditor's rights in the collateral or the economic equivalent of those rights, remain viable and aren't discharged.

This also means that in a probate case, even if the right to make a claim against the probate estate is wiped out, for example, due to failure to file the claim by a deadline, the the secured creditor continues to have the same rights against the collateral that the secured creditor would otherwise have (and indeed, more, since most loans make death of the debtor an event of default under the loan even if all payments are made on time).

Leases v. Security Interests

An area of law with heavy overlap with security interests is the law of personal property leases. Sometimes a transaction that could be structured as the purchase of personal property with a loan where the personal property purchased is used as collateral is instead structured as a lease of that personal property with an option right that gives the lessee the right to purchase the property for its depreciated value at the end of the lease term. This is governed by Article 2A of the Uniform Commercial Code.

In these transactions, the lessor of the personal property does retain title to it, even though the transaction is often effectively a financing mechanism. Often personal property leases are used as a financing mechanism because the tax treatment of a lease can be more favorable than the tax treatment of a sale subject to a secured loan for businesses.

Real Property Foreclosures and Related Evictions

The process of foreclosing on real property collateral varies considerably from state to state.

Non-Judicial Foreclosures

In most states, if a debtor is in default, a lender with real property collateral can used a non-judicial foreclosure process, sometimes with rather perfunctory approval by a court following a summary hearing.

In states with "deeds of trust" this process is overseen by a public official known as the "public trustee". In other states, this is handled by the creditor's lawyers.

In Colorado in 2016 there were 7,036 non-judicial foreclosures.

Judicial Foreclosures

Most states also have a secondary process (which is the only process in some states for real property foreclosures) called "judicial foreclosure".

In a judicial foreclosure, after various court filings, various notices and various waiting periods, some sort of foreclosure sale order is issued.

Then, the civil division of the county level law enforcement agency known as the sheriff conducts an auction sale of the property foreclosed upon and facilitates the process of issuing a new deed to the real estate to the winner at the auction sale. Often, only the lender will bid at the auction, sometimes especially when there is considerable equity or a hot real estate market, investors will also bid.

There are ways for the debtor and junior lienholders to make payments to the creditor during the process to cause the foreclosure to be called off. Payments of this kind made before the sale are usually limited to the amount necessary to bring the debt current and called "cure" payments, while payments made after the sale are usually of the entire foreclosure sale amount and are called "redemption" payments. The details and timing vary greatly from state to state.

In Colorado in 2016 there were 780 judicial foreclosures.

Post-Foreclosure Evictions

Following a judicial or non-judicial foreclosure, the new post-foreclosure sale owner gets title to the property and may have to evict the current occupants if they don't leave voluntarily. This is done by bringing an eviction action in court. If the new post-foreclosure owner prevails in that court case, the court orders the sheriff to evict the current occupants (this is sometimes called a "writ of restitution").

If ordered to do so by a court, the sheriff then makes arrangements with the new property owner and on the appointed day, supervises the process of evicting the current residents with much of the actual work done by laborers hired by the new property owner and the sheriff simply keeping the peace during the process as the court's order is enforces.

Evictions are very common. In Colorado in 2016, 36,969 evictions in its limited jurisdiction courts (for cases with less than $15,000 a month of rent) which make up 27% of the limited jurisdiction court caseload, and 303 evictions in its general jurisdiction courts. Of course, most of those cases involve landlord and tenant rather than the aftermath of an eviction, but the process is basically the same.

Uniform Commercial Code Article 9 Enforcement

The process for enforcing a UCC 9 security interest is less elaborate.

Intangible Personal Property

In the case of intangible personal property (e.g. shares of stock or accounts receivable), upon default, the creditor gives notice to the person in control of the intangible property that they are entitled to payment from the collateral and take control of that intangible property until the debt is paid in full or the collateral is exhausted.

This is usually done without resort to the courts or law enforcement. But, a court order could be obtained if the person in control of that intangible property refuses to cooperate. Such a court order would also usually enforced without law enforcement involvement.

Non-Judicial Repossession of Tangible Personal Property

In the case of tangible personal property (from tools to a car to industrial equipment), upon default the creditor is allowed to repossess the property by any means possible that does not give rise to a breach of the peace. There are private sector professionals "repo men" who specialized in repossessing tangible personal property without law enforcement involvement - some states regulate them, some don't.

If you prefer a schematic chart explaining the non-judicial repossession process under the UCC one can be found here.

Many states, including Colorado, have additional non-UCC regulation of the process of repossessing motor vehicles and often require individuals who repossess motor vehicles professionally to be licensed.

The relevant statutory section of the Uniform Commercial Code states:

§ 9-609. SECURED PARTY’S RIGHT TO TAKE POSSESSION AFTER DEFAULT.

(a) [Possession; rendering equipment unusable; disposition on debtor's premises.]

**After default, a secured party:

(1) may take possession of the collateral;** and

(2) without removal, may render equipment unusable and dispose of collateral on a debtor's premises under Section 9-610.

(b) [Judicial and nonjudicial process.]

A secured party may proceed under subsection (a):

(1) pursuant to judicial process; or

(2) without judicial process, if it proceeds without breach of the peace.

(c) [Assembly of collateral.]

If so agreed, and in any event after default, a secured party may require the debtor to assemble the collateral and make it available to the secured party at a place to be designated by the secured party which is reasonably convenient to both parties.

Basically, UCC 9-609(b)(2) legalizes what would otherwise constitute the criminal of simple larceny (i.e. theft) of tangible personal property in the absence of this statute, when justified by a written security agreement and a good faith belief of a creditor that the loan secured by that collateral is in default.

There are no court records (obviously) showing the number of self-help repossessions of collateral in Colorado that could be used to compare to the other numbers I reference in this Answer.

In a variation on this, tangible personal property that is in the creditor's possession all along until the loan is repaid is called a "pawn" transaction.

Judicial Repossession Of Tangible Personal Property

If the creditor cannot repossess the property without a breach of the peace or prefers not to repossess the property privately, the creditor can bring a court case known as "replevin" or "claim and delivery" seeking a court order (sometimes called a "writ of restitution" although terminology may vary from state to state and a "writ of forfeiture" wouldn't be a surprising name for this kind of order in some state) demanding the turnover of the tangible personal property to the creditor that is directed at the sheriff who supervises the process of having people hired by the creditor carry out the order so as to avoid a breach of the peace. Sometimes a "writ of assistance" which authorizes the sheriff to enter a locked building to access the collateral is also obtained.

The sheriff then carries out or supervises private persons who carry out the court's writs to repossess the property.

These kinds of cases are relatively common. For example, in Colorado in 2016, there were 343 replevin cases involving property that is arguably worth $15,000 or more in its general jurisdiction courts, and 391 in its limited jurisdiction courts that handle smaller cases, for a total of 734 cases a year, most of which involve repossession of collateral (although replevin is a type of case that can also be used to recover personal property that belongs to you in someone else's possession for any other reason as well).

Difficult To Move Tangible Personal Property Collateral

In both the non-judicial and judicial repossession processes, if the tangible personal property is too heavy to move easily, it is locked (e.g. with a chain and padlock) in a way that makes it unusable to someone without a key which is given to the creditor.

Post-Repossession Disposition of Tangible Personal Property Collateral

Once a credit obtains tangible personal property collateral under UCC 9 either judicially or non-judicially, the creditor usually as a duty to make commercially reasonable efforts to sell the collateral and to apply the proceeds to the debt (with any excess proceeds returned to the debtor).

In certain exception cases with proper notice, the creditor can instead do a "strict foreclosure" that completely extinguishes the debt and vests title of the tangible personal property collateral "in kind" in the creditor without the need for a sale.

If the tangible personal property is collateral for more than one loan, the foreclosing creditor has dealings with the other secured creditors with a security interest in the collateral as provided in UCC 9.

A sheriff is not involved in the sale process as the sheriff would be in the case of real estate or in the case of property seized to satisfy a money judgment.

  • And from what I can discern, the special status of vehicles is that only vehicles are left "out in the open" where they can be taken without trespass: you can't break in to a garage to repossess a car. – user6726 Apr 14 '17 at 20:26
  • @user6726 The legal standard is whether there is a "breach of the peace" necessary to repossess non-judicially. This term is quite vague and is interpreted differently from state to state and from case to case in a fact specific way. A debtor has a right to sue if the repossession was done with a breach of the peace and in some circumstances such a repossession would also be a crime. Similar ambiguity is involved in bail bondsman arrests of their charges. Vehicles are special mostly in who the security interest is "perfected" via title documents rather than state filings. – ohwilleke Apr 14 '17 at 20:37

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