When you get a loan to make a large purchase – such as a car, house, or furniture – included in the loan papers is an agreement between you and the lender stating that the property is collateral for the loan.
Collateral can also be required for other loans as well. The collateral does not have to be related to the purpose of the loan. For example, businesses can obtain loans to cover short-term expenses and use equipment or even accounts receivable as collateral.
The collateral is a way for the lender to decrease their risk and protect against the possibility that you might default or not pay back the loan. If you do not pay back the debt or fall behind in payments, you give up your right to the collateral property and the creditor can take it. This is called repossession.
The most common cases of repossession are when a lender repossesses a car. Cars are movable pieces of property that are relatively valuable and most people have to borrow money to purchase a car. But any type of property that is pledged as collateral can be repossessed.
Creditors are not required to warn you before they repossess the collateral. Until the loan is paid off, the property technically belongs to them and they have the right to take it if the conditions of the loan agreement are not met. If you are even one payment behind, the creditor can legally repossess the collateral, though in most cases, they will give you a warning before taking action.
The good news is that if you file bankruptcy, creditors cannot repossess any of your property. Also, if you file chapter 13 bankruptcy within 10 days after a creditor has repossessed your vehicle or other possession, you may be able to get it back. If you are facing repossession, contact a bankruptcy lawyer to learn more about your options.