If you fall behind on your mortgage or car payments, you might worry that the lender will suddenly take your property. Many people call this kind of taking a “repossession.” But when it comes to homes, that description isn't quite accurate. In reality, losing a house due to unpaid mortgage debt is called a "foreclosure", and it’s a very different legal process from a repossession.
Understanding the difference between repossession and foreclosure is important, especially if you’re struggling with loan payments. This article explains how each process works, how they affect you, and what options you have to protect your property and credit.
What's the Difference Between Repossession and Foreclosure?
While repossession and foreclosure are both processes that a creditor uses to reclaim property you put up as collateral for a loan, the procedures are different. In fact, the legal procedures and types of assets involved differ significantly between repossessions and foreclosures.
Here's a summary of the differences between a repossession and a foreclosure, with more details below.
- Foreclosures are specific to real estate, such as homes or land, while repossessions can apply to many types of personal property, such as vehicles, equipment, boats, and motorcycles.
- A court order usually isn't needed for a repossession. A foreclosure sometimes has to go through court (but not always).
- Repossessions are usually quicker and more straightforward than foreclosures.
What Are the Similarities Between Repossession and Foreclosure?
With both a repossession and a foreclosure, the lender's goal is to recover an outstanding debt after selling the repossessed or foreclosed property. Here's a summary of the similarities between a repossession and a foreclosure, with more details below.
- A repossession and foreclosure can happen after a borrower doesn't meet their obligations under the terms of a secured loan agreement, such as by failing to make the payments.
- Both procedures result in the borrower losing the property. With a repossession, the lender takes specific collateral, like a car. With a foreclosure, the lender goes through a detailed legal process, allowing it to sell the property, such as a house, to recover the outstanding debt.
- Both repossessions and foreclosures involve legal procedures, although the process and complexity differ.
- A repossession or foreclosure will both hurt the borrower's credit scores, affecting the borrower's ability to get loans or credit in the future, or to get good interest rates.
Chart: Summary of Repossession vs. Foreclosure
| Feature | Repossession | Foreclosure |
| Property Type | Cars, boats, equipment | Homes, real estate |
| Needs Court? | Usually not | Sometimes |
| Speed | Fast (days or weeks) | Slow (months or years) |
| Method | Self-help or replevin | Judicial or nonjudicial process |
| Credit Impact | Significant | Significant |
How Repossession Works
"Repossession" usually refers to the legal process where a lender takes back secured property, such as a car, boat, or motorcycle, due to the borrower's default on the loan obligations. When a borrower fails to make the payments, the lender, often without having to get a court order, can swiftly reclaim the property.
When Is Repossession Used?
When you stop making payments on certain secured loans, like a car loan, the creditor can simply take (repossess) the collateral (the vehicle). The repossession is usually through a self-help process, a peaceable retaking without a court order.
Otherwise, if a peaceable retaking isn't possible, the creditor will use a replevin process to get possession of the item.
Example of a Repossession
In most states, car lenders, for example, can take your vehicle from you without prior notice if you're in default on the loan. For example, if you're behind in your car payments and leave your car parked on the street outside your home, the lender can just take it.
The Creditor Can't Breach the Peace
But when repossessing the item, the creditor or its agent can’t "breach the peace." That is, the creditor can’t use or threaten to use physical force against you to get the item back.
For example, say the creditor or its agent breaches the peace during the repossession, like by shoving you out of the way and breaking into your locked garage to repossess a car, you can sue the creditor.
What Happens After a Repossession
After the creditor repossesses the car, it can sell the vehicle to a new owner. State law sets the procedures for the sale and notice requirements.
Deficiency Judgments After Repossession
The creditor uses the money it gets at the sale to pay off what you owe on the car. If the car sells for less than what you owe, the creditor can sue you to get a deficiency judgment. The “deficiency” is the difference between what you owe and what the creditor gets from selling the vehicle.
What Is Replevin?
If the creditor can’t find the item or repossess it without breaching the peace, the creditor will likely go to court and get an order requiring you to turn over the property. This process is called "replevin." The creditor will then sell the item to a new owner.
How Foreclosure Works
Again, "foreclosure" is the legal process through which a lender sells real estate to recover a loan after a borrower defaults. State law sets out a specific process that the lender must go through before holding a foreclosure sale. If the lender is the high bidder at the foreclosure sale and becomes the property's new owner, then the lender can take possession of the home.
When Is Foreclosure Used?
Typically, a lender uses the foreclosure process to sell a home after the borrower defaults on the loan.
How Foreclosures Work
The foreclosure process is more complicated than repossession. Depending on state law and the circumstances, a foreclosure will be judicial or nonjudicial.
Judicial foreclosures. In about half of the states, the lender has to file a lawsuit in court to foreclose. This process is known as a "judicial" foreclosure. Usually, once a court signs off on the foreclosure, the home is sold to a new owner at a foreclosure sale, which is typically an auction. But in two states (Connecticut and Vermont), the lender doesn’t have to hold a sale. Once a court grants a judgment of foreclosure, ownership of the home goes directly to the lender. Judicial foreclosures usually take at least several months, and as long as a few years in some states, to complete.
Nonjudicial foreclosures. In the remaining states, the lender can choose to use an out-of-court ("nonjudicial") process to foreclose. In a nonjudicial foreclosure, the lender has to follow a series of specific steps described in the state statutes before selling the home at a foreclosure sale. The exact process varies widely from state to state, though it often involves recording a notice in the land records and mailing notice to the borrowers. Nonjudicial foreclosures usually take much less time than judicial ones, typically just a few months or less.
How foreclosure sales work. Anyone, including the foreclosing lender, can bid on the home at a foreclosure sale. At the sale, the lender will bid on the property using what’s called a "credit bid." With a credit bid, the lender bids the debt you owe as a credit; it doesn’t have to offer cash. Other parties who bid on a property at a foreclosure sale have to bid cash or a cash equivalent, like a cashier's check.
The lender may bid the full amount you owe, including foreclosure fees and costs, or it might bid less. If the lender is the highest bidder at the sale and becomes the new owner of the property but bids less than the total debt, it might be able to get a deficiency judgment against you. Whether or not the lender can get a deficiency judgment depends on state law.
Usually, the lender is the high bidder at the sale and gets title to the property (ownership) in this way. The property then becomes what’s called "REO."
At this point, or perhaps after a post-sale redemption period expires, if you don't move out voluntarily, you’ll face an eviction. Once you’re out of the home, the lender will sell the property to a new owner.
What Are My Options If I Am Facing a Repossession or Foreclosure?
When facing a repossession or foreclosure, maintaining contact with the lender is crucial. You might be able to avoid losing your property by working out a repayment plan, refinancing or reinstating the loan, or getting a forbearance or loan modification, for example.
Another option is to voluntarily surrender the personal property to the lender to avoid repossession, give the home back to the lender in a deed in lieu of foreclosure, or sell it in a short sale. With these options, you might be able to avoid a deficiency judgment, although your credit will still be affected.
Read More Articles
Read about losing your manufactured home to a repossession or foreclosure.
Find out what happens if you don't make your car loan payment.
Get information on hiring a foreclosure attorney.
Where Can I Get Help If I'm Facing a Repossession or Foreclosure?
If you’re facing a foreclosure, consider talking to a lawyer to learn about the procedures in your state and to find out exactly when you’ll have to move out. You can also ask a lawyer for information about loss mitigation options, like a loan modification. A HUD-approved housing counselor is also a good resource for information about foreclosure alternatives.
If you're facing a repossession and need assistance, consider talking to an attorney who works in collections and debt relief.