When an equipment loan goes bad, the lender must consider how to best recover its collateral and mitigate its losses. Often, collateral is difficult to locate and its value is insufficient to repay the loan. This is especially true for movable and depreciating assets such as trucks and trailers. Adding to the challenge, obligors may be uncooperative or non-responsive. In these circumstances, what collection options are available? Also, must the lender liquidate its collateral before filing a lawsuit against the obligors for a money judgment?   

The first step is to review the agreements governing the loan. Typically, they grant the secured lender multiple remedies upon default. These remedies include: accelerating the loan balance, repossessing the collateral and converting the loan to a money judgment. Further, the lender generally may exercise all remedies of a secured party under the Uniform Commercial Code (UCC).

Under Article 9 of the UCC, a secured lender’s rights upon default are cumulative and may be exercised simultaneously. Specifically, the lender may obtain a money judgment, take possession of its collateral and/or enforce its security interest by any judicial procedure. In other words, the lender may file a lawsuit for all its claims while also pursuing its collateral outside of court. 

There are several benefits to filing a lawsuit immediately upon default.  First, if the lender cannot repossess its collateral without disturbing the peace, the lender can obtain a replevin order, which directs the sheriff to facilitate the recovery at a specific location. Second, if the location of the collateral is unknown, the lender can obtain a detinue/possession order that compels the obligors to surrender the collateral to the lender. Third, the lender can obtain a money judgment against the obligors for the unpaid loan, which can be enforced or leveraged into a favorable settlement. 

Once a money judgment is entered, it can be recorded in the real estate records, which creates a lien against any property of the debtors. Such a lien can be valuable if a debtor files a bankruptcy case, as the lien may then be treated as secured. Additionally, the lender can seek to garnish any bank account or income of the debtors. 

In sum, the swift filing of a lawsuit upon default gives the lender the maximum remedies allowed under the law. Further, it is often the most efficient approach, because collateral recovery may require a court order, such as when the collateral is secured in a building or a landlord denies access.                

To be clear, the UCC does not require a lender to liquidate its collateral before obtaining a money judgment. For example, a lender may wait for market conditions to improve before auctioning its collateral. Although this may be counterintuitive and some judges may hesitate, courts have repeatedly enforced this right, provided the lender is acting in good faith and in a commercially reasonable manner. When a lender acts in bad faith, it subjects itself to non-UCC law, including various torts and statutes regulating debt collection. Likewise, when a lender acts in an unreasonable manner, it can be liable for any loss sustained by the debtors due to the lender’s unreasonableness.     

Finally, when collateral is liquidated after a money judgment is entered, the net proceeds must be applied to the judgment balance.