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Can the bank repossess a vehicle if a loan to a servicemember's spouse is in default?

My bank has a situation where a servicemember pledged his car to secure a loan made to his wife. The loan is to the wife, who is not a servicemember, and the servicemember is not a signer or co-maker on the loan. The loan is now in default, and the bank wants to know if it may repossess the vehicle? 

The Servicemembers Civil Relief Act (SCRA) applies in this situation. Unlike the Military Lending Act (MLA), which also covers the spouses of servicemembers, the SCRA does not extend to the family members of servicemembers, including spouses. However, while SCRA protections do not extend to the individual obligations of the spouses of servicemembers, it is the servicemember who owns the car and who has pledged it as collateral for a loan. The SCRA protects servicemembers from repossession of their property pledged as collateral for any loan, including a loan made to someone else. 

The statute requires the bank to file paperwork with the courts before proceeding with repossession. That is, the bank will have to file an affidavit explaining that the property belongs to a servicemember. The purpose of the filing is to protect an owner who is on active duty and possibly may not be in a position to challenge the action. 

Another way that the bank could repossess the vehicle is if the servicemember signed a waiver. Again, it is important to follow all the steps outlined in the law. The waiver is only legal if it is:

  • in writing
  • conspicuous (at least 12-point type, no fine print), and
  • on a document separate from the loan agreement.

In addition, the servicemember must have signed it during or after the period of military service. If the servicemember signed the waiver before entering military service, it becomes invalid when the servicemember enters military service. (October 2017)

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