Five years ago, we repossessed a car and sold it without contacting the borrower’s father, who had cosigned the loan. The sale resulted in a deficiency balance. Do we have to provide a default notice to the father before attempting to collect the deficiency balance from him?

Yes, you must provide notice to the cosigner before attempting to collect the deficiency balance from him. The Illinois Consumer Fraud and Deceptive Business Practices Act requires you to notify a cosigner before taking any action to collect from the cosigner, and it describes the information that must be included in this notice.

Since you are collecting a deficiency balance from a sale for which the cosigner did not receive notice, the cosigner may attempt to challenge the collection efforts. The Uniform Commercial Code requires you to notify secondary obligors, such as cosigners, as well as debtors, before selling a car or other loan collateral. However, you may be able to overcome such a challenge. When a lender fails to provide notice of a sale, Illinois courts have placed the burden on the lender to prove (1) that the loan amount was greater than the sale price of the car, and (2) that the sale was “commercially reasonable” (as defined in the UCC), before recovering the deficiency balance. We believe you can correct your earlier failure to provide notice of the collateral’s sale by providing proof to the cosigner that the car was sold, that the loan amount was greater than the sale price, and that the sale was commercially reasonable.

For resources related to our guidance, please see below:

Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/2S (“No person may . . . take any collection action regarding a cosigner of an obligation unless prior thereto, such person has notified the cosigner by first class mail that the primary obligor has become delinquent or defaulted on the loan, that the cosigner is responsible for the payment of the obligation and that the cosigner must, within 15 days from the date such notice was sent, either pay the amount due under the obligation or make arrangements for payment of the obligation.”)

Uniform Commercial Code, 810 ILCS 5/9-611 (“Persons to be notified. To comply . . . the secured party shall send an authenticated notification of disposition to: (1) the debtor; (2) any secondary obligor . . . .”)

Uniform Commercial Code, 810 ILCS 5/9-627 (A disposition of collateral is made in a commercially reasonable manner if the disposition is made: (1) in the usual manner on any recognized market; (2) at the price current in any recognized market at the time of the disposition; or (3) otherwise in conformity with reasonable commercial practices among dealers in the type of property that was subject of the disposition.”)

First Galesburg Nat. Bank & Trust Co. v. Joannides, 103 Ill.2d 294, 298 (1984) (“If the collateral is sold without notice to the debtor or the guarantor, the presumption is that the value of the collateral sold was equal to the indebtedness. The presumption can be rebutted by a showing by the creditor that the value of the collateral was less than the indebtedness and that the sale was ‘commercially reasonable.’”).