Legal Definitions - absolute-bar rule

The absolute-bar rule is a legal principle that prevents a lender (known as a creditor) from collecting any remaining debt (called a deficiency judgment) from a borrower (known as a debtor) if the lender failed to properly sell the property (known as collateral) that was used to secure the loan after the borrower defaulted. This rule applies when the lender either sells the collateral in a way that is not "commercially reasonable" or fails to give the borrower proper notice about the sale.

In essence, if a lender does not follow the correct legal procedures for selling repossessed property, they lose the right to pursue the borrower for any money still owed after that sale.

• Example 1: Car Repossession Without Proper Notice

  Imagine Sarah defaults on her car loan. Her bank repossesses the car. Instead of sending Sarah a formal notice about when and where the car will be sold, the bank simply sells it at a private auction. The sale price is less than what Sarah still owes on the loan. Because the bank failed to provide Sarah with reasonable notice of the sale, the absolute-bar rule would prevent the bank from suing Sarah for the difference between the sale price and her remaining loan balance.

• Example 2: Business Equipment Sold in a Commercially Unreasonable Manner

  A small manufacturing company, "InnovateTech," defaults on a loan secured by its specialized 3D printing equipment. The lender repossesses the equipment. Instead of hiring an expert appraiser or selling the high-tech machinery through an industry-specific broker, the lender quickly sells it to a general used equipment dealer for a significantly reduced price, without proper advertising or effort to find a buyer who would pay its true market value. This hasty and undervalued sale would likely be considered "commercially unreasonable." Consequently, the absolute-bar rule would prevent the lender from seeking a deficiency judgment from InnovateTech for the remaining loan amount.

• Example 3: Recreational Vehicle Sale with Combined Issues

  John defaults on a loan for his recreational vehicle (RV). The lender repossesses it. The lender then stores the RV for several months in an unsecured lot, allowing it to suffer weather damage and significant depreciation. The lender eventually sells the RV at a public auction that was poorly advertised in a local newspaper and held in a remote location, resulting in a very low sale price. Furthermore, the lender never sent John a formal, written notice detailing the auction date, time, and location. In this scenario, the lender's actions involve both a lack of proper notice (poorly advertised auction, no formal notice to John) and a commercially unreasonable disposition (allowing deterioration, selling at a poorly attended auction). The absolute-bar rule would prevent the lender from pursuing John for any remaining debt after the sale.