New Supreme Court Ruling on Debtor’s Property and Automatic Stays in Chapter 13
By: Dean A. Langdon
Having a vehicle repossessed is sure to disrupt your life. One way to recover a repossessed vehicle has been to file a Chapter 13 bankruptcy. Once filed you can demand return of the vehicle and resume payments to the creditor. Creditors would return the vehicle because keeping it could be a violation of the automatic bankruptcy stay. The automatic stay prevents efforts to take or “exercise control over” a debtor’s property. Once in bankruptcy many courts held that keeping a repossessed vehicle was “exercising control” and violated the automatic stay.
Some courts held that merely keeping a repossessed vehicle did not violate the automatic stay, but that a debtor had to get an order from the bankruptcy court (a “turnover order”) before the creditor had to return the vehicle. This issue arose frequently in Chicago, which seizes vehicles if an owner has too many parking fines. The federal Court of Appeals for Chicago agreed with the bankruptcy court that Chicago’s refusal to return seized vehicles after an individual filed Chapter 13 violated the automatic stay. Chicago appealed to the Supreme Court, which recently ruled that simply keeping possession of property after a bankruptcy filing does not violate the automatic stay. The case is City of Chicago, Illinois v. Fulton, Case No. 19-357, decided January 14, 2021.
Supreme Court – Bankruptcy Law
The Supreme Court looked at a section of the bankruptcy law that protects debtors and their property from creditors. They also looked at a section which permits a bankruptcy court to order that property be returned to a debtor. The Court found that in most cases, it would take an affirmative act to violate the automatic stay. They determined that simply holding property was not such an act. The Supreme Court also found that the section of the bankruptcy law which permits a court to order property to be returned to a debtor would be unnecessary if the automatic stay already required property to be turned over. As a result, a debtor will now have to make a formal request. This request would be through the bankruptcy court to require a creditor to return a repossessed vehicle.
What This Means for the Debtor
As a practical matter, this means it will be more expensive and time-consuming to try and recover a repossessed vehicle by filing a Chapter 13 bankruptcy. For individuals who must have their vehicle to get to work, take children to school or obtain medical care, that extra time and expense will make it much more difficult to restore order to daily routines and could result in job loss or other negative consequences. If you fall behind on your car payments and are worried it might be repossessed, talk with an attorney about filing bankruptcy as soon as you can. Once a bankruptcy is filed, the automatic stay prevents a creditor from repossessing a vehicle. But if they already have it, bankruptcy is no longer as effective at getting it back quickly.
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