If your automobile is repossessed before you file a Chapter 13 bankruptcy, the creditor will need to return the vehicle to you in most situations.  In some Chapter 13 scenarios, a case is filed right after a repossession has taken place, and a debtor will need to have the asset returned to him or her so that it can be taken care of in the Chapter 13 plan.

Can a creditor continue to hold the collateral, or must it be turned over to the Chapter 13 debtor? One case is illustrative.  In Thompson v. General Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009), a court was called upon to determine whether an asset lawfully seized pre-petition must be returned to the estate after debtor files for chapter 13 bankruptcy, and if so, whether the asset must be returned even without a showing by the debtor that he can adequately protect the creditor’s interest.

In Thompson, the creditor (GMAC) repossessed a motor vehicle.  A few days later Thompson filed for chapter 13, and sought the return of his vehicle from GMAC through the automatic stay provision of § 362(a)(3), which provides that “a petition filed [for bankruptcy] . . . operates as a stay . . . of any act to obtain possession of property of the estate . . . or to exercise control over property of the estate.”

GMAC refused because it claimed that Thompson could not adequately protect its interest.  The court initially ruled against Thompson, but on appeal the Seventh Circuit reversed, finding that GMAC had violated the automatic stay by exercising control over the vehicle.

The court also found that GMAC could always ask for adequate protection payments from the court, so that its claim that its interests were in jeopardy was highly exaggerated.  In making its ruling, the court looked at the plain meaning of Section 542(a), as well as a Supreme Court decision (U.S. v. Whiting Pools Inc).  Basically, before any creditor can claim a need for adequate protection of its interests, the asset must be returned to the debtor.  Short of that, no rational way exists to evaluate a creditor’s assertions.   It should be noted, however, that another court has ruled differently.  In the Eleventh Circuit, a different position was taken in another recent case.

In Bell-Tel Federal Credit Union v. Kalter,  292 F.3d 1350, 1351–52 (11th Cir. 2002) the court approached the problem from a different angle.  It held that a secured creditor does not have to return a vehicle that was seized pre-petition.  While the Thompson court analyzed whether the car must be returned without a showing by the debtor that the creditor’s interest is protected, the Bell-Tel court focused on whether the car was even part of the estate.

The Eleventh Circuit stated that if the property was not part of the bankrupt estate, then the debtor had no right to have the car returned. Section 541(a)(1) states that property of the estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.”

Since property seized before filing can be considered property of the estate only if the debtor still had a legal or equitable interest at the time of filing, the Eleventh Circuit looked to state law to determine whether the debtor had a legal or equitable interest in the car.  Specifically, the court looked to see if the creditor took legal title to the car when it was repossessed. The Eleventh Circuit found that, following repossession, the debtor held a very tenuous ownership claim on the car.

Because the car was not part of the estate, the court held that the secured creditor did not have to return the car.  Regardless whether we agree with the Eleventh Circuit’s analysis (shouldn’t any prepetition transfer, even an auto repossession, be part of the bankruptcy estate?  Why are voluntary transfers part of the estate, but not involuntary ones?)  the fact remains that this issue is an important one.

In our experience, it almost always happens that an auto repossessor will gladly return a vehicle to a debtor after the filing of a Chapter 13 case, as long as some provision for resuming payments is made in the plan, and as long as a case is filed without undue delay.  Creditors do not want to have to deal with used cars.  They want payments, not collateral.

Time matters as well. Once a vehicle is repossessed, it is critical to get a case filed as soon as possible.  The longer a debtor waits, the more it looks like he or she is not serious about getting the vehicle back.  Like so much else, those who fail to take timely action will lose out.

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