Supreme Court Says Automatic Stay Doesn’t Require Return Of Repossessed Property
The automatic stay is one of the most powerful weapons in a consumer’s bankruptcy arsenal. It preserves the debtor’s assets, protects creditors, and gives the debtor some breathing room while the bankruptcy case is going on. But a recent Supreme Court case has now weakened the power of the automatic stay.
What is the Automatic Stay?
When you file your bankruptcy case, and for the duration of your case, an automatic stay is in effect. The automatic stay immediately stops all collection activities against you. If there are lawsuits against you they must stop. Any repossessions or foreclosures must stop. Even collection calls and letters must stop in their tracks.
This is because once you file for bankruptcy, your property is no longer yours (in theory). It belongs to the bankruptcy estate, and the trustee needs to see what property you keep, and what property, if any, goes to creditors.
Return of Repossessed Property
But although we know that collection activities against you must stop, a question has remained open and disputed among the country’s federal courts: Does the automatic stay require that a creditor return property to the debtor that has previously been repossessed? Put another way, does the creditor need to “undo” collection activities by returning property, repossessed before the automatic stay, to the debtors?
That question was recently posed to the United States Supreme Court. The case involved a woman whose car was impounded for an unpaid parking ticket. She filed for Chapter 13 bankruptcy, and asked that the car be returned to her pursuant to the automatic stay.
Supreme Court Finds Car Does Not Have to be Returned
Some federal courts had found that a creditor’s failure to return repossessed property once the stay was in effect was a violation of the stay. But the Supreme Court disagreed. Some justices said that the stay prevented creditors from taking affirmative acts to collect. Just retaining property wasn’t an affirmative act.
Many justices disagreed, saying that requiring debtors to actually file actions to get property back would lead to delays, and delays in returning property meant that debtors would have a harder time with their “fresh start” needed to fund a reorganization plan in a Chapter 13 bankruptcy.
Nonetheless, the court stood firm, and now creditors have one less thing that they need to comply with what a bankruptcy is filed.
Don’t Wait Too Long
The lesson here is not to wait too long to file for bankruptcy. Once a car has been repossessed, or a home foreclosed on, it may be difficult if not impossible for the debtor to get that property back.
The automatic stay does not “undo” items that have been repossessed, and while there are avenues for debtors to get property back, such as by filing what are known as turnover suits, those avenues can be costly and time consuming,