High Court to Decide on Creditors’ Duty to Release Impounded Vehicles to Owners in Bankruptcy

The U.S. Supreme Court is poised to resolve the question of whether a creditor may retain possession of a debtor’s repossessed vehicle once the debtor files for bankruptcy. Five of the nation’s circuit courts have said no but the Third Circuit, which covers New Jersey, Delaware and Pennsylvania, has disagreed, making the issue ripe for the highest court to decide.

In the Third Circuit case, In re Denby-Petersen, the question was whether the automatic stay, which requires creditors to stop collection efforts when a debtor files for bankruptcy, also requires creditors to turn over any collateral it repossessed prior to the bankruptcy filing.

The Third Circuit rejected the idea that the turnover provision in bankruptcy law requires the automatic return of collateral that was repossessed before a Chapter 7 filing. Instead, the court held that the debtor must take affirmative steps toward exercising control over the seized vehicle. A debtor could satisfy this requirement by filing a motion demanding that the car be turned over to him. If the bankruptcy court grants the motion and a creditor still refuses to return the vehicle, then the creditor would be in violation of the automatic stay and might be subject to sanctions.

In the face of this solid split among several federal circuits, the U.S. Supreme Court has agreed to take up the issue, as it often does to assure uniformity of federal law. The court will review a Seventh Circuit decision, City of Chicago v. Fulton, which followed the majority view among the circuits that the automatic stay applies to property seized prior to the filing of a bankruptcy petition. The court’s eventual ruling could affect other types of pre-petition seizures of property.

If your vehicle has been repossessed and you are having serious financial problems, talk to an attorney at the Law Offices of James C. Zimmermann. We may be able to help you get back on track through bankruptcy or other debt relief options. Arrange a free attorney consultation by calling 973-764-1633 or contacting us online. Our offices are conveniently located in Hackensack, Vernon, Wayne, Pompton Lakes and Nutley, New Jersey.