The Automatic Stay in Bankruptcy Applies to Repossessed Property

Weber v. SEFCU (In re Weber), 477 B.R. 308 (Bankr. N.D.N.Y. 2012)

The Automatic Stay in Bankruptcy

When a debtor files for bankruptcy, the automatic stay goes into effect. The automatic stay prevents creditors from pursuing action against the debtor in an attempt to collect. Creditors may not contact the debtor, foreclose on property, or repossess property. Debtors get some room to breathe and the chance to save property such as cars and homes. The bankruptcy estate gets to take control over the debtor’s assets and manage payments to creditors. The automatic stay applies to all property in which the debtor has an ownership interest – that includes property that has been repossessed but may still be redeemed.

A Repossession in New York

Chris missed several payments on his truck and the SEFCU, which held his loan, repossessed it. The SEFCU sent Chris a letter explaining that he could cure his default by making up the back payments and then he could redeem the truck. A couple days later, Chris filed for chapter 13 bankruptcy. That day, his attorney informed the SEFCU that Chris had filed for bankruptcy, invoking the protection of the automatic stay, and requested the return of Chris’s truck. The SEFCU refused, arguing that Chris had to obtain a turnover order from the court. Weber v. SEFCU, 477 B.R. 308 (Bankr. N.D.N.Y. 2012)

About two months after the repossession, Chris got his court order and the SEFCU returned his truck. He then pursued action against the SEFCU for violation of the automatic stay. He argued that the credit union should have returned his truck as soon as he gave notice of his bankruptcy. The SEFCU replied that it was entitled to hold the truck until Chris obtained a turnover order. Id.

Repossessed Property Must Be Returned Immediately

The court determined that “a creditor who takes lawful repossession of a debtor’s property prior to the debtor filing a bankruptcy petition must return the property to the reorganization estate immediately upon learning of the bankruptcy proceedings.” Id. at 311. As long as the debtor still has an ownership interest in the property and the Bankruptcy Code makes the property “available to the reorganization estate,” a creditor must return that property. Id. Anything less violates the automatic stay. Because Chris had the option to redeem his vehicle, he still held an ownership interest in the truck. The SEFCU should have returned his truck as soon as he filed for bankruptcy.

Turnover Requires No Action from the Debtor

In order to prove that it had not violated the automatic stay, the SEFCU pointed to In re Alberto, 271 B.R. 223 (Bankr. N.D.N.Y. 2001), which held that a debtor must take a proactive step to regain property. Without obtaining a turnover order from the court, according to Alberto, a debtor has no right to have his property returned and a creditor may retain possession. The court considered Alberto in this case and declined to follow it. Rather, “the onus to return the estate property is placed upon the possessor; it does not fall to the debtor to pursue the possessor.” In other words, the SEFCU should have returned Chris’s truck as soon as it received notification of his bankruptcy filing. By refusing to return the truck and demanding that Chris get a turnover order, the SEFCU violated the automatic stay and owed him damages. Weber at 313.

Repossessed Property Must Be Returned Under the Automatic Stay

Generally, everything you own and everything you earn over your basic living expenses, except for Social Security income and your retirement accounts, is part of you bankruptcy estate. The bankruptcy estate is comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C.A. § 541(a)(1). You still possess an interest in property even if it has been repossessed, which means that repossessed property is still part of your bankruptcy estate. As soon as you notify your creditors of your bankruptcy filing, they must return that property to you.