Bankruptcy is intended to prevent the seizure of some assets. But federal courts have been inconsistent on whether creditors must immediately return repossessed or impounded property when the owner files for bankruptcy. The U.S. Supreme Court is considering an appeal on impounded vehicles that could impact Chapter 13 bankruptcy and other filings.

Impoundment and divided courts

The appeal involves the City of Chicago’s impoundment of vehicles when their owners accumulate unpaid parking or traffic fines. The Supreme Court heard oral argument on this appeal earlier this month.

The U.S. Seventh Circuit Court of Appeals ruled, in 2019, that Chicago violated the automatic stay provisions in the federal bankruptcy code when it continued to hold on to impounded vehicles before the bankruptcy filing. Indiana falls within the seventh circuit’s jurisdiction.

The federal bankruptcy code prohibits any acts seeking to control property of the bankruptcy estate. But creditors, according to the City of Chicago, do not have to turn over property. It claimed that debtors bear the responsibility of seeking court orders returning their property.

Federal appeals courts have been divided on this issue. The second, eighth, ninth and eleventh circuits have issued rulings agreeing with the seventh circuit’s ruling in this case. The third, tenth and DC circuits have issued rulings taking opposite positions.

Impact

Legal experts have different forecasts. Some experts claim that rulings allowing creditors to keep this property would seriously impair the debtors’ ability to reorganize under Chapter 13 and Chapter 11.

Another expert claims that the case would be significant because individuals may file for bankruptcy just to seek return of their repossessed vehicles. Debtors could assume new leverage against auto lenders if they default on loans which could upset the bankruptcy code’s careful balance between debtors and secured lenders.

Protection

Some experts predict that the Court’s ruling would rest upon determining which party has the burden of proving that there is adequate protection of the creditor’s interest in the collateral. These parties are the creditor seeking to keeping the property in the motion for relief from an automatic stay or the debtor seeking a turnover motion.

Currently, adequate protection is required for tuning over collateral. This can be decided quickly on an emergency basis, if necessary. Auto lenders need confirmation that its vehicle collateral is sufficiently insured, or it could suffer a catastrophic loss if it is destroyed.

An attorney can provide you with reasonable options to protect your property and get out of overwhelming debt. Lawyers may also assist you through bankruptcy if it is filed.