Hey, Repo Man: Court Says Give the Car Back

The U.S. Court of Appeals for the Seventh Circuit has ruled that creditors must give repossessed property back - even though it was repossessed legally - after debtors file for Chapter 13 bankruptcy.

The Facts

In the case, the General Motors Acceptance Corporation (GMAC) repossessed Theodore Thompson's 2003 Chevy Impala after he fell behind on payments. On February 5, 2008, soon after repo men took the car, Thompson filed Chapter 13 bankruptcy. Thompson asked GMAC to return the car but GMAC refused.

Bankruptcy Court Decides Against Thompson

The bankruptcy court, prior to Thompson's appeal, originally ruled that GMAC did not have to return the car because Thompson lacked evidence that GMAC's interests were adequately protected. In other words, GMAC could keep the car in order to protect its financial interests after Thompson defaulted on the loan.

Appeals Court Reverses That Decision

On appeal, the Court of Appeals reversed the bankruptcy court's decision, reasoning that by retaining possession of the vehicle, GMAC had "exercised control" over property of the bankruptcy estate, an act prohibited by §362(a) of the Bankruptcy Code.

The court said that GMAC had no incentive to seek protection of an asset, given that it already had the car, and that §542(a) of the Bankruptcy Code required GMAC to return the car to the bankruptcy estate and then ask to have its interests protected.

Here's why:

The Law

In Whiting Pools, 462 U.S. 198, 204 (1983), the U.S. Supreme Court unanimously held that the IRS, which had seized some of the debtor's assets prior to its bankruptcy filing, was subject to the automatic stay.

Filing Chapter 13 bankruptcy triggers the "automatic stay," which stops all collection activity on a debtor's accounts. This means no repo men, no phone calls, and no collections letters.

While a creditor is indeed entitled to adequate protection of its interests, according to the Supreme Court, it is first required to seek protection of those interests under congressionally-established bankruptcy procedures, rather than resorting to something like asset seizure (or repossession, as in Thompson's case).

If it were otherwise, the automatic stay, which should provide a measure of relief for a debtor, would have little effect against a creditor who had already repossessed the property. This would thwart the goal of Chapter 13 bankruptcy, which is to reorganize and repay debts without having to liquidate all assets, as the court of appeals in Thompson's case noted.

On top of that, there were very practical reasons for returning Thompson's Impala: he needed it for work (and work helps repay debt). Moreover, allowing GMAC to keep the car would unfairly tip bargaining power in favor of GMAC and force Thompson (the debtor) to bear the cost of seeking relief through the court system.

Source: Thompson v. GMAC, 566 F.3d 699 (7th Cir. 2009)