15 April 2021 / Monette W. Cope

A Creditor Does Not Have to Return the Car, But What Should be Done?

Topics: Bankruptcy

The United States Supreme Court ruled that not returning collateral upon demand once a bankruptcy is filed is not a violation of the automatic stay1. Specifically, the Court ruled that not returning a vehicle is not a violation of 11 U.S.C. §263(a)(3). What that means, in other words, is that passively holding on to and not returning, for instance, a vehicle, upon demand if it had been repossessed prior to a bankruptcy filing is no longer in itself a stay violation. Although this is a relief of sorts, the decision gives little or no direction to creditors on what to do other than to give its blessing to retain the repossessed collateral. And, it does not explain whether holding on to the vehicle would violate any other sections of §362.

Prior Law

Previously, in many jurisdictions, once a bankruptcy was filed, lienholders were required, upon demand, to return or make available any repossessed collateral. This resulted in the return of vehicles even if they were not insured or the debtors did not have valid driver’s licenses. Creditors were required to risk their security first and then seek to enforce their rights by filing immediate motions for relief.

What the Supreme Court Said and Did Not Say

In Chicago v. Fulton2,  the Supreme Court held that 11 U.S.C. §362(a)(3), which prohibits creditors from exercising control over estate property, does not require that creditors turnover repossessed collateral just because a bankruptcy has been filed. This section merely preserves the status quo at the same time it prevents affirmative acts against the collateral. To put this in a familiar consumer bankruptcy scenario, if a vehicle was repossessed prepetition, the status quo is that it is repossessed, and it may remain so without violating the stay. But, another Code section, 11 U.S.C. §542, requires property of the estate be turned over to the debtor or trustee. So, at the same time that a creditor is not violating the stay by not turning over repossessed property, it also has an obligation to turn over the property. The question remains how  a creditor should manage the tension created by these conflicting sections of the Bankruptcy Code.

What a Creditor Can Do

  • A creditor or lienholder can continue in possession of the vehicle unless and until a bankruptcy court orders it be turned over. 
  • §542 is not self-executing. That is, a creditor does not have an affirmative duty to turn over property until a court orders it to. A debtor (or a trustee) must file an adversary proceeding to seek turnover of property. This is time-consuming and burdensome for the debtor. 
  • A creditor or lienholder can ask for insurance and/or driver’s license verification (if there is cause to believe the license was suspended or is expired) before turning over the vehicle voluntarily.
  • Because most consumer debtors rely on their vehicles to get to work, the vehicle is crucial to their livelihood. If a chapter 13 plan provides for treatment of the collateral, or if the chapter 7 Statement of Intention indicates the debtor intends to reaffirm the debt secured by the collateral, nothing prevents a creditor or lienholder from turning over the vehicle voluntarily.

What a Creditor Cannot Do

  • The collateral cannot be sold without relief from stay in any chapter.
  • Plan terms cannot be negotiated in exchange for release of the vehicle. 
    • That said, a creditor or lienholder may return the vehicle and then object to the plan, or not return it and then file for relief from stay and/or adequate protection.
  • A creditor or lienholder cannot demand a reaffirmation agreement in exchange for release of the vehicle. 
    • However, the vehicle may be returned and a creditor or lienholder may seek a reaffirmation agreement, or they may decline to return it and file a motion for relief. 
  • A creditor or lienholder cannot make any demands other than for insurance or, if there is reason to believe the debtor’s driver’s license is expired or suspended, for a valid driver’s license.

The Future

Case law will surely develop to give more guidance to creditors and debtors on how to proceed when collateral is repossessed before a bankruptcy is filed and debtors request return of the vehicle after filing. It is also important to remember that the Supreme Court’s decision is made only under §362(a)(3), and it specifically ruled that it did not decide the issue under any other section, meaning that retention of the vehicle may be found to violate another section of §362. However, unless and until there are further rulings on the issue, secured creditors and lienholders are within their rights to retain repossessed collateral after a bankruptcy filing. For now, follow these simple guidelines, and if you have questions, do not hesitate to contact your bankruptcy attorney. 

For more comprehensive information and insights, watch part I and II of our How to Accelerate Auto Loan Recovery Success webinar series here and here.

This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.

City of Chicago, Illinois v. Fulton
, 141 S. Ct. 585, 208 L. Ed. 2d 384 (2021)

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Monette W. Cope


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