By Walter Metzen
Either Chapter 7 or Chapter 13 bankruptcy will stop a vehicle repossession or seizure immediately upon filing.
It is, however, important to differentiate between vehicle repossession and seizure.
Either form of bankruptcy will offer at least short-term benefit in either case, but, whether there is a long-term benefit or not will depend upon whether your vehicle has been repossessed or seized and whether you have filed a Chapter 7 or Chapter 13.
The Automatic Stay and Vehicle Repossession and Seizure
The moment a bankruptcy is filed, all collections activity must cease.
This is due to an injunction known as the Automatic Stay Against Collections that is enforced immediately upon the filing of the case under Federal law.
The Automatic Stay prevents creditors from engaging in or continuing any activity constituting an attempt to collect a debt that you owe after the bankruptcy case is filed.
The Automatic Stay will halt the mailing of invoices or collection letters, collections phone-calls, collection lawsuits, foreclosures, the perfection of liens, and—repossessions and property seizures (among other things).
When you file for Chapter 7 or Chapter 13 bankruptcy, any ongoing attempt to repossess or seize your vehicle must stop.
Thus, if you file your bankruptcy case immediately upon receipt of, for example, a motion filed by a creditor after receiving judgment against you in a Michigan district court collections case seeking authorization to execute the judgment via seizure of your vehicle, you will stop the creditor from ever accomplishing that.
Should the creditor proceed to seize your vehicle anyway, your bankruptcy attorney will have immediate cause to file a motion for contempt of court and to seek monetary sanctions against the creditor in the United States Bankruptcy Court for the Eastern District of Michigan.
However, what if the car has already been repossessed or seized prior to the filing of the Chapter 7 or Chapter 13 bankruptcy case?
Getting a Vehicle Back After Repossession or Seizure
Until last year, a vehicle repossessed or seized was required to be returned once a bankruptcy case was filed, so long as it had not yet been auctioned off by the repossessing or seizing creditor.
However, the case-law on this point has evolved.
In 2019, the U.S. Supreme Court ruled in a case called City of Chicago, Illinois, v. Fulton, et al, that the Automatic Stay does not provide an affirmative requirement that a creditor return property already repossessed or seized prior to the date of filing of a bankruptcy case.
This unfortunate decision will have wide-ranging effect upon debtors’ ability to obtain the fresh start that is the promise of bankruptcy.
City of Chicago was the consolidation of a number of appeals by the City from bankruptcy and appeals court rulings in favor of Chicago debtors whose vehicles had been impounded by the City in (then) violation of the Automatic Stay.
Despite all lower courts having ruled in favor of the debtors, the Supreme Court unanimously ruled in favor of the City of Chicago, relying primarily on Webster’s Dictionary in their decision as opposed to any deep legal analysis or thought. (Republican or Democrat, it’s a fact that U.S. Supreme Court Justices don’t understand bankruptcy and nearly always rule in favor of creditors.)
The City of Chicago was not required to return the impounded vehicles, and neither will, now, your creditors.
It is thus crucial to get your bankruptcy case filed before the actual repossession or seizure of the vehicle occurs.
Chapter 7 vs. Chapter 13 vs. Repossession vs. Seizure
A Chapter 7 bankruptcy is a liquidation bankruptcy in which all dischargeable debt is wiped out without any need for you to repay any of it. The process is generally complete within 4 months of the filing of the case.
A Chapter 13 bankruptcy is a “reorganization” bankruptcy in which, over 3-5 years, you repay what debt you can afford to repay and then discharge the balance of unsecured debt.
A vehicle repossession is an action by a secured vehicle loan lender to take possession of the collateral securing the loan due to failure to make contractual payments. That collateral is the vehicle itself.
A vehicle seizure is the seizure of a vehicle owned free and clear in execution of a money judgment granted by a court for a debt owed to a third-party. For example, the holder of a credit card balance might sue you for collections, obtain a judgment, and then execute that judgment in full or in part by seizing a vehicle you fully own for sale at auction.
Those quick definitions in mind, presuming you do stop a repossession or seizure with a bankruptcy filing, what good does it do?
A Chapter 7 bankruptcy does not provide any mechanism for “catching up” delinquent payments on secured debts, such as a car loan.
You may stop the repossession momentarily with a Chapter 7 bankruptcy filing, but the car lender will be quickly entitled to file a Motion for Relief from the Automatic Stay in the Bankruptcy Court in order to proceed with the repossession if you do not directly bring the delinquent payments up to date.
Alternatively, the lender can simply wait for your discharge to issue and then repo the car with no court oversight as the Automatic Stay lifts upon entry of the Chapter 7 discharge Order.
A Chapter 13 bankruptcy, on the other hand, will allow you to retain the vehicle and catch delinquent payments up through the Chapter 13 payment plan over 3-5 years at 0% interest.
If you are behind on car payments and want to keep the car, a Chapter 13 bankruptcy would be the appropriate form of bankruptcy to file.
On the other hand, if you do not wish to keep the car and happen to be eligible for Chapter 7 bankruptcy, the Chapter 7 bankruptcy will discharge your liability for the vehicle loan.
The lender will, during or after the Chapter 7 proceeding, repossess the vehicle at its discretion.
With regard to a vehicle seizure, either form of bankruptcy will be equally effective in stopping the seizure and discharging the underlying unsecured money judgment.
Again, however, it is now essential that you file the bankruptcy before the vehicle is taken.
Stopping a Vehicle Repossession or Seizure with Bankruptcy: The Bottom Line
The bottom line with regard to vehicle repossession and seizure in bankruptcy is that, to act aggressively and effectively to stop such action from occurring, it is essential that you retain the services of an experienced bankruptcy attorney to assist you.
A knowledgeable Michigan bankruptcy lawyer knows who to call and who to notice of the bankruptcy filing—and who to pursue for contempt and sanctions when needed.
Attorney Walter Metzen has successfully represented Chapter 7 and Chapter 13 bankruptcy clients in the Detroit area for over 28 years.
Contact us now to schedule your free, initial bankruptcy consultation.