We’ve previously discussed the automatic stay, and its effects that become active when a debtor files for bankruptcy. However, what happens when property of the debtor, such as a car, is repossessed by a creditor just prior to the bankruptcy? Is the debtor able to regain control of the property, or is possession truly nine-tenths of the law?
Property of the Estate
First, we need to determine whether the vehicle, and whatever interest the debtor may still have in the vehicle, is property of the bankruptcy estate. The bankruptcy estate consists of all property the debtor has when they file the petition. This includes the following:
- property in your possession;
- property in someone else's possession (for instance, an item you've loaned to a friend);
- property you've recently given away;
- property you haven't yet received but are entitled to;
- proceeds from your property (such as rental income or dividends);
- certain assets you receive within 180 days after filing (for example, an inheritance or lottery winnings); and
- your share of marital property.
The bankruptcy estate holds the interest in that property, separate from the interest held by the debtor. The debtor is able to deduct from the bankruptcy estate any exemptions as allowed by state or federal law. Anything not exempted is considered property of the estate and under the control of the trustee.
Timing of Repossession
Once the bankruptcy estate is created, the trustee will then assume control of the property not exempted. The trustee will also assume control of the property not necessarily held by the debtor. This would include property that was taken by a creditor prior to the filing of the bankruptcy where the debtor still has an interest. This means that, depending on where the debtor is in the repossession process, the trustee can exert control over the repossessed vehicle.
If the creditor has yet to repossess the vehicle, the vehicle will be safe from repossession as long as the automatic stay is in effect. Once the bankruptcy petition is filed, the automatic stay prevents any and all collection efforts against a debtor, including repossession.
If the creditor has repossessed the vehicle, but has yet to auction it, the automatic stay will prevent the auction and force a return of the vehicle. This is because the debtor still has an interest in the property and, as such, it cannot be sold without the permission of the trustee and bankruptcy court. Similarly to a sheriff’s sale, once the automatic stay comes into effect any collections or sale of the debtor’s property without permission of the trustee becomes void.
If the creditor has repossessed the vehicle and already sold it prior to the bankruptcy, there is usually nothing the automatic stay can do. Because the debtor no longer has a legal interest in the property, there is no longer an ability to regain that property into the bankruptcy estate. Unfortunately, it is too little, too late to get the vehicle back in your possession once the sale occurs. It is crucial to file prior to the auction or sale occurring after the repossession.
What’s Next After Regaining Possession?
Once the petition is filed, and the debtor regains possession of the vehicle, the next step is to determine how the amount owed on the car is going to be satisfied. This is highly dependent on the type of bankruptcy the debtor filed.
In a Chapter 13 case, the debtor will be able to cure the arrears over the course of the plan. However, they do need to stay current on all payments to be made post-petition, in addition to paying down the arrears. Failure to pay both will normally result in the creditor motioning for relief from the automatic stay.
Also in a Chapter 13, a debtor can “cram down” the amount owed. If the debtor purchased the vehicle in the past 910 days (2 and a half years), they can file a Chapter 13 plan that “crams down” the value of the vehicle to its actual value. For example, if the debtor purchased their vehicle for $10,000.00, but it is now worth only $5,000.00, they can propose to pay the lender $5,000.00 plus interest over the course of their plan.
Cramming down payments also allows for the cramming down of interest rates. In In Re Till, 541 U.S. 465 (2004), the United States Supreme Court found that when a debtor is paying a loan through a Chapter 13 plan, they can cram the interest rate down to the prime interest rate, plus one. The prime interest rate is the interest rate that banks use as a basis to set rates for different types of loans. For example, if the debtor’s current interest rate is 10%, and the prime interest rate is 4.5%, the debtor can cram their interest rate down to 5.5% (prime plus 1) over the course of the Chapter 13 plan. This helps any debtors in these circumstances get out from suffocating loans and properly reorganize.
Chapter 7 debtors have fewer options. While the automatic stay will go into effect and prevent the sale of a repossessed vehicle, and even return the vehicle to the debtor, the debtor does not have a plan of repayment as in a Chapter 13. Therefore, once the automatic stay is expired at the end of the bankruptcy, the vehicle may still be repossessed if it was not already liquidated during the bankruptcy proceedings. If a Chapter 7 debtor is delinquent, they can attempt to enter into a reaffirmation agreement with the creditor, redeem the vehicle, or surrender the vehicle. This is still better than the alternative, as it will prevent the vehicle from being sold at auction.
CONCLUSION
If your vehicle is at risk of repossession, or has been repossessed without being auctioned off, there is still time to save your vehicle. Call an experienced bankruptcy attorney, like those found at Scura, Wigfield, Heyer, Stevens & Cammarota for help.
