It seems to be common knowledge that a repossessed vehicle can be recovered by a bankruptcy debtor when the debtor files a chapter 13 bankruptcy and the vehicle has not yet been sold by the repossessing creditor. However, it is a lesser known fact that the debtor may recover the repossessed vehicle in a chapter 7 bankruptcy. In order to understand how this process works, it is necessary to examine the interplay between a couple of sections of the United States Bankruptcy Code.

Upon the filing of a debtor’s bankruptcy case, the automatic stay of 11 United States Code § 362(a) goes into effect regardless of the bankruptcy chapter under which the case is filed. Said automatic stay operates to prohibit any collection actions by creditors after a bankruptcy case is filed. It also prohibits creditors from exercising “control over property of the estate.” See 11 USC § 362(a)(3). From this section it’s clearly prohibited to collect, or even keep, property of the bankruptcy estate. The question then becomes whether or not a repossessed vehicle falls within the statutory definition of property of the bankruptcy estate.

Again, we must turn to the language of the U.S. Bankruptcy Code to answer this question. The United States Supreme Court has expressly recognized that the scope of the governing code section regarding this matter, 11 USC §541(a)(1), is broad and that it includes in the estate of the debtor any property made available to the estate by other provisions of the Bankruptcy Code. United States v. Whiting Pools, 103 S.Ct. 2309, at 2313 (1983). In that case, the Supreme Court found that property of a bankruptcy estate includes collateral that has been repossessed pre-petition. Stated simply, the holding stands for the proposition that if a car is repossessed and in the hands of the creditor when the petition is filed, the person filing bankruptcy can still get the car back.

The Supreme Court noted specifically that §542(a) of the Bankruptcy Code is a provision that brings property into the bankruptcy estate that was not in the possession of the debtor at the time the bankruptcy proceeding was commenced. The court concluded that §542(a) does not require that the debtor hold a possessory interest in the property at the commencement of the proceedings. Id. at 2314.

Under 11 U.S.C. §542(a), if a car is in the possession of a creditor after a repo, the debtor may compel the creditor to return possession of the property. Section 541(a)(1) of the Bankruptcy Code sets forth that the commencement of a case under any chapter creates the bankruptcy estate, and that estate of the debtor includes "all legal and equitable interests of the debtor in property, wherever located or by whomever held, as of the commencement of the case," with the exception of the provisions contained in §541(b) and (c)(2). Once the vehicle is sold at auction by the creditor, however, the debtor’s legal and equitable interests are extinguished and the vehicle is beyond the far reaching grasp of the Bankruptcy Code.

From a practical standpoint, there is usually little sense in pursuing a repossessed vehicle if the debtor is filing a Chapter 7 bankruptcy because, in order to keep the car long term, the debtor would have to return to good standing with the creditor. Most chapter 7 debtors are simply unable to cure the arrears that have accrued under the loan and are simply looking at the vehicle being repossessed once the bankruptcy has been completed or the automatic stay being terminated upon request of the creditor.

However, if it is the debtor’s intent to redeem the vehicle under §722 of the Bankruptcy Code, the secured creditor must accept a payoff of their loan at the current value of the vehicle. Many debtors are able to secure financing from a third party lender to acquire the funds necessary for the payoff of the old loan. In this scenario, the creditor’s claim is satisfied in full under the law. Refusal of the creditor to return the vehicle to a debtor seeking to redeem his or her vehicle in a Chapter 7 bankruptcy is a clear violation of §362(a)(3), and impedes the debtor’s legal right to redeem the vehicle.

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