Creditors may not condition the return of property on a lack of adequate protection. If one does, then it has violated the automatic stay and may be subject to sanctions. The most common scenario in Chapter 13 bankruptcies is a vehicle is repossessed prior to the bankruptcy filing, but has not yet been sold. In many districts, creditors may demand proof of insurance or a valid driver’s license before the return of the vehicle. Not so anymore in Illinois, Indiana, and Wisconsin.
In Thompson v. GMAC (08-2077); In re Thompson (08 B 2560), the Seventh Circuit ruled that “a creditor must first return an asset in which the debtor has an interest to his bankruptcy estate and then, if necessary, seek adequate protection of its interests in the bankruptcy court.” This means that even if a vehicle is uninsured, it must be turned over to the debtor.
There are two applicable exceptions to this rule:
1) The property is of inconsequential value or benefit to the estate. (If there is no equity in the vehicle, but the debtor needs it to go to work, it is a benefit to the Chapter 13 estate.)
2) A good faith transfer of the property is done without the creditor having actual notice or knowledge of the bankruptcy. (I.e. The car is sold prior to knowledge of the Chapter 13 filing.) These exceptions are narrow, and will not be of much aid to a creditor lacking adequate protection.
The court reasoned that a creditor may not assume authority to determine whether it is adequately protected; this is to be decided by a bankruptcy court.
The best practice in the Seventh Circuit would be to agree to turn the vehicle over, and at the same time, request proof of insurance. If the debtor does not provide it, then the creditor should refer the case to counsel to file an emergency motion for adequate protection and/or relief from stay. While this Advisory uses a vehicle as an example, the decision applies to any property that the debtor demands returned. If you have any doubt about how to proceed when a Chapter 13 debtor demands return of property, contact your bankruptcy attorney. Better to get advice than to get sanctioned for violating the automatic stay.
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