he “automatic stay” in the Bankruptcy Code operates to stay collection actions, service of process, lien perfection, and judgment enforcement, upon the debtor’s filing of a bankruptcy petition. 11 U.S.C. §362(a). The automatic stay prevents creditors from repossessing cars or taking other actions with respect to their collateral. But what happens if a creditor has already taken action to repossess its collateral before the commencement of a bankruptcy case?

In In re: Joy Denby-Peterson, 941 F.3d 115 (3d Cir. 2019), the Third Circuit Court of Appeals held that a secured creditor that refused to return a car (a Chevrolet Corvette) to its owner after the commencement of a Chapter 13 bankruptcy case did not violate the automatic stay protection of the Bankruptcy Code when it refused to immediately return the car after it received notice of the commencement of the bankruptcy case. The Third Circuit explained that the refusal of the secured creditor, which lawfully repossessed the car pre-petition, did not constitute “an[] act . . . to exercise control over property of the estate.” In re Denby-Peterson, 941 F.3d at 118 (citing 11 U.S.C. §§ 362(a)(3), (k)). The Third Circuit explained:

Guided by the plain language of the Bankruptcy Code’s automatic stay and turnover provisions, the legislative purpose and policy goals of the automatic stay, and the reasoning of the Supreme Court and our two sister circuits, we hold that a creditor in possession of collateral that was repossessed before a bankruptcy filing does not violate the automatic stay by retaining the collateral post-bankruptcy petition.

In re Denby-Peterson, 941 F.3d at 132.

In the underlying Chapter 13 case, the Bankruptcy Court did grant the Chapter 13 debtor’s motion for turnover of the car. However, Bankruptcy Court denied the Chapter 13 debtor’s request for sanctions (fees and costs) under the Bankruptcy Code, and that decision was upheld by both the District Court for the District of New Jersey, and the Third Circuit Court of Appeals.

For secured creditors, this ruling means that, even though a car that was lawfully repossessed pre-bankruptcy petition may have to be turned over to a Chapter 13 debtor’s estate post-bankruptcy filing, no sanctions may be imposed against that secured creditor for violation of the automatic stay. For debtors, this ruling means that Bankruptcy Courts cannot grant sanctions when secured creditors retain possession of assets repossessed pre-petition.

Schedule a Free Initial Consultation with Middlebrooks Shapiro bankruptcy lawyers if you have any questions about how to address an issue with car repossession.

About Middlebrooks Shapiro

New Jersey Attorney Melinda D. Middlebrooks and Attorney Joseph M. Shapiro have over 30 years of bankruptcy law experience. From our office in Springfield, NJ, we help clients with the most basic or complex personal and business bankruptcy cases by leading them through the legal process of numerous practice areas.

Call 973-218-6877 to speak with the experienced bankruptcy attorneys at Middlebrooks Shapiro. We’ll ensure you get the perspective you need to understand the full picture and the right guidance to have a successful bankruptcy, rebuild your credit, and move forward with your new debt-free life.