Chicagoans have found a new avenue through which to regain possession of their vehicle after it has been impounded by the City: file a chapter 13 bankruptcy case. In 2018, 17,603 new chapter 13 bankruptcy cases were filed in the Northern District of Illinois. By comparison, in 2018, the Middle District of Florida, one of the busiest bankruptcy courts, saw 6,650 new chapter 13 cases filed, and the Southern District of California, another large bankruptcy district, saw 1,426 new filings. The driving force behind the Northern District of Illinois’s skewed statistics appears to be Chicago residents utilizing bankruptcy filing to obtain an impounded vehicle from the City.
In Chicago, fines for traffic violations can result in mounting debt for residents. For example, Chicago’s red light camera tickets can cost over $100 per violation, and those charges are often exacerbated due to late fees. If Chicago residents fail to pay, the city, or one of its contractors, can “boot” the residents’ vehicles. If residents do not pay the balance owed to the city within a certain amount of time of booting (sometimes as short as 24 or 48 hours), city contractors tow and impound the vehicles. Once a vehicle is impounded, residents again have a limited amount of time to pay fees and retrieve their vehicles before they are sold. Even if a resident’s vehicle is sold, the sale proceeds do not offset the resident’s fees owed to Chicago.
When residents lack the necessary funds to remedy this situation, some will file chapter 13 bankruptcy as an avenue to have the vehicle returned. That practice is so common that some local attorneys leave advertisements on booted vehicles and represent on their websites that they can help residents get their vehicles back for less money than they owe the city.
How Filing Chapter 13 May Help Get A Seized Vehicle Returned
Upon filing, a bankruptcy estate is created, which consists of the debtor’s “legal and equitable” interests in property. This includes the debtor’s right to redeem property. Under the Bankruptcy Code, chapter 13 debtors have the right to use estate property, and, therefore, have standing to pursue violations of the automatic stay against creditors and seek to have certain property returned. There is a circuit split as to how the automatic stay applies to personal property, particularly vehicles, when it was repossessed prior to the bankruptcy filing. That bankruptcy bench in the Northern District of Illinois is split, too.
Following seizure of their vehicles, many Chicagoans file for chapter 13 bankruptcy, relying upon the Seventh Circuit’s Thompson v. GMAC, to demand that the city, as a creditor, return the vehicle to them, the debtor. In Thompson, the court found that a secured creditor violated the automatic stay by failing to return the vehicle after the bankruptcy filing. In other words, the creditor “exercised control” over property of the bankruptcy estate in violation of the automatic stay, and was required to return it to the debtor. Once the vehicle is returned, many Chicago residents will abandon their bankruptcy cases to be dismissed by other parties or the court. If the case is dismissed immediately after the debtor retrieves the vehicle, the city may obtain a writ of replevin to retake the vehicle from the debtor.
But, in 2017, one Northern District of Illinois bankruptcy judge changed course, and did not require the city to return the vehicle. The court held that the city had a possessory lien on the vehicle. By keeping the vehicle, the city was maintaining perfection of its possessory lien and did not violate the automatic stay. Shortly thereafter, four other Northern District of Illinois judges ruled oppositely, each holding that the vehicles should be returned to the debtors. Chicago has appealed those four decisions to the Seventh Circuit in a consolidated appeal, captioned City of Chicago v. Robbin L. Fulton, No. 18-2527.
Is This an Abuse of the Bankruptcy Process?
Filing for bankruptcy initiates a formal legal proceeding, which should not be taken lightly. The filing establishes certain rights and obligations for parties other than the debtor. In particular, creditors must adjust their treatment of the debtor’s account immediately to avoid violating the automatic stay. Other interested parties, including trustees, the U.S. Trustee, judges, and court personnel, must spend time and resources analyzing schedules and statements and attending initial hearings and 341 meetings, even if the case is quickly dismissed. The strain on the bankruptcy system caused by these bankruptcy filings is evidenced by the number of chapter 13 cases filed in the Northern District of Illinois as compared to other jurisdictions.
The ABI Suggests a Solution
The American Bankruptcy Institute’s Commission on Consumer Bankruptcy recently released a report of recommendations to improve the consumer bankruptcy system. The report recommends a statutory amendment to balance the debtors’ and creditors’ conflicting interests regarding collateral repossessed prepetition. Specifically, the Commission recommends a Bankruptcy Code amendment to expressly provide that retaining possession of estate property violates the automatic stay. To ensure adequate protection for creditors, property subject to potential loss in value due to accident, casualty or theft (i.e. vehicles) may be retained by the creditor unless the debtor fails to provide proof of insurance or other security for the value of the property.
The Commission further recommends amending the Bankruptcy Code to protect the “status quo” for creditors with statutory liens dependent upon possession. For example, if the resident provided proof of insurance, presumably the city would be required to release the vehicle. Any statutory lien dependent upon possession that the city had would continue in the same amount and priority as if the creditor had retained possession of the vehicle. If the debtor dismissed the case immediately after retrieving the vehicle, the city would have the right to obtain a writ of replevin.
Finally, the report recommends amending the Federal Rules of Bankruptcy Procedure to provide that the debtor could enforce the turnover right by motion instead of adversary proceeding. This allows the debtor a more expedient and cost-effective resolution.
For now, all eyes remain on City of Chicago v. Robbin L. Fulton, the consolidated appeal of the four Northern District of Illinois cases that held against Chicago. The issues are briefed and the matter will be set for oral argument. In the meantime, the circuit split on the issue remains, with the minority of decisions finding that vehicles do not need to be released upon bankruptcy filing unless the court orders otherwise.