By Shelley B. Fowler*
It’s no surprise when a car buyer defaults on his or her retail installment contract. It’s also no surprise when a creditor repossesses the car of a delinquent buyer and when the buyer whose car has been repossessed files a bankruptcy petition. But what may be surprising is that at least two views have developed on what steps a creditor may or may not take in this scenario. Let’s see how one of those views played out in a recent case.
After Joy Denby-Peterson defaulted on the retail installment contract she signed in connection with her car purchase, Nu2u Auto World repossessed the car. Denby-Peterson filed a Chapter 13 bankruptcy petition and demanded that Nu2u return the car. After Nu2u refused, Denby-Peterson filed a motion in her bankruptcy case for turnover of the car and for sanctions against Nu2u for violations of the automatic stay. Nu2u responded that Denby-Peterson surrendered all rights to the car by signing a document waiving her right to redeem the car when she visited Nu2u to retrieve her personal property that was in the car when it was repossessed.
The bankruptcy court found that Denby-Peterson was the lawful owner of the car, the waiver document was invalid, and Nu2u did not violate the automatic stay by retaining the car after the bankruptcy filing. The U.S. District Court for the District of New Jersey agreed and affirmed.
The district court noted that the bankruptcy court correctly followed the minority position, adopted in the District of New Jersey, that a creditor does not violate the automatic stay by retaining property that it repossessed pre-petition so long as it maintains the status quo in effect at the time of the bankruptcy filing. However, the district court noted that, under the minority view, if the creditor demands proof of insurance naming it as loss payee and the debtor complies, then the creditor will be in violation of the automatic stay unless it returns the vehicle to the debtor because both parties are protected in the event of an accident. In this case, the district court found that the bankruptcy court correctly concluded that there was insufficient evidence that the car was insured where the only evidence of insurance was Denby-Peterson’s testimony.
So, this case adopted what’s considered the minority position. The majority position requires that the creditor return the repossessed car immediately upon learning of the car owner’s bankruptcy filing. And some courts frequently require something in between the two positions.
Given that the law on this issue is constantly changing as courts continue to weigh in, now might be a good time for you to sit down with your dealership’s lawyer and understand where your state’s law on this issue stands.
Denby-Peterson v. Nu2u Auto World, 2018 U.S. Dist. LEXIS 187686 (D.N.J. November 1, 2018).
*Shelley B. Fowler is a managing editor at CounselorLibrary.com, LLC. She can be reached at 410.865.5406 or by email at firstname.lastname@example.org.