A creditor with a security interest in property, such as a car, that is repossessed, must return the property after the owner files bankruptcy. Failure to immediately return the property is a violation of the automatic stay, according to the In re Thompson case decision by the 7th Circuit Court of Appeals, a position pioneered by the 6th, 8th, 9th and 10th Circuits. A creditor that violates the automatic stay can be forced to pay monetary damages. Compare that result with a pawn broker who holds possession of property in return for a loan and who may keep the property after the owner files bankruptcy, according to the plain language of section 541 of the Bankruptcy Code. The pawn lender is not required to return the property to the debtor and the automatic stay offers the debtor no relief as to the pawned item.
To understand the disparate treatment between the car lender and the pawn broker one must examine a combination of bankruptcy statutes. First, start with the automatic stay of section 362. The stay prevents acts to collect property from the debtor or from the bankruptcy estate. Selling or keeping possession of a repossessed car is a violation of the stay. The creditor must immediately give the car back to the owner and pursue remedies in bankruptcy court.
Next, one must understand when a person files bankruptcy section 541 creates an estate, which comprises, for the most part, all of debtor’s property. What is not included in that estate is property which is in the possession of the lender and that was pledged as security for a debt for which the debtor has no obligation to repay, redeem, or buy back – this is the pawn shop exclusion.
Andy Miofsky, Esq.
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Last modified: January 22, 2013