Once a debtor files a bankruptcy petition the automatic stay imposed by the Bankruptcy Code generally precludes actions to recover the debt. It is unclear whether a creditor who seized a debtor's property before they filed for bankruptcy is required to release or return that property after the debtor filed.
The U.S. Supreme Court has granted certiorari to hear an appeal from the Seventh Circuit regarding whether a organization that is retaining possession of bankruptcy estate property has an affirmative obligation to return that property to the debtor or the bankruptcy trustee upon the filing of the petition. Some Circuits have said yes, while the others have said no, finding that keeping the property is a passive act that merely maintains the status quo.
The U.S Supreme Court, has agreed to hear a case in which cars belonging to a debtor were impounded by the city of Chicago as a result of traffic/parking citations. City of Chicago, Illinois v. Fulton. In that case, each debtor, belonging to a debtor after having their cars impounded, filed for bankruptcy. After Chicago refused to return their cars following the filing of the bankruptcy petitions, they moved for sanctions arguing that the cars were required to be returned to the owner. The debtors relied on the Seventh Circuit's prior decision in Thompson v. General Motors Acceptance Corp. in which the court held that a creditor must comply with the automatic stay and return a debtor's vehicle upon the filing of a bankruptcy petition. In Fulton, the Court followed its prior precedent and concluded that the city's primary objective in retaining possession of the vehicles was not ownership of the vehicles but rather "to put pressure on the debtors to pay their tickets . . . precisely what the stay is intended to prevent."
A bankruptcy court in the Eastern District of Virginia also recently decided a similar issue. In In re Nimitz, the debtor's former divorce counsel (the creditor), obtained a $10,310.75 judgment against the debtor and then successfully garnished the debtor's wages. The debtor filed for bankruptcy and sought a release of the garnishment. The creditor refused, stating that it was not aware of any requirement to end the garnishment. The debtor then filed a motion for sanctions for violation of the automatic stay. The Court found that the creditor violated the automatic stay by continuing to exercise control over the garnished funds after the petition had been filed. The bankruptcy court also found that the creditor's actions, or inactions, constituted a willful violation of the bankruptcy stay and the debtor was entitled to damages in the form of sanctions.
The Supreme Court's decision in Fulton should decide the availability of various remedies that creditor’s have prior to the filing of a petition including not only seizures but repossessions, and garnishments. Until the Supreme Court decides the Fulton Case creditors in New Jersey, which is located in Third Circuit, may follow the current law which allows them to retain the property. However, they should carefully consider what steps they might be required to take upon a debtor's bankruptcy filing, in light of the ramifications of the United States Supreme Court opinion when it is issued.