Bankruptcy

Illinois Statute Gives Debtors Less Protection After Bankruptcy?

By Bob Lawless

A crazy Illinois law demonstrates how bad drafting is not just for the U.S. Congress. State legislatures can do it too! It is my understanding that some Illinois automobile lenders are citing this law (625 ILCS 5/3?114) as a reason to give some debtors less protection after they filed bankruptcy. Under this reasoning, these debtors are in  worse legal position because of the bankruptcy filing. That can't be right.

The Illinois law has to do with the repossession of automobiles used as collateral for a loan and as far as I can tell from some quick research has no analogue in any other state. In Illinois and in many other states, a secured lender can repossess an automobile either through judicial process or by repossessing the automobile itself--a "self-help" repossession. In the case of a repossession by judicial process, the law provides for notice and safeguards to protect the rights of the borrower. In the case of a self-help repossession, the law provides for different and more extensive notices to make sure the borrower's rights are protected.

A little-noticed change to Illinois law in 2006 added an exception "if the repossessed vehicle is the subject of a bankruptcy proceeding or discharge." See 625 ILCS 5/3?114(f-30). The exception treats a repossession after bankruptcy as a self-help repossession and then proceeds to waive most every notice and procedural safeguard. This change passed both chambers of the Illinois legislature unanimously, suggesting it was a relatively uncontroversial measure. I cannot find anyone who knows exactly what the purpose was behind this change. To my bankruptcy professor's eye, it looks like the Illinois legislature may have been trying to waive the notices and procedural safeguards when vehicles are returned to secured lenders as part of the bankruptcy process. If so, that small and rather technical change to the law might make some sense. The federal bankruptcy court's oversight might make the state law notices and procedural safeguards redundant paperwork.

Many bankrupt debtors, however, are able to keep their automobiles by continuing to make payments after the bankruptcy filing. Sources tell me that some automobile lenders may be claiming this Illinois law removes the requirements to send notices and other procedural safeguards after the bankruptcy process and going forward. These lenders claim that once a debtor has been through bankruptcy, any automobiles the debtor owned at the time of bankruptcy are stripped of the statutory protections. That does not make sense. Under that logic, a bankrupt debtor gets fewer legal protections for the automobile because of the bankruptcy. In any event, the language of the Illinois statute is awkward and does not fit. We don't speak of automobiles or any of the other debtor's assets being the "subject of a . . . discharge"; the bankruptcy discharge is a personal right of the debtor. Also, because all of the debtor's assets become part of the federal bankruptcy estate, we might say an asset is part of the bankruptcy proceeding, but I would not generally say an asset is the "subject of a bankruptcy proceeding."

If the Illinois statute does give debtors fewer protections because of a federal bankruptcy filing, it surely must be preempted and unconstitutional. Section 525(a) of the Bankruptcy Code prohibits the states from taking certain discriminatory actions against bankrupt debtor, and the spirit of section 525(a), if not its precise language, would support preemption. Looking at the big picture, the states could undo the entire federal bankruptcy scheme if they could strip debtors of rights after a bankruptcy filing.

I could not find any cases interpreting the Illinois statute or discussing its application inside of a bankruptcy filing. That does not surprise me. The dollar amounts involved with most repossessed automobiles probably do not suggest it would be worthwhile to lavishly spend attorneys' fees litigating the points raised. Instead, my guess is that this battle may be played in the trenches as aggressive automobile lenders run up against consumers who will push back.

Full post as published by Credit Slips on March 11, 2008 (boomark / email).