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Illinois Statute Gives Debtors Less Protection After Bankruptcy?

posted 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.


Sounds scary but I don't think that little change in Ill law will make too much difference in Chapter 7 or 13 Bankruptcies at all. 1. 11 U.S.C. 362 “automatic stay”. Despite what Ill has to say on the matter 362 is a federal law and an important concept comes into play. “Supremacy” Federal law will always supersede state law when there is a conflict between the two. 2. The notices are redundant in that before a creditor can move against collateral in bankruptcy it would have to “Lift the Stay” usually takes 20-30 days with notice to the debtor and debtors attorney. They both can see it coming. 3. If a creditor repossesses a vehicle post-discharge or while the case is pending in a Chapter 13 the debtor can assert his or her “Discharge Injunction” or "Automatic Stay" Injunction again “Injunction” is the key word. It’s a product of federal legislation not state and local laws.

In a Chapter 7 a debtor must reaffirm a secured debt before discharge. If not then the creditor can move against the vehicle and take the collateral with whatever means State law allows except suing or demanding payment from the debtor him or herself. They theoretically have what’s called an “In rem” action. Meaning against the thing. Even in a chapter 7 bankruptcy the car creditor cannot take the vehicle while the Chapter 7 process is still ongoing, they again have to file a “Relief from Automatic Stay” Motion to gain possession of the vehicle. If the car creditor relies on state law and ignores Federal Bankruptcy laws they can be sanctioned by the Bankruptcy Judge and those terms are spelled out in black and white. NOT SO SCARY not at all.

Not trying to lecture you Bob. You have much more knowledge and experience than I do about Bankruptcy. I just like to re-hash it. It helps me understand BK code better. Writing it down helps as well. You are all my surrogate teachers.

I did read that blog on the quirky way 05 BK law was drafted. Can you re-blog on the hanging paragraph and how 506 is or is not supposed to apply to 910 claims. Its like they glued it on at the end... you can’t even cite it correctly…..! It's like it's not even a subsection???

Bob, the procedural forfeit seems like a lay-down 525 case, no? If I were the Ill AG defending such an action, I'd try to say simply that the debtor is entitled to notice of a pending post-default sale, and "the federal bankruptcy process" (whatever that might mean) provides such notice as a matter of law. (I'd still prefer to be the appellant and not the responding AG on this one.)

John, a 525 case? Yes. A lay-down 525 case? I don't see it quite that way. Section 525 prohibits state governments from discriminating against bankrupt debtors with regard to a "license, permit, charter, franchise, or other similar grant." The Illinois statute waives the notices normally sent to debtors who have their automobile repossessed. I think the entire federal statutory structure supports preemption here, but I have to admit that section 525 doesn't quite cover it alone.

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