Extensive Bankruptcy Rules Changes Now In Effect

Effective December 1, the bankruptcy rules have been extensively amended—one of the most significant rules changes in years.  This article explains the implications for individual debtors and provides resources to deal with the changes. 

The procedure for turnover of property has been simplified, making it easier to recover many repossessed vehicles. Debtors no longer need file a statement that they completed a financial management course.  The rules have been completely restyled and renumbered. 

The article also links to five forms debtors can use to require turnover, updated with the new rule changes. In addition, the article links to a side-by-side comparison of the old and new rules, and explains an inadvertent substantive change, and how to cope with that change.

Easier Procedure to Require Creditors to Turnover Repossessed Property

Effective December 1, Rule 7001 is now amended to allow individual debtors to require creditors to turnover property by motion rather than an adversary proceeding.  For example, it is now easier for an individual debtor to recover fully exempt vehicles repossessed prior to a bankruptcy.

A 2021 Supreme Court decision in City of Chicago v. Fulton, 592 U.S. 154 (2021), held that the automatic stay does not require a secured creditor to return property it repossessed before a bankruptcy is filed. See NCLC’s Practice Tools in Response to Latest Supreme Court Bankruptcy Decision. Before Fulton was decided, creditors often voluntarily released to debtors repossessed cars and other property to avoid the possibility of stay violation sanctions.  Some creditors continue this practice after Fulton if they are not concerned with how their claim is provided for under the debtor’s chapter 13 plan, and the debtor has given proof that the car is insured.  But Fulton left debtors with a slow and costly option if the creditor would not willingly give back the property. 

Justice Sotomayor pointed out in her concurring opinion in Fulton that the use of a car is essential for many debtors to stay employed and to be able to succeed in their chapter 13 plans.  She stated that while the Court held that section 362(a)(3) does not compel the turnover of property, “bankruptcy courts are not powerless to facilitate the return of debtors’ vehicles to their owners” as required by Code section 542(a). 592 U.S. at 165. 

Under section 542(a), a party holding repossessed property is required to turn over the property to the debtor if the property is claimed as exempt. See NCLC’s Consumer Bankruptcy Law and Practice § 9.9.

However, the procedural steps for enforcing section 542(a) create challenges. Bankruptcy Rule 7001 until December 1 provided that a proceeding to recover property must be brought as an adversary proceeding. Rather than using the more streamlined motion practice for a contested matter, a debtor who is in immediate need of the property must file an adversary complaint, accompanied by a motion for a temporary restraining order and preliminary injunction together with an affidavit or verified complaint.  Justice Sotomayor’s concurring opinion noted this problem, stating “[i]t is up to the Advisory Committee on Rules of Bankruptcy Procedure to consider amendments to the Rules that ensure prompt resolution of debtors’ requests for turnover under § 542(a), especially where debtors’ vehicles are concerned.” 592 U.S. at 166.

Effective December 1, in response to Fulton, Rule 7001(a) is amended to create an exception to the adversary proceeding requirement, permitting an individual debtor to proceed by motion when seeking turnover under § 542(a) of tangible personal property such as a car or tools of the trade. The procedures under Rule 9014 will apply to such a motion seeking turnover. 

NCLC’s Updated Sample Pleadings Related to Turnover of Property Reflecting This Change

NCLC has updated the digital version of NCLC’s Consumer Bankruptcy Law and Practice Appendix G.5, Turnover of Property, to reflect the rule change. Before filing a motion, it is still advisable to send a letter to the creditor requesting immediate turnover of the property, similar to NCLC’s sample Form 46 Letter Demanding Turnover of Property.  If a motion for turnover is filed, such as sample Form 47 Motion Seeking Turnover of Property, it is no longer necessary to file a separate motion for a temporary restraining order and preliminary injunction as the debtor can request an emergency hearing on the turnover motion. Local court rules should be reviewed for any scheduling and notice requirements for requesting an immediate or emergency hearing on the motion.

In some cases, if the debtor is asserting claims against the creditor in addition to seeking turnover, it may still be advisable to bring the matter as an adversary proceeding. For this reason, NCLC has retained and updated the following sample forms: Form 47a Complaint Seeking Turnover of Property; Form 48 Plaintiff’s Motion for Temporary Restraining Order and Preliminary Injunction; Form 49 Proposed Order for Preliminary Relief in Complaint for Turnover of Property; and Form 50 Motion for Enforcement of Turnover Order and to Hold Defendant in Contempt of Court.

Elimination of Required Statement About Completion of Financial Management Course

To receive a discharge in a chapter 7 or chapter 13 case, the debtor must submit proof of completion of a postpetition financial management course.  See NCLC’s Consumer Bankruptcy Law and Practice § 8.3.3.  This requirement in the 2005 Act was implemented by Rule 1007(b)(7), which initially required the debtor in all cases to file a statement of course completion using the Official Form 423 certification. 

Because some debtors fail to sign and file the Form 423 certification and their cases are closed without a discharge even though they have completed the course, the Rules Committee considered ways to simplify the process. Under a 2013 amendment to Rule 1007(b)(7), the debtor need not file the Form 423 certification if the course provider has notified the court of the course completion. Effective December 1, Rule 1007(b)(7) is amended again to no longer require that debtors file an Official Form to prove that they completed the course, and Official Form 423 has been abrogated. 

Instead, a certificate of completion issued by the course provider must be filed if the course provider does not submit it directly to the court.  In most cases, the debtor must simply complete the course, and the certificate of completion will be filed by the course provider. Still, this change should help avoid cases being closed without a discharge if the certificate is not filed by the provider. 

To implement the change, the reference to “statement” in current Rule 1007(b)(7) is amended to refer to a “certificate,” and conforming changes with those references are made to Rules 1007(c)(4), 4004(c), 5009(b), and 9006(b)(3)(B) and (c)(2). The amendment to Rule 1007(b)(7) also eliminates the requirement that a debtor who has been excused by the court from taking the course must file Form 423, or a certificate of completion.

Side-by-Side Comparison of New Restyled and Renumbered Bankruptcy Rules with Former Rules

The Bankruptcy Rules became the final set of federal court procedural rules that have been restyled, effective December 1, 2024, using the same style guidelines that were used for the Appellate, Criminal, Civil, and Evidence Rules. The style changes were not intended to change the substantive meaning of the rules.  They are intended to make the rules easier to understand and to have a consistent style throughout the rules.  In some cases, the restyling changed the location and numbering of provisions within a rule. 

To assist attorneys with the changes, NCLC has updated the digital version of NCLC’s Consumer Bankruptcy Law and Practice Appendix B (free to the public) to include a side-by-side comparison of former and revised rules.  The former rules are shown in the “original” column and the restyled rules are shown in the “revision” column.

Restyling of Rules Makes an Inadvertent Substantive Change 

While the restyling of the rules was intended to be only stylistic, it appears to have resulted in a substantive change in one instance affecting consumer bankruptcies. Before Rule 3001 was restyled, the sanction provision in former Rule 3001(c)(2)(D) stated that it applied to any claimant who fails “to provide any information required by this subdivision (c).” Subdivision (c) before the restyling applied to (c)(1), (c)(2) and (c)(3), and therefore included the disclosure requirements in former (c)(3) for a claim based on an open-end or revolving consumer credit agreement that are now in Rule 3001(c)(4).  

As a result, courts had held before the restyling that the sanction provision in former Rule 3001(c)(2)(D), which is now Rule 3001(c)(3), applies when a proof of claim is filed by a creditor on a credit card debt, often by a debt buyer, that fails to comply with the disclosure requirements. See NCLC’s Consumer Bankruptcy Law and Practice § 11.6.2.8.2.8 and § 14.4.4.5.

In its restyled form, the sanction provision in Rule 3001(c)(3) states that it applies when a “claim holder fails to provide any information required by (1) or (2)…,” and therefore it does not apply to information required by Rule 3001(c)(4) for open-end consumer credit agreements.

NCLC has requested in a comment letter that the Rules Committee correct the error.  Until the rule is amended to clarify that the sanction provision is applicable, attorneys can argue that courts may continue to exercise their authority to supervise the production of evidence in the claim administration process and to sanction improper behavior even without a specific reference to sanctions in the rule.