Arlington, Virginia—On October 13, 2020, the U.S. Supreme Court will consider a case that addresses the intersection of the U.S. Bankruptcy Code and the explosion of municipalities using fines and fees to raise revenue across the nation. The case, Chicago v. Fulton, considers to what extent the Bankruptcy Code protects people who are driven into bankruptcy by court debt from the actions of rapacious municipal governments to collect on that debt.
Under the U.S. Bankruptcy Code, when a debtor files for bankruptcy, that action creates a bankruptcy estate that is made up of the debtor’s property and overseen by the bankruptcy trustee. The filing also creates what is called an “automatic stay” of efforts by creditors to collect on debts owed by the debtor. It also requires any entity that possesses the debtor’s property to turn that property over to the bankruptcy estate. The federal courts are split on whether a creditor may retain that property and force the trustee to file suit to have it returned or whether the creditor must immediately return it as part of the automatic stay.
In the cases before the Court, the City of Chicago, which runs a massive fine and impound program from which it derives roughly 9% of the city’s operating budget, seized the debtors’ cars before bankruptcy and refused to return them after they filed for bankruptcy protection. The 7th U.S. Circuit Court of Appeals concluded that, by retaining the cars, the city was attempting to pressure the debtors to pay off their debt to the city and, as such, the city was violating the automatic stay. The city sought review by the U.S. Supreme Court, which agreed to hear the case.
A philosophically diverse coalition of the groups that work in the fines and fees area filed a friend-of-the-court brief urging the U.S. Supreme Court to affirm the 7th Circuit. The brief—filed by the Institute for Justice, the Roger Baldwin Foundation of the ACLU of Illinois, the Cato Institute, the Fines and Fees Justice Center, the R Street Institute, the Rutherford Institute, and the American Civil Liberties Union Foundation—argued that the purpose of the Bankruptcy Code is to allow debtors a fresh start and that this goal is more important than ever because the rise of civil and criminal fines and fees over the past three decades has forced people into bankruptcy. Fueled by local and state governments’ desire for revenue, the explosion of fines and fees has mired millions of people into an endless spiral of debt. The city’s failure to return the cars it impounded was consistent with the efforts of municipalities across the country to force people who cannot pay their court debt to do so through harsh means, such as impoundment, arrest, and even imprisonment.
“The City of Chicago here is acting directly contrary to the purpose of the Bankruptcy Code,” IJ Senior Attorney Bill Maurer said. “Having access to a car to get to work is essential for a debtor to meet the requirements of their bankruptcy plan and to pull themselves out of debt. Here, the city’s desire for revenue is not just pushing people into bankruptcy, its failure to abide by the automatic stay is helping to keep people in bankruptcy longer than necessary.”
The city’s use of drivers as mobile ATM’s is well-known. Faced with unsustainable budget deficits, the city raised fines and fees for parking, traffic, and ordinance violations, and began aggressively impounding vehicles for unpaid tickets. In all, Chicago residents owe an almost incomprehensible $1.45 billion to the city in unpaid tickets. This has resulted in a tenfold increase in the number of Chapter 13 bankruptcies in the Northern District of Illinois between 2007 and 2017.
“Chicago may try to milk its citizens for revenue using traffic, parking, and ordinance violations,” said Maurer. “It cannot violate the provisions of the Bankruptcy Code designed to protect the very people it has driven into bankruptcy when it does so, however. The U.S. Supreme Court should uphold the 7th Circuit and the intent of the Bankruptcy Code and require Chicago to turnover impounded cars to the bankruptcy estate.”
IJ is also challenging Chicago’s massive and procedurally unfair impound system directly. They represent Chicago area residents in a constitutional challenge to the system. The Illinois trial court recently rejected Chicago’s efforts to dismiss the case.