BAPCPA Limits Remedies Against Debtors Who Don’t Reaffirm or Surrender

December 19, 2017

There are remedies when an individual debtor does not elect between redeeming, affirming, or surrendering personal property collateral, but delaying the debtor’s discharge is not one of them, according to Bankruptcy Judge Phillip J. Shefferly of Detroit.

Before and after the BAPCPA amendments in 2005, the circuits have been split on a debtor’s ability to “ride through” or “stay and pay,” the colloquial terms referring to a debtor who simply continues paying secured debt that was current on filing, without electing between reaffirmation or surrender.

The Second, Third and Tenth Circuits allow “stay and pay,” Judge Shefferly said, while the First, Fourth, Fifth, Seventh, Ninth and Eleventh do not. To rule in his case, Judge Shefferly had no guidance because the Sixth Circuit is yet to confront the question.

The consumer debtor filed a chapter 7 petition owning a mobile home conceded to be personal property. The home was subject to a purchase money mortgage. The debtor was current on the mortgage at filing.

In her schedules, the debtor checked the box indicating that she intended to enter into a reaffirmation agreement regarding the mobile home under Section 521(a)(2). She checked another box indicating her intention to retain the property, but in the space for an explanation she said she intended to “pay and retain.”

The lender filed a motion asking the court to delay the entry of her discharge until she either reaffirmed the debt or surrendered the mobile home under Section 521(a)(2). Judge Shefferly denied the motion in an opinion on Nov. 30.

Judge Shefferly summarized the ambiguities in Section 521 before and after BAPCPA. That section now expressly provides some legal consequences if a debtor does not timely perform his or her duties under Section 521(a)(2) either to surrender or retain and reaffirm secured debt.

In terms of remedies, the property is removed from the estate under Section 362(h)(1) and the automatic stay terminates, allowing the creditor to enforce its rights under non-bankruptcy law if the debtor does not carry out his or her election under Section 521(a)(2).

If the debt is secured by a purchase money security interest in personal property, there is an additional remedy in Section 521(a)(6). That section provides that the debtor “shall not retain possession of” the personal property collateral if the debtor has not entered into a reaffirmation agreement under Section 524(c) or redeemed the property.

Although a bankruptcy court in Texas had delayed a debtor’s discharge under similar circumstances, Judge Shefferly said there was no supporting authority in the Bankruptcy Code or the Bankruptcy Rules.

Because the debtor had already missed the deadline for redeeming, reaffirming, or surrendering the mobile home, Judge Shefferly said that the creditor’s request for that relief was moot. Instead, he said, “certain legal consequences of such failure came into effect by operation law.”

Specifically, the mobile home was no longer property of the estate, and there was no automatic stay. Filing an amended statement of intention at that stage, Judge Shefferly said, “would not unwind those legal consequences.”

The creditor conceded that it could enforce remedies under non-bankruptcy law. The creditor nonetheless wanted additional relief from the bankruptcy court because, in Judge Shefferly’s words, “enforcing applicable non-bankruptcy law remedies can frequently be difficult and expensive.”

Although the additional remedy “does not appear to be unreasonable,” Judge Shefferly said, “the Bankruptcy Code does not license the court to search for ways to minimize a creditor’s time and expenses.”

Because the Bankruptcy Code includes specified remedies, Judge Shefferly said he was not authorized by the Code and Rules to delay entry of the debtor’s discharge.

Judge Shefferly noted that the creditor had not sought relief under Section 521(a)(6), which provides that the debtor may not retain possession of personal property, like the mobile home, secured by a purchase money security interest.

Judge Shefferly did delay the entry of discharge by 14 days to afford the debtor time to reaffirm the debt, perhaps because the lender could have forced the debtor to vacate the home. The lender might not have attempted to enforce that remedy previously because the lender wanted a borrower who reaffirmed the debt, not an empty mobile home in foreclosure.

Judge Shefferly mentioned that BAPCPA included another remedy. In Section 521(d), a so-called ipso facto clause is effective against a debtor who does comply with Section 521(a)(6). Evidently, the judge said, the lender’s mortgage note did not include an ipso facto clause.

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