PRE-BAPCPA: In re Price, 370 F.3d 362 (2004)
The Debtors in this case filed a joint Chapter 7 Bankruptcy in Delaware and attempted to “ride through” their automobiles in the Bankruptcy—that is, they wanted to use their automobiles while remaining current on the their monthly auto loan payments but made no agreement to reaffirm the debt with the creditor. To “ride through” essentially means that the debtor's personal liability for the original debt is discharged, but the creditor is precluded from repossessing the item so long as the debtor remains current on the original contract payments. The creditor in this case argued that the Bankruptcy Code does not permit the Debtors to continue possessing the cars simply by paying their bills, but instead allows only four options: (1) surrender the cars, (2) purchase them in a lump-sum payment (“redeem”), (3) negotiate another loan that would attach postpetition liability (“reaffirm”), or (4) claim a recognized exemption under the Bankruptcy Code.
The Third Circuit Court of Appeals considered whether these options were intended to be exclusive by the Bankruptcy Code. In making its decision, the Court looked to Section 521(2)(A) of the Bankruptcy Code, which states that the debtor shall file a statement of intention with respect to retaining or surrendering property and, if applicable, specify that the property is exempt, that debtor intends to redeem the property, or that the debtor intends to reaffirm the property. The phrase “if applicable,” the Court found, serves the purpose of requiring the debtor to specify its intent only if that intent falls under one of the three specified categories.
Furthermore, the Court concluded that creditors would not be disadvantaged by interpreting the Bankruptcy Code in this light, as they would still be able to motion to lift the automatic stay if the debtors were to default on payments under the original loan agreement.
The Court ultimately held that their “examination of the substantive rights provided elsewhere in the Code guides [this Court] to conclude that although unstated in section 521(2), debtors do have the option to retain property while staying current on loan payments” thus allowing Debtors to “ride through.”
In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), which amended the Bankruptcy Code. Among other things, BAPCPA now required that a failure to redeem or to reaffirm a debt within the applicable time period terminated the automatic stay with respect to personal property of the estate or the debtor. (See Section 362(h))
This meant that debtors could no longer “ride through” bankruptcy simply by retaining the property while staying current on the loan payments, but instead needed to redeem or reaffirm the debt within a prescribed time period, or risk a lifting of the automatic stay, allowing the creditor to take measures to repossess the property.
POST-BAPCPA: In re Baker, 390 B.R. 524 (Bankr. D. Del. 2008)
In Baker, the debtor filed a statement of intention to retain the collateral and to continue to make payments but then entered into a reaffirmation agreement. The Court later refused to approve the agreement because it constituted undue hardship on the debtor.
The Court ultimately found that the debtor substantially complied with the Code by entering into the reaffirmation agreement. Although the reaffirmation agreement was ultimately denied, debtor was able to retain the collateral while continuing to make payments since it had substantially complied with the applicable sections of the Code (521(a)(2)(C) and 362(h))—thus allowing debtor to “ride through.”
CURRENT STATE OF THE LAW
The “ride through” option remains available to debtors in Delaware. In order to make sure substantial compliance is met, debtors should indicate one of the statutory options in its Statement of Intention. If the debtor chooses to reaffirm, it must complete a reaffirmation agreement with the creditor. The court will review the reaffirmation agreement to determine if it is in the best interest of the debtor. If the court determines that the reaffirmation agreement is not in the best interests of the debtor after reviewing the agreement and the debtor’s current income and expenses, the court will deny the agreement. Once the agreement is denied, debtor is able to continue to make payments and retain the collateral, all while being able to discharge personal liability of the debt—effectively creating a “ride through.”