Related Keywords: reaffirmation . redemption . ride-through . secured debt .
Before the passage of BAPCPA in 2005, five Circuit Courts had held that a "fourth option" existed in addition to the choices of "redemption" "reaffirmation" and "surrender".
This fourth option was nicknamed the "ride through" which essentially meant that the debtor's personal liability for the original debt was discharged, but the creditor was precluded from repossessing the item so long as the debtor remained current on the original contract payments.
In a "ride through" scenario, if the item suddenly becomes worthless, due to, say a car accident or deterioration, the debtor can simply stop making payments, surrender the now-worthless property, and owe not a penny more.
Understandably, ride through is an attractive option that consumer bankruptcy lawyers advocated for their clients in the jurisdictions that allowed it.
The question now is whether this option still exists.
At first blush, it looks like BAPCPA eliminated the "ride through" option, and many courts have ruled that way.
However, a strong argument has been made and followed by some courts that IF a debtor submits a reaffirmation agreement for approval, the court can effectively grant a "backdoor ride through" by disallowing the reaffirmation -- thereby satisfying the new law's requirement that the debtor pick one of the three options -- in this case reaffirmation.
The judge cooperates in setting up the ride through by disapproving of the reaffirmation on the grounds that the "ride through" option will give the debtor a much better deal, and as a consequence, the reaffirmation is not "in the debtor's best interest" as required by law.
End result: the contract goes forward under state law, whatever it happens to be. The Federal judges ruling on a matter of Federal Bankruptcy law is limited to only those provisions affected by it -- in this case, the debtor's personal liability for the debt is NOT reaffirmed, other aspects of the contract may still be enforceable under state law.
In some states, this means that that, as long as the debtor remains current on the payments, the property can't be repossessed, but the debtor is is no longer personally liable for unpaid amounts in the case of a default, but the property must be surrendered)
The Columbia Law Review Article makes the case that ride through should survive in those jurisdictions that allowed it.
The issues argued in these cases are whether the hanging paragraph allows a debtor to surrender a 910 vehicle in full satisfaction of his debt. If not, then, "the remaining debt must be treated as an unsecured claim in the Chapter 13 plan. Although the debt "need not be paid in full, any more than [the debtors] other unsecured debts, [] it [cannot] be written off in toto while other unsecured creditors are paid some fraction of their entitlements." In re Miller
The means test Forms 22A (Chapter 7) and 22C (Chapter 13) allow you to deduct the full amount of secured debt payments you are currently making at the time you file your bankruptcy petition.
The question arises, what if you plan to surrender that property during the course of your bankruptcy. This issue is particularly relevant in Chapter 13 cases, where the case continues on for 3 to 5 years, and your ability to pay in the future is one of the elements the court must consider in confirming a proposed Chapter 13 plan.
In a Chapter 7 case, the issue may turn on whether the debtor has actually surrendered the property yet -- that is, if the payments are still "contractually due" at the time the means test form is filed.
This timing question can become relevant because a trustee must make the "abuse" determination (based on the means test form) within 10 days after the section 341 meeting, Meanwhile, the debtor has up to 30 days from the date of the original filing (or the date of the 341 meeting if that comes first) to state whether they intend to surrender the property, and then gets another 30 days after that to actually act on their intentions. Thus, at the time of the abuse determination, it is possible that the debts are still "contractually due."
All of this may be a moot point in many courts, however, because a judge can still find a debtor ineligible to file if the judge thinks there is an ability to pay. Some courts have allowed the deduction, under Sec. 707(b)(2), then ruled that the surrender of the property (and the removal of that debt) means that the debtor has enough funds to pay his unsecured debts and therefore will refuse to grant a discharge of those debts based on the "totality of the circumstances" Sec. 707(b)(3).
This issue comes up in three contexts.
1. Forms 22A: First is the threshold determination of whether the debtor qualifies for Chapter 7 or only for Chapter 13 at the time of the original finding, as determined by the means test (Form 22A), and
2. Form 22C: if the debtor goes the 13 route, the length of the "applicable commitment period" as determined by Form 22C-- a fancy way of saying whether the plan has to be 3 or 5 years.
3. The third context applies only to above-median income debtors in Chapter 13, where debtors must complete Form 22C to determine their "disposable income" and also, later must must propose an actual monthly payment plan to repay their debts, which must be reviewed and approved by a Judge who can reject a plan for non compliance with the law and feasibility (i.e. whether the debtor will really be able to afford the proposed payments? or on the other end, whether the debtor will be paying enough into the plan to satisfy the law's standards against "abuse" of the bankruptcy system.)
The case law deals with the complications that arise because the first two, based on Forms 22A (for Chapter 7) and Form 22C (for Chapter 13) seem to ask for a snapshot in time (at the date the debtor first files for bankruptcy, whereas, under traditional bankruptcy law, a judge can look at the "real world" of the debtors circumstances several months later, when it finally comes time to determine whether a proposed Chapter 13 plan can be approved. Courts are split on whether the 2005 bankruptcy amendments require judges to use the Form 22C calculation, or whether they can consider changes in the debtor's actual circumstances at when the plan is finally up for approval (called the "confirmation hearing").