There is a lot of chatter going on among Nebraska bankruptcy attorneys about reports of court hearings where debtors are being told they can keep a car even if they choose not to reaffirm the car loan as long as payments are kept current.
That’s news to me and many of my colleagues. The Bankruptcy Reform Act of 2005 was supposed to end the Ride-Through option. A “ride-through” is where a lender cannot legally repossess a vehicle even if the debtor does not sign a formal Reaffirmation Agreement as long as the loan was paid current.
A reaffirmation agreement is an agreement to pay a debt (typically a home or auto loan) listed in a bankruptcy case. Reaffirmations basically pull a debt out of the bankruptcy and makes a debtor liable again for the payment. Secured debts tend to be reaffirmed in Chapter 7 and unsecured debts almost never. Clients tend to reaffirm their car loans because if they don’t the banks may repossess a vehicle regardless if the loan is paid current.
In contract to the reaffirmation agreement, a “ride through” gives the debtor the best of both worlds: they keep the vehicle but are not liable for the debt in the event they can not afford future payments. Keep the vehicle if you can afford the payments, but surrender it without being responsible for the debt if you cannot. Everybody loved the ride through, except the banks.
BANKRUPTCY REFORM ACT ENDS THE RIDE-THROUGH?
Along comes the Bankruptcy Reform Act of 2005, and the bankers finally got what they wanted. The automatic bankruptcy stay rule was modified to ban the ride-through option:
In a case in which the debtor is an individual, the stay provided by subsection (a) is terminated with respect to personal property of the estate or of the debtor securing in whole or in part a claim, or subject to an unexpired lease, and such personal property shall no longer be property of the estate if the debtor fails within the applicable time set by section 521(a)(2)—
(A) to file timely any statement of intention required under section 521(a)(2) with respect to such personal property or to indicate in such statement that the debtor will either surrender such personal property or retain it and, if retaining such personal property, either redeem such personal property pursuant to section 722, enter into an agreement of the kind specified in section 524(c) applicable to the debt secured by such personal property, or assume such unexpired lease pursuant to section 365(p) if the trustee does not do so, as applicable; and
(B) to take timely the action specified in such statement, as it may be amended before expiration of the period for taking action, unless such statement specifies the debtor’s intention to reaffirm such debt on the original contract terms and the creditor refuses to agree to the reaffirmation on such terms.
And with that 2005 amendment to the Bankruptcy Code, we all waived goodbye to the ride-through. You want to keep that car? Sign here please.
But now our court seems to be saying something else. Several bankruptcy attorneys report of hearings where the court is saying they can keep their vehicle as long as the loan is paid current. Is the Ride-Through back?
It appears that Nebraska Statute 45-1,107 is the key law in question.
Consumer credit transaction; default; consumer’s right to cure.
(1) With respect to a consumer credit transaction, after a default a creditor may neither accelerate maturity of the unpaid balance of the obligation nor take possession of collateral, except voluntarily surrendered collateral, because of such default until twenty days after a notice of the consumer’s right to cure is given. The consumer shall have twenty days after the notice is given to cure any default by tendering the amount of all unpaid sums due at the time of the tender, without acceleration, plus any unpaid charges, or by tendering any other performance necessary to cure the default as specified in the notice of right to cure. Cure shall restore the consumer to his or her rights under the agreement as though the default had not occurred.
(2) With respect to defaults on the same obligation after a creditor has once given notice of the consumer’s right to cure, the consumer shall have no further right to cure and the creditor has no obligation to proceed against the consumer or the collateral.
Okay, so a consumer has 20 days to cure a default. But how exactly does this law help when a car loan is not reaffirmed in bankruptcy? There are no cases in Nebraska even mentioning this law. Most auto loan contracts contain a “bankruptcy clause” which states that filing bankruptcy itself constitutes a breach of the agreement. How does one cure that type of breach?
Based on the complete lack of case law on this statute, it is very unclear that Nebraska state law permits a general ride-through option.
Perhaps the court is referring to something called a “Back Door Ride-Through.” To qualify for a backdoor ride-through, a reaffirmation agreement must be filed with the court and the court must then disapprove the agreement. By filing the reaffirmation agreement with the bankruptcy court, the technical requirements of §521(a)(2) and §362(h) are satisfied. See Coastal Fed. Credit Union v. Hardiman, 398, B.R. 161, 166 (E.D.N.C. 2008); In re Baker, 390 B.R. 524, 532 (Bankr. D. Del. 2008); In re Blakely, 363 B.R. 225, 2230 (Bankr. D. Utah 2007). See Debtor’s Dilemma: The Economic Case for Ride-Through in the Bankruptcy Code, Amber J. Moren,The Yale Law Journal.
A backdoor ride-through creates a binding nonrecourse loan subject to the automatic bankruptcy stay protection.
Why would a court deny a filed reaffirmation agreement? Generally, if it appears that a debtor does not have sufficient income to justify the monthly expense or if the the loan balance significantly exceeds the value of the vehicle, a court may decline to approve a reaffirmation agreement.
Is the backdoor open in Nebraska? Does a reaffirmation agreement filed with the bankruptcy court that is not approved give rise to a ride-through? There is no written opinion stating this, but it would seem from reported court hearings that such an option may exist.
Image courtesy of Flickr and Anders Ljungberg.