The United States Bankruptcy Court at Richmond, in the case of Tidewater Finance Co. v. Cooper, ruled that where the debtors had fallen behind in their payments but were not in default in paying for their vehicle at the time they filed their petition or at the date of a hearing on relief from stay, the creditor on the vehicle was not entitled to relief from the stay, and that the debtors could retain the collateral and continue to make payments pursuant to the contract.
In Cooper Judge Tice noted that there was a split among the U.S. Circuit Courts regarding the correct interpretation of 11 U.S.C. §521 (2). Some Circuits have held that a debtor who desires to retain exempt or abandoned property has only two choices: redemption or reaffirmation. While most Circuit Courts have determined that relief from automatic stay should be denied and that creditors could not compel debtors to redeem the collateral or reaffirm the debt as long as the debtors are current on their payments.
Judge Tice stated that our Circuit Court (the 4th Circuit Court) follows the majority view and has decided that a debtor who is not in default can retain collateral after discharge without reaffirming, redeeming, or surrendering the collateral. Judge Tice stated that the 4th Circuit Court determined that Bankruptcy Code §521 (2)(A) is a procedural provision merely to inform the lien creditor of the debtor’s intention. Judge Tice noted that in the case of In Re: Belanger the Court did not specify from which date the debtor's default is to be measured – the filing date, the date of the creditor’s motion, the hearing date, or simply default at any time.
Judge Tice further noted that in the case of Am. Nt’l Bank & Trust Co. v. DeJournette, arising out of the U.S. District Court for the Western District of Virginia, the Court determined that a defaulted debtor should be treated differently, and that a debtor who defaulted after filing does not have the option to retain the collateral, and must choose among the Bankruptcy Code §521 (2)(A) options of surrender, redeem or reaffirm.
Judge Tice opined that the situation in DeJournette could be distinguished from that in Cooper. In DeJournette, the debtors were delinquent at the date of the filing of their bankruptcy petition. As of the date of the hearing, the DeJournette debtors had paid payments to bring them current on their loan; however, the debtors did not pay the late charges or legal fees and costs associated with their prior arrearage.
In Cooper the debtors were not in default when they filed their Chapter 7 bankruptcy petition because they were within the contractual grace period, nor were they in default on the date of the preliminary hearing on relief from stay. While there was a time in between debtor’s bankruptcy filing and the date of the hearing where the debtors fell behind in their payments, they were current as of the hearing date.
In Cooper Judge Tice found that the creditor failed to demonstrate any real harm or risk of financial loss resulting from the continuation of the stay. The debtors were current in their monthly payments and had adequate insurance on the vehicle. Thus, allowing the debtors to remain in possession of the vehicle in exchange for payment of the monthly installment placed the parties in the same position as they were prior to the debtors’ bankruptcy filing. Further, if the debtors failed to make their monthly payments, the creditor could elect to repossess.
The result of Cooper is a bitter one for creditors – unless the debtor is in default at the time of the bankruptcy filing, or, sometime thereafter, the debtor can retain the collateral and simply keep paying without the requirement of a reaffirmation agreement. This could result in the debtor using the collateral for a number of years, diminishing its value, and then walking away from the debt and leaving the creditor with worthless collateral.
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