Bankruptcy: Redemption - Exercising the Right of Redemption

Can debtors exercise the right of redemption after discharge has been ordered?

     A decision by Judge Krumm for the Western District of Virginia appears to have answered this question. The case was In Re Hawkins. The debtors sought to reaffirm the bank loan secured by their Dodge Colt. The debtors later learned of Bankruptcy Code §722 redemption rights, and sought to redeem instead of reaffirm. Before redemption was achieved, the chapter 7 discharge was granted.  The creditor opposed the motion and alleged that debtors' right of redemption expired when they were discharged in bankruptcy. The court found for the debtors and held that the debtors' discharge did not bar their motion for redemption under § 722. Debtors were clearly entitled to reaffirm debts after discharge under 11 U.S.C.S. § 524. While 11 U.S.C.S. § 722 was silent on whether they were allowed to redeem property after discharge, the court found that it was Congress' intent to consider the concepts of reaffirmation and redemption together. The court reasoned that although the Code is silent as to when debtors may exercise their right to redeem, since concepts from reaffirmation and redemption were considered by Congress together, the time frame for exercising one option should be applicable to the other option. Therefore, the time frame for exercising redemption rights was the same as that for exercising reaffirmation rights.

      Right to redeem / repossess property in Chapter 13 cases:

      In the case of Tidewater Finance Co. v. Moffett, the Fourth Circuit Court of Appeals ruled that a Chapter 13 debtor was entitled to the return of her car, which had been repossessed by a finance company.  This decision affirmed the original bankruptcy court decision, as well as the appellate decision of the District Court.

     In Moffett, the debtor, in her reorganization plan, exercised her right to redeem under the Virginia Uniform Commercial Code (“UCC”); the plan provided for full payment of her debt to the finance company, plus interest on the delinquent payments.

     The debtor worked at the Federal Emergency Management Agency, forty miles from her home.  A couple of years prior to the bankruptcy filing she had bought a previously owned, three year old Honda Accord from a dealer in Woodbridge, which assigned its loan to the finance company creditor.  The car was the debtor’s only means to get to work each day.  The debtor made her payments in a timely fashion for a year, and then missed two payments.  This prompted the finance company to repossess the car.  Later that same day the debtor filed for Chapter 13 bankruptcy.  A week after that the debtor’s lawyer demanded that the finance company return the car.  The finance company filed a motion for relief from the automatic stay so that it could sell the vehicle.  The bankruptcy court denied the motion, however, and ordered the finance company to return the car.  In doing so, the bankruptcy judge required adequate protection for the creditor in the debtor’s Chapter 13 plan.  The debtor’s Chapter 13 plan provided for full payment of the loan.  The finance company returned the car, but appealed to the District Court.

     The District Court Judge found that the debtor had a statutory right of redemption, and also found that the finance company was required to turn over the car once its interest was adequately protected in the Chapter 13 plan.

     The finance company appealed again, this time to the Fourth Circuit Court of Appeals. In his opinion, the Fourth Circuit Court Judge cited that pursuant to the federal bankruptcy code, once a petition is filed, an automatic stay goes in effect. Any party with property that the trustee can use, sell or lease must turn it over to the trustee, after that party’s interest is protected. The district judge said the question in this case was whether the finance company and the car at issue were subject to the referenced code provisions. The judge looked at the UCC as controlling, since the case involved default on a purchase agreement with a secured creditor. The UCC allows the creditor the right of repossession, but within limits. The debtor also has rights upon repossession, including the right to redeem the property under UCC Section 8.9A-623 (c)(2). The Judge ruled that the debtor’s right to redemption becomes one of the “legal or equitable interests” of her bankruptcy estate.

     The 4th Circuit agreed with the lower courts that if the creditor’s interest is protected in the plan, then it must turn over the car. UCC Section 8.9-623(b) allows a debtor to redeem collateral by tendering in full its obligations to the creditor. In this case, the Judge noted that the debtor’s plan did just that. The plan even provided interest to the finance company for the delinquent payments. The Judge wrote: “[T]he bankruptcy plan here provided for the payment of all future installments, the curing of all delinquent payments, and the payment of all applicable interest over the course of the plan”. “Such a flexible approach to repaying claims is precisely what the Bankruptcy Code allows in order to facilitate a debtor’s successful rehabilitation.” The Judge affirmed the lower court’s decision.