Bankruptcy: Debtors Retaining Collateral

     The Fourth Circuit Court of Appeals case of Home Owners Funding v. Belanger stands for the proposition that Chapter 7 bankruptcy debtors may retain their collateral after discharge if they are current in their consumer loan installment payments.

     In Belanger the debtors, who had remained current on their payments, filed for Chapter 7 relief and filed a statement of intent under Bankruptcy Code §521 (2) (a) indicating that they wanted to retain possession of their mobile home. The creditor moved the Bankruptcy Court to compel the debtors to reaffirm the debt, redeem the collateral, or surrender it. The creditor, relying on Bankruptcy Code §522 (2) (a), was obviously concerned that the collateral would depreciate to a value less than the balance due, and would be barred from recovering the deficiency. The Court noted that the creditor is presumed to have structured the risk of depreciation into its loan.
     The Court noted that it has held (in the case of Riggs National Bank v. Perry) that a "default-on-filing clause" in an installment loan contract was unenforceable as a matter of law. Therefore, the creditor could not ask for the collateral merely based on the filing. Note, however, that not all courts take this position; see Dominion Bank v. Koons.
     The Court in Belanger denied the creditor's motion and discharged the debtors, holding that the debtor's had complied with Bankruptcy Code §521 (2) (a) by giving notice of their intent to retain the property while continuing to make payments in accordance with their contract with the creditor.
     Attorneys representing debtors can use this opinion against creditors by urging them to remain current with their loans, but not to sign reaffirmation agreements. Many of you have already run into this problem with debtor's counsel.