Bankruptcy: Reaffirmation Required for Certain Abandoned Collateral

In the case of American National Bank & Trust Co. v. DeJournette, the United States District Court in Danville ruled that where the debtors defaulted on their debt secured by a car and a tractor prior to filing for bankruptcy, the Bankruptcy Court erred in not requiring the debtors to reaffirm their obligation or redeem the underlying debt in order to retain the secured property.

The District Court ruled that whether by means of abandonment or claimed exemption, the property at issue was no longer part of the estate. Therefore, the termination of the automatic stay is governed by Bankruptcy Code §362(c)(2), as opposed to Bankruptcy Code §362(c)(1). Pursuant to §362(c)(2), the automatic stay was lifted upon the earlier of the closing of the case and the discharge. Since the automatic stay had already been terminated by operation of §362(c), the District Court ruled that it was incapable of granting the bank's motion to modify the stay. Nevertheless, the District Court determined that it was capable of providing the bank other "effectual" relief. Underlying the bank's request for modification pursuant to §362(d)(1) was a claim that the Bankruptcy Court misapplied Bankruptcy Code §521(2) by not requiring the defaulting debtor to either reaffirm of redeem their obligation in order to retain the secured property. The District Court ruled that the Bankruptcy Court erred in ruling that the debtors did not either have to redeem or reaffirm. In making its decision the District Court noted that the various circuit courts are split on the issue on whether a non-defaulting debtor must reaffirm or redeem his obligation when he seeks to retain secured collateral, or whether following a Chapter 7 filing, a non-defaulting debtor may simply hold on to the collateral securing the loan and continue making payments under the original loan agreement.

The District Court concluded that where debtors have defaulted on a secured debt prior to filing a bankruptcy petition, they must reaffirm their obligation or redeem the underlying debt in order to retain the secured property.  The District Court noted that one bankruptcy court in this District, in In Re Doss, disagreed with its conclusion and has extended the holding in In Re Belanger, to a situation involving a defaulting debtor. The District Court found that in a situation where the debtor had defaulted on a secured debt prior to filing for bankruptcy, the most efficient and fair remedy is to require the debtor to either surrender the collateral, or, if he desires to retain the collateral, redeem or reaffirm the obligation. Therefore, despite the ruling in Doss, the District Court found that other relevant case law supported its position.

In conclusion, the District Court found that the appropriate relief in this case was to compel the debtors to either surrender the collateral, or, if they chose to retain the collateral, compel them to either redeem the debt or reaffirm their obligation. Accordingly, the debtors were ordered to file a new statement of intention either to surrender or retain the secured property. If they chose to retain the secured property, the debtors would likewise be ordered to state an intention to either redeem the debt pursuant to Bankruptcy Code §722 or reaffirm their obligation pursuant to Bankruptcy Code §524(c).