Repossession of Vehicle Allowed by Court after Chaper 7 Discharge without Reaffirmation

19 Jun Repossession of Vehicle Allowed by Court after Chaper 7 Discharge without Reaffirmation

The Kansas Supreme Court recently ruled in Hall v. Ford Motor Credit Co. LLC, that a debtor’s failure to reaffirm a debt secured by his pick-up truck during his Chapter 7 bankruptcy constituted a default of his loan with Ford Motor Credit.  The court found that the debtor’s Chapter 7 discharge significantly impaired the secured creditor’s propsect of payment, performance, or realization of its collateral so that it was allowed to repossess the collateral despite the fact that the debtor was current on his payments to Ford.  The court applied Section 5-109(2) of the Uniform Consumer Credit Code in making its decision.

The Kansas Supreme Court found that the bankruptcy filing was not an enforceable default, but ruled that the entry of a Chapter 7 discharge without the reaffirmation of a debt when the collateral was worth less than the debt is an enforceable default. 

The debtor argued that Ford’s fears of significant impairment were only anticipatory in nature – especially since he was current in his payments.  He also told the court he intended to stay current.  The court, however, disagreed.  It stated that the Bankruptcy Code had established procedures for debtors who wanted to keep collateral such as vehicles, furniture, etc. and faithfully make payments.  The court went on to say “under Hall’s ‘trust-what-I-say-today’ method of reaffirmation that Ford must accept additional risk that Hall would change his mind at any time and unilaterally decide to terminate any part or all of his contract performance.  Meanwhile, Hall has been relieved of all personal liability and is subject to no additional sanction for failing to fulfill his precatory assurance of performance.  “If Hall chooses to terminate performance, Ford Credit will be left to salvage whatever it can from the truck in whatever condition it might be at the time.  In that vein, the truck’s value in relation to the remaining balance on the contract is an important factor.  A creditor would be justified in believing that a debtor would ordinarily not gratuitously pay more for a vehicle than it is worth.  Accordingly, the prospect of debtor’s continued performance would be significantly impaired as a matter of economic reality whre the note is substantially undercollateralized.”  In this case, the Debtor owed Ford Credit approximately $7,500.00 more than the truck was worth.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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