“Retain and Pay” Rejected by Appeals Court; Reaffirmation Agreements Likely Required by New Ruling

20 Jan “Retain and Pay” Rejected by Appeals Court; Reaffirmation Agreements Likely Required by New Ruling

No notice is required before a bank repossesses your motor vehicle after a chapter 7 bankruptcy, unless you formally reaffirm the vehicle loan, according to a recent federal appeals court decision. This case casts doubt on the “option” of “retain and pay,” where the debtor simply continues payments on a vehicle loan after filing chapter 7, without siging or filing a reaffirmation agreement with the bankruptcy court.

In re Jones, No. 08-2177 (4th Cir. Jan. 11, 2010), involved a West Virginia debtor who filed chapter 7 in 2006 having a vehicle loan owed to Daimler Chrysler. The debtor did notsign a reaffirmation agreement regarding his vehicle, and his Statement of Intentions simply stated he would “continue payments.” Daimler Chrysler obtained an order lifting the bankruptcy stay based upon the vehicle installment contract’s ipso facto clause (also known as abankruptcy clause). This clause stated that the loan would automatically be in default upon the filing of a bankruptcy.

Shortly after obtaining the lift stay order, Daimler Chrysler repossessed the vehicle, even though the debtor had made one payment after the bankruptcy filing, by electronic means,which Daimler Chrysler had accepted. The debtor then sued Daimler Chrysler in bankruptcy court, claiming that West Virginia law required official notice to him prior to repossession, and claiming that formal reaffirmation agreements were not required under the 2005 Bankruptcy Reform Act.

TheU.S. Court of Appeals, Fourth Circuit, reversed the lower courts, which had sided with the debtor. The appeals court held that “retain and pay” was notallowed under the 2005 Bankruptcy Reform Act, except by consent of the lender. Because no reaffirmation agreement had been filed, Daimler Chrysler was free to repossess the vehicle once 45 days had elapsed from the section 341(a) meeting of creditors.

The appeals court also held that Daimler Chrysler was not required to notify the debtor of his right to cure the default on the loan(which consisted of the act of filing for bankruptcy) under West Virginia law, prior to repossession, because the default was not capable of being cured. As such, requiring Daimler Chrysler to notify the debtor of such a “right” would be “absurd” and would serve no purpose.

The appeals court also rejected the debtor’s argument that Daimler Chrysler had accepted his intention to “retain and pay”through its receipt ofhis single electronic payment; this was ambiguous at best and the court refused to find that Daimler Chrysler’s action was evidence of its acceptance of “retain and pay.”

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Craig W. Andresen is a consumer bankruptcy lawyer in Bloomington, Minnesota, with 22 years’ experience in consumer and small business bankruptcy cases. He is the Minnesota chair of the National Association of Consumer Bankruptcy Attorneys, and is a member of the Minnesota State Bar Association’s Bankruptcy Section. Mr. Andresen lectures often on the topic of consumer bankruptcy at local and national legal seminars.
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