In re Donley

• Citation: 131 BR 193
• Decision Date: 31 July 1991
• Docket Number: Bankruptcy No. 91-07104.
• Parties: In re Harvey B. DONLEY a/k/a Chris H.B. Donley and Cheryl M. Donley a/k/a Cheryl M. Story, Debtor(s).
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Northern District of Florida

131 B.R. 193 (1991)

In re Harvey B. DONLEY a/k/a Chris H.B. Donley and Cheryl M. Donley a/k/a Cheryl M. Story, Debtor(s).

Bankruptcy No. 91-07104.

United States Bankruptcy Court, N.D. Florida, Tallahassee Division.

July 31, 1991.

Steven Huss, Tallahassee, Fla., for debtors.

Emily S. Waugh, Tallahassee, Fla., for Capital City.

William Miller, Tallahassee, Fla., Trustee.

ORDER

LEWIS M. KILLIAN, Jr., Bankruptcy Judge.

THIS MATTER is before the court on the debtors', Harvey & Cheryl Donley, Motion for Determination of Necessity of Reaffirmation Agreement. The debtors seek to retain their automobile without the necessity of a reaffirmation agreement. The creditor, Capital City First National Bank ("Capital City"), has taken the position that the debtors have three alternatives: (a) surrender the collateral, (b) redeem the collateral by a lump sum payment, or (c) reaffirm the debt. Having considered the arguments of counsel, the filed memorandum of law, and for the reasons set forth below, we find that the debtors may retain their automobile without redeeming the property or reaffirming the debt, so long as they remain current under the contract and maintain insurance on the collateral.

The debtors filed their petition for protection under Chapter 7 of Title 11, United States Code, on March 19, 1991. On that same day, they filed a statement of intention to retain their 1990 Mazda truck upon which Capital City holds a lien. The debtors owe the bank approximately $10,700 for the truck which has an approximate market value of $7,600. The debtors have remained current on their obligation to the bank. It is their contention that as long as they continue to remain current under the obligation, they are not required to reaffirm the debt. Contrarily, Capital City contends that pursuant to Bankruptcy Code § 521(2)(A) the debtor must either surrender the collateral, redeem it, or reaffirm the debt.

The provisions of the Bankruptcy Code specifically allow the debtor to reaffirm a debt or redeem personal property from a lien. See 11 U.S.C. §§ 524(f) and 722. Courts cannot force the parties to enter into a reaffirmation agreement, nor can they force a debtor to redeem the collateral. Capital City asserts that the debtors must do one or the other or surrender the property. If a debtor is to redeem the property he must pay the secured creditor the market value of the car at the time of the redemption. If they choose to reaffirm the debt they must assume the personal obligation that would have otherwise been discharged in bankruptcy.

The dispute arises from the effect of the Chapter 7 discharge. Once the debtors receive their discharge they are relieved of any personal liability on the obligation to Capital City. Capital City contends that the relief of the personal obligation jeopardizes its interest in the property. Unless the debtors remain liable for the debt they will have little incentive to pay, particularly as the value of the collateral continues to decrease. Additionally, it argues that the debtors' continuation of payments under the original obligation, without reaffirmation is, in essence, a redemption by installment payments.

This court has previously held that a Chapter 7 debtor may not redeem the collateral by installment payments unless the creditor consents. In re Harp, 76 B.R. 185 (Bankr.N.D.Fla.1987). The continuation of payments under the original obligation, however, is not a redemption by installment. Redemption requires the determination of the value of the collateral. Once established, the debtor would make installment payments only up to the value amount. After payment of the collateral value, the lien would then be discharged. The continuation of payments under the original obligation will result in payments for the term of the contract, regardless of the value of the collateral. The lien remains intact until the financing contract is paid in full, not just until the value of the collateral has been paid. Thus, even if the debtor's cease making payments at some point in the future, the creditor has the benefit of the payments which have been made, plus the collateral.

Capital City contends that if the debtors intend to retain the vehicle, § 521 requires them to reaffirm the debt or redeem the collateral. Section 521 requires that a debtor shall:

(2) If an individual debtor\'s schedule of assets and liabilities includes consumer debts which are secured by property of the estate—

(A) Within thirty (30) days after the date of the filing of the petition under Chapter 7 of this title, or on or before the date of the meeting of creditors, whichever is earlier, or within such additional time as the court, for cause, within such period fixes, the debtor shall file with the Clerk a statement of his intention with respect to the retention of surrender of such property and, if applicable, specifying such property is claimed as exempt, that the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property (emphasis added).

There is a split in the case law as to how this provision should be interpreted. The view urged by Capital City finds that § 521 limits the debtor's options by requiring it to either surrender, redeem, or reaffirm. However, the majority of courts that have considered the issue, have not found the language of this provision to be limited to those three options.

The former view was followed by the 7th Circuit in Matter of Edwards, 901 F.2d 1383 (7th Cir.1990). In that case, the debtor was not in default on the underlying loans and filed a petition for bankruptcy under Chapter 7. Additionally, the debtor wanted to continue paying off the installment loans secured by the two cars without reaffirming the debts. The court found that the "legislative purpose speaks strongly against permitting debtors to improve their position dramatically against secured creditors by relieving them of personal liability." Id. at 1386. To allow a debtor to reinstate the loan but without personal liability would give the debtor little or no incentive to insure or maintain the property. Consequently, the court determined that the language of § 521 is mandatory and that a debtor who wishes to retain the secured property must either redeem it or reaffirm the debt. Further, to permit the debtor to retain the property by merely keeping up the installment payments "allows a debtor to force a new arrangement on a creditor." Id.

The 10th Circuit in Lowry Federal Credit Union v. West, 882 F.2d 1543 (10th Cir. 1989), examined the same issue but came up with the opposite conclusion. In that case, the debtors sought to retain their pickup truck without either reaffirming the debt or redeeming the collateral. The debtors, like in the case at hand, declared that they intended to retain their truck but did not state whether they would redeem or reaffirm. They did not comply with § 521(2)(B) which requires that if a debtor is going to redeem or reaffirm they need to do so within a forty-five (45) day period.

The 10th Circuit first examined whether the failure to comply with § 521 resulted in the creditor succeeding automatically to any rights it may have. It found that the debtors failure to act under § 521 would give only the trustee an interest in the property. It does not give a secured creditor an automatic right to repossess the collateral.

The court next examined the question of whether § 521 limited the debtor's right to retain possession of the collateral through either redemption or reaffirmation. Without elaboration, the court found that nothing within the Bankruptcy Code makes either redemption or reaffirmation exclusive.

The court in In re Hunter, 121 B.R. 609 (Bkrtcy.N.D.Ala.1990), agreed with the Lowry decision. It examined the words of § 521, particularly the words "if applicable," and found that when a debtor is...