Courts have long struggled with the issue of whether the Code permits a "ride-through" for a chapter 7 debtor's secured personal property. In fact, this question of "whether a chapter 7 debtor who has remained current on all installment payments to a lender may retain collateral securing a dischargeable consumer debt without either reaffirming the debt or redeeming the collateral...by continuing to make timely [contract] payments" has been called "the most controversial consumer credit issue" under the Code.² Even after passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. 109-8, 119 Stat. 23 (2005) (BAPCPA) attempted to settle the issue, the results of a recent ABI online poll demonstrate that the so-called "fourth option" of "installment redemption" still generates controversy. This poll indicated that 32 percent of respondents agreed strongly with the proposition that BAPCPA precludes the "fourth option" of ride-through for a debtor's secured personal property.³ However, 28 percent of those who responded strongly disagreed with the same proposition.⁴ This article briefly examines the competing positions before the enactment of BAPCPA, summarizes the relevant amendments under BAPCPA and concludes with the impact of those changes on the "fourth option."

Pre-BAPCPA Opinions on the "Fourth Option:" Divisions Within and Between the Circuits

Before BAPCPA, courts were deeply divided on the validity of the "fourth option."⁵ Some courts held, in essence, that the interplay between §§521(2) (statement of intention filing requirement), 524(c) (reaffirmation agreement requirements) and 722 (redemption) permitted debtors to retain collateral and continue to make monthly payments without redeeming or reaffirming the debt, provided the debtors are not in default on the contract.⁶ Courts that permitted debtors to exercise this "fourth option" generally interpreted §521(2) as a statute whose purpose was simply to provide notice via the filing of a statement of intention, not to affect the debtor's substantive rights regarding the collateral at issue. Some courts based their interpretation of §521(2) in part on the phrase "if applicable" in §521(2)(A),⁷ which they viewed as not limiting the debtor's choices; others relied on §521(2)(C), which states that nothing in §§521(2)(A) or (B) "shall alter the debtor's or the trustee's rights with regard to such property under this title."⁸ In arriving at an interpretation supporting the "fourth option," some courts also looked to the underlying purpose of the Code, which favors a "fresh start" for debtors.⁹

Other courts, in interpreting the same Code provisions, came to the opposite conclusion: They found there were only three alternatives for a debtor holding property encumbered by consumer debt, either (1) retain the property and reaffirm the underlying debt, (2) redeem the property or (3) surrender the property.¹⁰ These courts generally viewed the phrase "if applicable" in §521(2)(A) "to mean that if retention is selected from the two general options available (retention or surrender), then the debtor must specify one of the three listed retention options." Burr, 160 F.3d 846 (citation omitted). They also focused on the fact that nowhere in the plain language of the statutes was such a "fourth option" mentioned, while, in contrast, redemption, reaffirmation and surrender are specifically enumerated.¹¹

Interestingly, courts on both sides focused on the plain language of the relevant Code provisions, yet arrived at diametrically opposing positions. One of the reasons for lack of consensus about the meaning of §521(2) may be the counterintuitive fact that this statute mandates the filing of the statement of intention but provides no specific consequences for the debtor's failure to comply with that statute's time requirements or for the debtor's failure to enumerate in the statement of intention whether the debtor intends to retain the collateral and reaffirm the underlying debt, redeem the collateral or surrender the collateral. This lack of consequence, coupled with the language in §521(2)(C), provided room for the interpretation that the "fourth option" was viable. However, as summarized below, the BAPCPA amendments now provide that a debtor's failure to comply with the requirements related to the statement of intention will generally lead to the termination of the automatic stay as to the encumbered collateral.

BAPCPA Amendments Impacting the "Fourth Option"

BAPCPA has extensively revised the Code, and §521 was not spared congressional scrutiny. Section 521(2) has been redesignated as §521(a)(2), and it now provides that a debtor must file a statement of intention regarding property of the estate encumbered by any debt, not just consumer debt.¹² The debtor is to perform the stated intentions with respect to such property within 30 days after the first date set for the §341(a) meeting of creditors.¹³

Section 521(a)(6) is an entirely new section and provides, in sum, that an individual chapter 7 debtor cannot retain possession of personal property in which a creditor has a purchase money security interest, unless the debtor, not later than 45 days after the first meeting of creditors, either enters into a reaffirmation agreement under §524(c) or redeems the property under §722.¹⁴ If the debtor fails to take action within the 45-day period, the automatic stay under §362(a) is terminated as to such property, and the property is no longer estate property, thus permitting the creditor to exercise nonbankruptcy law remedies.¹⁵ However, there is an exception if the court, after notice and a hearing on motion of the trustee filed before the expiration of this period, determines that the property has consequential value/benefit to the estate, orders adequate protection of the creditor's interest and orders the debtor to deliver possession of the collateral to the trustee.¹⁶

Finally, former §521(2)(C) has been amended to state, in essence, that the debtor's rights with regard to encumbered collateral are now subject to a new section, §362(h).¹⁷ This new section applies to individual cases under any chapter of the Code with respect to personal property of the debtor or the estate, and it recites clear consequences if a debtor fails to comply with the requirements contained in redesignated §521(a)(2).¹⁸ Section 326(h) provides for termination of the automatic stay as to such personal property if the debtor fails to timely file a statement of intention, fails to indicate in the statement of intention whether the debtor intends to redeem, surrender or enter into a reaffirmation agreement, and if the debtor fails to take timely action as specified in the statement of intention, unless that statement provides for reaffirmation and the creditor refuses to agree to reaffirmation on such terms.¹⁹ There is an exception to the termination of the stay if the court so orders; the criteria for application of this exception are the same as the exception under new §521(a)(6).²⁰

Conclusion: The End of the "Fourth Option" for Secured Personal Property

The disagreement between circuit courts on the "fourth option" indicates that, in light of the ambiguities in the relevant statutory language, either interpretation under the pre-2005 Code had merit. In fact, opinions addressing the validity of the "fourth option" seem to depend in no small part on what particular statutory language the courts chose to stress and on which of the many policies underlying the Code the courts chose to emphasize. Under the Code as amended by BAPCPA, however, room for interpretation permitting the "fourth option" has, at best, been significantly narrowed, particularly due to new §§521(a)(6), 326(h) and the amendment to the former §521(2)(C). Taken together, the BAPCPA revisions to the Code sections relating to the "fourth option" provide unambiguous consequences if a chapter 7 debtor fails to enumerate in a statement of intention whether he or she plans to redeem, reaffirm or surrender: The automatic stay is terminated and the collateral at issue is no longer estate property. This stands in stark contrast to the Code before the enactment of BAPCPA, which provided no specific consequences for a debtor's failure to comply with §521(2). Although Congress did not excise the phrase "if applicable" from §521(2)(A), considering the totality of the BAPCPA amendments, it nevertheless appears clear that Congress effectively eliminated the "fourth option" for individual chapter 7 debtors' secured personal property.

Footnotes

¹ The opinions expressed herein are solely those of the author. Return to article

² Waxman, Ned W., "Redemption or Reaffirmation: The Debtor's Exclusive Means of Retaining Possession of Collateral in Chapter 7," 56 U. Pitt. L. Rev. 187 (1994). Return to article

³ See ABI Quick Poll of Aug. 11, 2005, available at http://www.abiworld.org. Return to article

⁴ Id. Return to article

⁵ Although other appeals courts have ruled on this question, the Eighth Circuit Court of Appeals never addressed the validity of the "fourth option;" courts within the Eighth Circuit are split on this question. See Sanabria v. Am. Nat'l. Bank (In re Sanabria), 317 B.R. 59, 61 n.2 & n.3 (BAP 8th Cir. 2004) (noting split within circuit and citing cases); compare, e.g., In re Canady-Houston, 281 B.R. 286 (Bankr. W.D. Mo. 2002) ("fourth option" valid); In re Parker, 142 B.R. 327 (Bankr. W.D. Ark. 1992) (same); and In re Manring, 129 B.R. 198 (Bankr. W.D. Mo. 1991) (same) with In re Kennedy, 137 B.R. 302 (Bankr. E.D. Ark. 1992) (options of redeeming, reaffirming or surrendering collateral are exclusive); In re Gerling, 175 B.R. 295 (Bankr. W.D. Mo. 1994) (same); and In re Griffin, 143 B.R. 535 (Bankr. E.D. Ark. 1991) (same). Return to article

⁶ See Price v. Del. State Police Fed. Credit Union (In re Price), 370 F.3d 362, 375 (3d Cir. 2004) (reasoning that the statutory language of §521, on its own and in the broader context of the Code, "sets forth a notice provision that does not limit a debtor's substantive retention options to the three stated therein"); McClellan Fed. Credit Union v. Parker (In re Parker), 139 F.3d 668, 673 (9th Cir. 1998) (finding that the only mandatory requirement imposed by §521(2)(A) was the filing of the statement of intention and that §521(2)(C) unambiguously states that nothing in §521(A) or (B) alters the debtor's rights with regard to the collateral); In re Boodrow, 126 F.3d 43, 51 (2d Cir. 1997) (concluding that §521(2) is ambiguous as to whether Congress intended the options there listed to be exclusive and reasoning, based on limited legislative history and policy of "fresh start" underlying the Code, that "confining an individual chapter 7 debtor to the choices of surrender, redemption or reaffirmation can severely interfere with providing...a fresh start."); In re Belanger, 962 F.2d 345, 347 (4th Cir. 1992) (reasoning that §521(2) was a merely a procedural provision requiring notice in order to inform the lien creditor promptly of the debtor's intention, and noting that §521(2)(C) provides that the subsection does not alter the debtor's rights with regard to the collateral); Lowry Fed. Credit Union v. West, 882 F.2d 1543, 1546 (10th Cir. 1989) ("while a debtor may redeem property, subject to 11 U.S.C. §722, or reaffirm a debt, subject to 11 U.S.C. §524(c)(4), nothing within the Code makes either course exclusive"); In re Kasper, 309 B.R. 82, 86 (Bankr. D. D.C. 2004) (viewing §521(2) as primarily a notice statute). Return to article

⁷ Section 521(2)(A) reads as follows: "The 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 30 days after the date of the filing of a 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 or surrender of such property and, if applicable, specifying that 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)." Return to article

⁸ See, generally, supra n.6. Return to article

⁹ See, generally, supra n.6. Return to article

¹⁰ See Johnson v. Sun Fin. Co. (In re Johnson), 89 F.3d 249, 252 (5th Cir. 1996) ("filing a statement of intention indicating that none of the three statutory alternatives are applicable, and failing otherwise to inform [creditor] of their intention is not in compliance with §521(2)"); Bank of Boston v. Burr (In re Burr), 160 F.3d 843, 847-48 (1st Cir. 1998) ("[t]he language of 11 U.S.C. §521 (2) unambiguously requires a debtor retaining collateral which secures consumer debt to elect and then perform one of the retention options specified in §521(2)(A)...."); Taylor v. AGE Fed. Credit Union (In re Taylor), 3 F.3d 1512, 1516 (11th Cir. 1993) ("Section 521 mandates that a debtor who intends to retain secured property must specify an intention to redeem or reaffirm. Nothing in the plain language of the statute provides a debtor with an option to retain the property and to continue to make payments"); In re Edwards, 901 F.2d 1383, 1387 (7th Cir. 1990) (holding that §521 requires a debtor to choose between the reaffirmation, redemption or surrender of property abandoned from the estate or exempted from discharge); In re Bell, 700 F.2d 1053, 1057 (6th Cir. 1983) ("a bankruptcy court's imposition of installment redemption clearly contravenes the overall statutory scheme and destroys the delicate balance between §§722 and 524(c), and therefore finds no sanction in principles of equity"). Return to article

¹¹ See, generally, supra n. 10. Return to article

¹² BAPCPA §305(2). Return to article

¹³ Id. Return to article

¹⁴ BAPCPA §304(1). BAPCPA §304(2) amends §722 of the Code to provide that if the debtor wishes to exercise his or her redemption right, the creditor's lien must be paid "in full at the time of redemption." Return to article

¹⁵ BAPCPA §304(1). Return to article

¹⁶ Id. Return to article

¹⁷ BAPCPA §305(2). Return to article

¹⁸ BAPCPA §305(1). Return to article

¹⁹ Id. Return to article

²⁰ Id. See, also, BAPCPA §304(1). Return to article