Cite as: Keith M. Lundin, Lundin On Chapter 13, § 8.9, at ¶ ____, LundinOnChapter13.com (last visited __________).
A debtor who cannot convince creditors to consent or who cannot afford the cost of reaffirmations or redemptions is a candidate for Chapter 13. In a Chapter 7 case, the debtor who desires to keep encumbered property has only two reliable1 choices: negotiate a reaffirmation agreement with the creditor or redeem the property by paying its value in a lump sum. If the debtor is behind in payments and can’t immediately get current or if the creditor is simply dissatisfied with the debtor as a borrower, the likelihood of consummating a consensual reaffirmation agreement is small. The option of keeping property subject to a lien and simply continuing to make payments—the so-called “ride through”—appears to have been severely restricted, if not eliminated, by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).2
Chapter 13 avoids the problem of creditor consent to reaffirmation. Even when the debtor is delinquent in payments to a secured claim holder, the Chapter 13 plan can modify the agreement or cure the default, keep the collateral and pay for it over time without the creditor’s consent.3 And most of the time, the Chapter 13 plan can reduce interest rates and monthly payments with respect to secured claims, making it affordable for debtors to keep collateral without reaffirmation agreements or redemption.
Even before the enactment of BAPCPA, a majority of courts concluded that redemption in installments was forbidden in Chapter 7 cases.4 The 2005 amendment to § 722 cements the prohibition against redemption by installment by requiring that the redemption payment to a lien holder be “the allowed secured claim . . . in full at the time of redemption.” Often debtors do not have sufficient cash to redeem needed personal property in a lump sum. A Chapter 13 debtor can accomplish redemption of property over time by providing for the value of collateral over the life of the plan—except as the Code requires otherwise.5
1 There is a third choice, “just keep making payments.” Sometimes creditors would rather have the debtor’s money—with or without personal liability—than repossess and sell their collateral. But this third option is not reliable and can collapse at any moment at the leinholder’s whim.
2 See 11 U.S.C. §§ 362(h), 521(a)(6) and 521(d), as amended by Pub. L. No. 109-8, 119 Stat. 23 (2005).
3 See § 74.11 The Power to Modify. But see § 75.1 In General: Modification Without § 506, § 75.2 Motor Vehicles and Any Other Thing of Value, § 75.3 Only PMSIs Need Apply, § 75.4 Acquired for Personal Use of Debtor, § 75.5 Surrender in Full Satisfaction? and § 75.6 Procedure and Miscellaneous Hanging-Sentence Issues for discussion of restrictions BAPCPA placed on modification of certain secured debts.
4 See Bank of Boston v. Burr (In re Burr), 160 F.3d 843 (1st Cir. Nov. 25, 1998) (Stahl, Lipez, Reavley); Johnson v. Sun Fin. Co. (In re Johnson), 89 F.3d 249 (5th Cir. July 26, 1996) (per curiam) (Politz, Jolly, Barksdale); Taylor v. AGE Fed. Credit Union (In re Taylor), 3 F.3d 1512 (11th Cir. Oct. 13, 1993) (Tjoflat, Dubina, Paine); In re Edwards, 901 F.2d 1383 (7th Cir. Apr. 27, 1990) (Cudahy, Coffey, Sharp). But see McClellan Fed. Credit Union v. Parker (In re Parker), 139 F.3d 668 (9th Cir. Mar. 17) (Nelson, Boochever, Trott), cert. denied, 525 U.S. 1041, 119 S. Ct. 592, 142 L. Ed. 2d 535 (Dec. 7, 1998).
5 See § 74.1 General Rules before BAPCPA, § 75.1 In General: Modification Without § 506, § 75.2 Motor Vehicles and Any Other Thing of Value, § 75.3 Only PMSIs Need Apply, § 75.4 Acquired for Personal Use of Debtor, § 75.5 Surrender in Full Satisfaction?, § 75.6 Procedure and Miscellaneous Hanging-Sentence Issues, § 76.1 Valuation, Claim Splitting and Dewsnup and § 78.1 Full Payment of Allowed Secured Claim.