Court Decision Marks the End of the Road for the Chapter 7 Ride-Through Option

by Lesley Anne Hawes January/February 2010
Under the ride-through option, debtors had an option in bankruptcy … to retain vehicles without reaffirming the debt and without redeeming the collateral. They could simply continue to make the monthly payments. If the debtor defaulted, lenders could repossess. However the Ninth Circuit of Appeals recent decision in the Dumont case may have taken that option away.

The Ninth Circuit Court of Appeals has concluded that the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 eliminated one of the options available to an individual Chapter 7 debtor to treat debts secured by personal property, such as a car loan. Long before BAPCPA, the Bankruptcy Code has required a debtor to file a statement of intention regarding debts secured by personal property such as a vehicle loan or financing lease. The debtor is required to declare whether it intends to reaffirm the debt secured by the vehicle, redeem the vehicle or surrender the vehicle to the lender. In a number of jurisdictions, including the Ninth Circuit, the debtor could select a fourth option — the ride-through.

Under the ride-through option, the debtor could retain the vehicle, without reaffirming the debt and without redeeming the collateral, by simply continuing to make the monthly payments. If the debtor subsequently defaulted on his or her payments, the lender could repossess the vehicle. In those jurisdictions that sanctioned the ride-through option, the lender was precluded from repossessing the car until the debtor committed a monetary default.

The significance of the ride-through option as it pertains to the rights of lenders becomes apparent when examined in the context of the other three options available under the Bankruptcy Code — redemption, reaffirmation and surrender — and in light of the effect of the discharge injunction under §524 of the Bankruptcy Code and the terms commonly found in a lender’s loan documents.

In Chapter 7, the debtor’s personal liability on prepetition debts is discharged through the bankruptcy unless the debtor reaffirms the debt to the lender. The discharge injunction under §524 of the Bankruptcy Code precludes creditors from enforcing a claim for a prepetition debt as a personal liability of the debtor. However, liens secured by the debtor’s property are not discharged, and the discharge injunction does not preclude the lender from enforcing its lien.

With respect to the option of surrender, when an individual debtor files bankruptcy, the debtor may choose to simply return the vehicle or other collateral to the lender. The lender will have the right to liquidate or otherwise dispose of the collateral under its loan or lease documents, and the debtor’s liability for any deficiency balance will be an unsecured claim discharged through the Chapter 7 proceeding. Debtors often elect this option where the debtor cannot afford to make the monthly payments or the debtor determines he or she does not need the vehicle or other property securing the debt. The lender is precluded from seeking to collect the deficiency as a personal liability of the debtor post-bankruptcy based on the discharge injunction under §524 of the Bankruptcy Code.

Another alternative treatment of debt secured by personal property is redemption. A debtor may redeem collateral from the lender by paying the lender in cash the amount of the fair market value of the collateral securing the debt within a specified time frame after the filing of the Chapter 7 petition. With redemption, the lender receives the value of its collateral, which is all that the lender could obtain if the lender repossessed and sold the vehicle itself. The lender may submit an unsecured claim for the deficiency balance in the debtor’s bankruptcy, and upon the debtor’s discharge, the unsecured deficiency balance will be discharged. As in the case of the surrender option, the lender will be prevented from seeking to collect the deficiency as a personal liability of the debtor post-bankruptcy based on the discharge injunction.

Reaffirmation is an agreement by which the debtor agrees to remain personally liable post-discharge for a particular debt. Reaffirmation agreements often involve a renegotiation of the payment terms on the debt and may be advantageous to both the lender and the debtor as the lender may receive payment in full of its debt, perhaps over an extended payment term, along with the ability to enforce the debtor’s obligations as a personal liability of the debtor post-bankruptcy, and the debtor may be able to retain property essential to its livelihood, such as tools necessary to the debtor’s business or a vehicle the debtor needs to commute to work, while obtaining reduced, more affordable monthly payments. In those jurisdictions where the ride-through option was not available, redemption of the collateral or a reaffirmation agreement were the only ways a debtor could continue to retain personal property collateral post-discharge.

In those jurisdictions where the ride-through option was available, there was little or no incentive for a debtor to reaffirm the debt, since the debtor could continue to retain and use the vehicle while making the monthly payments without the risk of remaining personally liable for the debt post-discharge. The jurisdictions that allowed the ride-through option relied on the fact that the lender’s lien was retained to secure the debtor’s obligations under the loan or financing lease to protect the lender in the event of a post-discharge default. Other courts, however, disagreed and held that the lien and the debtor’s making monthly payments were not enough to protect the lender.

Virtually all loan or lease agreements contain numerous covenants other than merely the obligation to make monthly payments, including covenants to provide insurance and to maintain and repair the collateral. Virtually all loan and lease documents contain a bankruptcy default clause, by which the filing of a bankruptcy by the debtor constitutes a default under the loan or lease documents. Many jurisdictions, which held the ride-through was not an option for the debtor to retain collateral post-discharge, relied on those other covenants and the default provisions of the loan or lease documents to hold that the debtor’s merely making monthly payments does not protect or compensate the lender for the risk that the debtor will not comply with its non-monetary obligations. These non-monetary obligations include: adequately maintaining and insuring the collateral, leaving the lender with no recourse against the debtor for the damage caused by the post-discharge violation of those obligations because of the discharge injunction. Further, allowing the ride-through would improperly prevent the lender from enforcing the terms of its loan or lease agreement, including the bankruptcy default provision, tying the hands of the lender while freeing the debtor from any liability for failure to perform its duties under the documents.

The Ninth Circuit, joining a long list of bankruptcy courts throughout the country, has now held the amendments to the Bankruptcy Code made by BAPCPA have eliminated the ride-through option. The Ninth Circuit was one of the courts that had held the ride-through was available to debtors. See In re Parker, 139 F. 3d 668 (9th Cir. 1998). In a split decision, the Ninth Circuit has ruled that the ride-through is not available based on the BAPCPA amendments. See In the Matter of Dumont (Dumont v. Ford Motor Credit Co.), 581 F.3d 1104 (9th Cir. 2009).

In its decision in Dumont, the Ninth Circuit noted some courts that have addressed the issue have held that the ride-through option might still be available, but only where the debtor has attempted to reaffirm the debt obligation or has otherwise substantially complied with the applicable reaffirmation provisions of the Bankruptcy Code. The majority opinion is drawn narrowly, indicating the decision applies only to individual debtors with debts secured by personal property that have not attempted to reaffirm the secured debt obligation. The court noted that the debtor in Dumont rejected a proposed reaffirmation offered by the lender.

For courts in other jurisdictions where the ride-through option was previously held to be available to debtors in Chapter 7, the Dumont decision may well presage an end to the ride-through for individual debtors.


Lesley Anne HawesLesley Anne Hawes, a partner in the Los Angeles office of McKenna Long & Aldridge, LLP, specializes in the representation of secured and unsecured creditors in bankruptcy proceedings and in the representation of federal equity receivers appointed in civil enforcement actions by federal agencies such as the Federal Trade Commission and Securities and Exchange Commission. Hawes is a regular contributor to the Monitor and other legal journals, and she has lectured for the National Business Institute and other organizations. She graduated Order of the Coif from University of Southern California law school and earned her undergraduate degree in political science magna cum laude from University of Southern California.

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