Debtors Must 'Reaffirm' Loans to Keep Cars, 9th Circuit Rules

A debtor who remains current on an automobile loan but does not "reaffirm" the debt in bankruptcy court still can lose the vehicle to lender repossession, the 9th U.S. Circuit Court of Appeals has ruled.

The court held 2-1 that the 2005 bankruptcy reform law eliminated the "ride-through" option, which allowed debtors to keep the vehicle as long as they stayed current with their existing payment schedule.

The appeals court said the law supersedes the 9th Circuit's previous ruling in McClellan Federal Credit Union v. Parker (In re Parker), 139 F.3d 668 (9th Cir. 1998), and mandates that debtors wishing to keep secured assets must enter into reaffirmation agreements with creditors.

A reaffirmation agreement is a contract between a creditor and a debtor that exempts from discharge a debt that otherwise would be discharged in a pending bankruptcy proceeding.

Creditors prefer such agreements because they impose a legal obligation on the debtor to repay the entire amount agreed on, even if it is more than the value of the collateral the debtor is keeping.

Before the 2005 reforms, bankruptcy courts were divided on whether a creditor could repossess a vehicle if a debtor who refused to sign a reaffirmation agreement was otherwise current on loan payments.

Courts that permitted "ride through" were said to allow a "fourth option," referring to the fact that the law is written with only three options: Reaffirm, pay off the debt in full or surrender the car.

The 9th Circuit's ruling came in the case of Antoinette Dumont, who owned a car with a loan provided by Ford Motor Credit Co. The loan agreement provided that Dumont would be in default if she was involved in a bankruptcy proceeding.

Dumont filed for Chapter 7 protection in 2006. At the time, she owed more on the vehicle than it was worth. In her statement of intentions Dumont said she would retain the car and continue to make monthly payments.

The opinion said Dumont refused Ford Credit's offer to reaffirm the debt.

Dumont received a discharge Aug. 15, 2006, and continued making payments on the car loan. However, Ford Credit repossessed the car without advance notice Nov. 14, 2006.

Dumont successfully reopened her bankruptcy case and sought to have Ford Credit sanctioned for violating her discharge. The bankruptcy judge refused to find Ford in violation of the discharge, and the 9th Circuit Bankruptcy Appellate Panel affirmed.

Dumont appealed to the 9th Circuit.

The appeals court majority noted that several of the bankruptcy reform law's provisions imposed new duties on debtors who hold property in which creditors have security interests.

Among those changes is a section of the law that says the automatic stay will be terminated if a debtor holding property in which a creditor has a security interest fails to indicate the intention to either surrender the property or redeem it, reaffirm the debt, or assume an unexpired lease. The use of "either" and "or" in this section indicates these are the only options, the majority held.

"While Dumont filed a statement of intention and properly stated that she intended to retain the property, she failed to indicate one of the three permissible means of doing so," Judge Diarmuid O'Scannlain wrote for the majority. "Accordingly, the automatic stay was terminated with respect to her automobile."

In addition, the majority said the vehicle was "no longer the property of the estate."

Judge Susan Graber dissented, saying nothing in the bankruptcy reform law or its legislative history indicates that Congress intended any change to "ride through." In addition, she said the new law made no changes to the section that historically has been the source of the "ride-through" provision.

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Michael G. Doan in Carlsbad, Calif., represents Dumont. Randall P. Mrocynski of Cooksey, Toolen, Gage, Duffy & Woog in Costa Mesa, Calif., represents Ford Credit.