In this case, Capital City First National Bank held a properly perfected secured interest in the debtor’s Mazda vehicle. The debtor filed a Chapter 7 bankruptcy and, although he owed more than $10,000.00 on his loan to the bank, he did not reaffirm that obligation or redeem the collateral. The debtor did, however, continue to make timely payments on this secured loan and said loan did not go into default.

Since the debtor neither agreed to reaffirm the debt with the bank nor redeem the collateral, the bank maintained that it had a right to reposses the collateral even though the loan was not in default.

A “reaffirmation” is the debtor’s personal obligation to repay the full amount owing on the debt. A “redemption” is when the debtor agrees to pay the creditor for the fair market value of said collateral (normally in one lump sum payment).

Here, the bank’s concern was that if the debtor did not reaffirm or redeem the property, then he would only continue to pay on the loan until he chose to discontinue payments, and at that time, the collateral would have depreciated so as to be no value to the bank should it elect to repossess the vehicle.

The Court noted that there is not a full agreement throughout the various State Bankruptcy Courts as to whether the debtor should be permitted to retain the collateral. This Court adopted the majority view of the State Courts and held that if the debt is not in default, the debtor need not either “reaffirm” nor “redeem” the property.

This Court found that the Bankruptcy Code does not limit the debtor, who chooses to retain the property and is not in default under the original obligation, to either redeem the property or reaffirm the debt.

The Court noted that if the debt goes into default, the bank may repossess the collateral and will receive said collateral according to the original agreement bargained for by the bank. Hence, whatever value the collateral will be worth, in the event the bank repossess, it will be the same value that the bank initially risked when approving the loan.

Accordingly, the Court held that the debtor may retain collateral without redeeming it or reaffirming the debt so long as he/she remained current under the original obligation. In re Harvey Conley (U.S. Bkrtcy. N.D. Fla., No. 91-07104).

EDITOR’S COMMENT

The minority view, on the other hand, would require either a reaffirmation agreement from the debtor, a redemption by the debtor, or the creditor could take possession of the collateral and sell the same. This minority view protects the creditor to a greater extent, since the creditor can lift the bankruptcy stay and repossess the collateral in the absence of a reaffirmation agreement or redemption by the debtor.

If the debtor is permitted to retain the collateral without a reaffirmation or redemption, then debtor can stop payments at any time and the creditor will have suffered the lost depreciation value of the vehicle while the debtor coninued to use the same.

Author: Charles R. Harroun, Attorney at Law