Court Clarifies a Chapter 7 Debtor’s Duties and Options Under § 521(a) and Outlines Consequences of Noncompliance

While a split among the circuits continues to persist with respect to whether the Bankruptcy Code permits a “ride-through” option in the context of a chapter 7 debtor’s statement of intention, the U.S. Bankruptcy Court for the Eastern District of Michigan (Shefferly, J.) recently sided with courts holding that the Bankruptcy Code does not permit a “ride through” or “stay and pay” option, and outlined the legal consequences for a debtor who fails to perform duties related to personal property securing a debt.[1]

In In re McCray, the debtor financed the purchase of a manufactured home in January 2010 and filed a chapter 7 case in August 2017. She listed the manufactured home on her Schedule A/B, estimating the value to be $25,000. She indicated on her Schedule D that the creditor’s secured claim totaled $21,366. At the time of the bankruptcy filing, the debtor was current on her payments to the creditor.

Using Official Form 108, the debtor filed a statement of intention identifying the creditor and the manufactured home. On the form, the debtor checked the box labeled “Retain the Property and enter into a Reaffirmation Agreement.” However, the debtor also checked the box labeled “Retain the property and [explain],” adding the words “Pay and retain.”

On Sept. 27, 2017, the creditor filed a Motion to Compel Compliance with 11 U.S.C. § 521(a)(2) and to Delay Entry of Discharge, asserting that the debtor did not sign a reaffirmation agreement as indicated in one of the boxes she checked on her Statement of Intention and arguing that the Bankruptcy Code does not permit a debtor to simply “pay and retain” without either redeeming the property or reaffirming the debt. In the motion, the creditor requested that the court enter an order (1) compelling the debtor to file an amended statement of intention to redeem, reaffirm or surrender; and (2) requiring the debtor to perform such intention prior to case closure. The creditor further requested that the court delay the debtor’s discharge until the debtor filed and performed under the amended statement of intention.

The debtor responded to the motion, admitting that she did not enter into a reaffirmation agreement but asserting that she was permitted to “pay and retain” the manufactured home so long as she continued to make the required payments. The debtor argued that the sole consequence under the Bankruptcy Code if she did not redeem or reaffirm would be the termination of the automatic stay, with a finding that the manufactured home was no longer property of the bankruptcy estate. According to the debtor, the creditor’s only remedy was to proceed under applicable nonbankruptcy law once the automatic stay terminated.

The court first addressed the debtor’s duties with respect to personal property that secures a debt, noting that Bankruptcy Code §§ 521(a)(2)(A), 521(a)(2)(B) and 521(a)(6) impose three duties on an individual debtor with a debt secured by personal property of the estate: file a statement of intention, perform the statement of intention, and, if the creditor has an allowed claim for the purchase price of such personal property, not retain possession of such personal property absent reaffirmation or redemption.[2] The court noted that each of these duties must be performed within a statutorily prescribed time frame, and that the Bankruptcy Code makes these duties mandatory. The court concluded that the statute makes no exception to these duties.[3]

The court next addressed whether a debtor may retain personal property that secures a debt, without redeeming such property or reaffirming the debt, by means of a “ride through” or “stay and pay.” The court noted that the Second, Third and Tenth Circuits recognize a “ride through” or “stay and pay” option, while the First, Fourth, Fifth, Seventh, Ninth and Eleventh Circuits do not.[4] The court, while noting that the Sixth Circuit has not ruled on the issue, relied on the text of the Bankruptcy Code, which expressly permits only three ways for a debtor to perform the duties imposed by § 521(a)(2): redeem, reaffirm or surrender.[5] The court concluded that a “ride though” or “stay and pay” option is not allowed under the Bankruptcy Code.[6]

Having determined that the debtor had not performed her duties under § 521(a), the court then considered the legal consequences for the failure to perform. The court examined § 362(h), which provides that the stay is terminated with respect to personal property of the estate or of the debtor securing in whole or in part a claim — and such personal property shall no longer be property of the estate — if the debtor fails to timely file and perform under a statement of intention, unless such statement specifies the debtor’s intention to reaffirm such debt on the original contract terms and the creditor refuses to agree to the reaffirmation on such terms.[7] The court noted that § 521(a)(6) (1) imposes a duty on the debtor not to retain possession of personal property absent timely reaffirmation or redemption, and (2) provides for the termination of the stay and removal of the property from property of the estate, as well as permits the creditor to take action against the property as permitted by applicable nonbankruptcy law.[8] The court concluded that, pursuant to these two sections,

the Bankruptcy Code now expressly provides at least some legal consequences that flow from an individual debtor’s failure to timely perform their duties under § 521(a)(2) with respect to personal property that secures a debt: under § 362(h)(1) the property is removed from the bankruptcy estate, the automatic stay is lifted, and the creditor is free to enforce its rights under applicable non-bankruptcy law with respect to such property. And if the debtor fails to perform their duty under § 521(a)(6) with respect to personal property that secures an allowed claim for the purchase price of the property, § 521(a)(6) expressly provides one more consequence: the debtor shall “not retain possession” of such property.[9]

Finally, the court considered whether it could delay the debtor’s discharge if the debtor fails to perform duties associated with personal property that secures a debt. The court observed that the circumstances set forth in Rule 4004(c) that authorize a bankruptcy court to delay a discharge are both specific and limited, and that an individual debtor’s failure to perform their duties under § 521(a)(2) is not one of the grounds identified in Rule 4004(c)(1) that excepts the court from its responsibility of issuing the debtor a discharge once the deadlines for objecting to discharge or filing a motion to dismiss have passed.[10] The court found that the creditor had not cited any authority under the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure that persuaded the court that it may delay granting a debtor a discharge because of a failure to perform the duties under § 521(a)(2).[11]

Having considered all of the issues, the court concluded that the debtor failed to timely perform her duties under § 521(a)(2), which triggered certain legal consequences, including removal of the manufactured home from property of the bankruptcy estate and termination of the automatic stay, such that it would be improper to compel an amended statement of intention.[12] The court noted that although the creditor would have preferred performance under the Bankruptcy Code, the court had no license to “minimize a creditor’s time and expense in enforcing the non-bankruptcy law remedies that it bargained for, just because its borrower later filed a bankruptcy case, even where its borrower failed to comply with all of their duties as a debtor in the bankruptcy case.”[13] The court further concluded that, while there may be other remedies for dealing with noncompliance, it had no statutory authority to delay the discharge.[14]

In re McCray presents a detailed, methodical analysis of the requirements imposed on an individual chapter 7 debtor with respect to debts secured by personal property. It provides clarity and guidance — at least with respect to jurisdictions in which courts do not recognize the “ride through” or “stay and pay” option — on the consequences to the debtor when the debtor fails to comply with § 521(a)(2) and (a)(6). Finally, it provides some suggestions as to what remedies a trustee or creditor may and may not pursue with respect to the debtor’s noncompliance.