There is no circuit authority, and the lower courts are split, on the interpretation of Section 365(p), one of the amendments included in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
The amendment allows an individual chapter 7 debtor to assume a lease that was automatically rejected by Section 365(d). The courts are divided on whether the debtor must also reaffirm the debt under Section 524(c).
In recent decisions, a district judge and two bankruptcy judges concluded that a debtor need not reaffirm if he or she has assumed a lease.
Affirming Chief Bankruptcy Judge Laura S. Taylor of San Diego on May 24, District Judge Gonzalo P. Curiel held that assumption under Section 365(p) is sufficient. Chief Bankruptcy Judge Laurel M. Isicoff of Miami agreed with Judges Taylor and Curiel in her June 12 opinion.
Under Section 365(d), a lease or executory contract is automatically rejected if it is not assumed by a chapter 7 trustee within 60 days of the order for relief. In the case of a lease for personal property such as a car, a chapter 7 debtor had no ability to assume an automatically rejected lease before BAPCPA. The debtor’s only option was to reaffirm the debt before discharge.
With the adoption of Section 365(p), a chapter 7 debtor now has the ability to assume a rejected lease of personal property. The lessor has the option, however, to consent to assumption or not and may condition assumption on the curing of defaults.
Although the lower courts are divided on whether the debtor must also reaffirm the debt under Section 524(c), Judges Curiel, Taylor and Isicoff agreed that reaffirmation is not also required if the debtor assumes a lease. If reaffirmation were also required, the debtor could retain the property but the lessor could not sue to collect the debt as a personal obligation of the debtor if the debtor were later to default, reject or rescind the assumed lease.
Judge Isicoff said that the “statutes are not ambiguous and do not contradict one another” because “Congress considered reaffirmation and assumption to be separate procedures.” She believes that requiring reaffirmation on top of assumption would be “absurd.”
If reaffirmation were also required but not obtained, a debtor would have use of a leased car after bankruptcy but have no personal liability for defaulting later. Assumption, by itself, would therefore provide little relief for a lessor. Furthermore, a lessor could not reinstate a debtor’s personal liability without reaffirmation before the entry of discharge.
The consequences of assumption are significant. As explained by Judge Isicoff, a debtor who assumes a lease, even without reaffirmation, becomes personally liable despite receiving a general discharge.
The debtor in California is appealing to the Ninth Circuit.
We recommend reading the opinions by Judges Curiel and Isicoff in full text for a plethora of reasons explaining why reaffirmation is not required if the debtor has assumed a lease.
The California opinion is Bobka v. Toyota Motor Credit Corp., 17-2380 (S.D. Cal. May 24, 2018); the Florida opinion is In re Abdemur, 17-16875 (Bankr. S.D. Fla. June 12, 2018).