BAPCPA Limits Remedies Against Debtors Who Don’t Reaffirm or Surrender

In the BAPCPA amendments in 2005, Congress may have intended to bar debtors from allowing mortgages to “ride through” bankruptcy, but the statute won’t help a lender in all circumstances, according to Bankruptcy Judge Mark X. Mullin of Fort Worth, Texas.

In his March 8 opinion, Judge Mullin said there was no statutory authority enabling the court to compel a debtor to turn over mortgaged property to the lender or to withhold entry of discharge until the debtor fulfills his or her stated intention of surrendering the property.

The Facts

Debtors in chapter 7, the husband and wife owned a mobile home that is personal property in Texas. The lender held a purchase money security interest in the mobile home. There were no defaults either before or after bankruptcy. The note did not contain a so-called ipso facto clause that would have made bankruptcy a default.

Originally, the debtors filed a statement of intention in which they elected to retain the mobile home and enter into a reaffirmation agreement with the lender. After the first meeting of creditors and after conferring with attorneys, Judge Mullin said, the couple decided not enter into a reaffirmation agreement.

Instead, the debtors amended their statement of intention by electing to “surrender” the mobile home.

When the debtors continued to pay the debt and had not vacated the mobile home, the lender filed motions asking Judge Mullins to (1) delay the entry of the debtors’ discharges until they had surrendered the property and the lender had “secured” the property, and (2) allow the lender to “secure” the mobile home. The lender argued that simply modifying the automatic stay did not benefit nor provide adequate protection to the lender.

The Desired Remedy Isn’t in the Statute

On issues raised by the lender, Judge Mullin said that courts around the country disagree.

Judge Mullin explained why the debtors’ actions already had resulted in modifications of the automatic stay, on several grounds. Because the debtors had not timely performed their intention to surrender, the automatic stay terminated under Section 362(h)(1)(B). The automatic stay also terminated under Section 521(a)(6) because the debtors had not entered into reaffirmation agreements before the prescribed deadline. And, of course, the stay would terminate on discharge under Section 362(c). Discharge would absolve the debtors of personal liability were they to default later.

Because there was no default entitling the lender to foreclosure, the lender argued that the debtors were attempting to have the security interest “ride through” bankruptcy, allegedly in violation of Section 521(a)(2). That Section prescribes deadlines for debtors to state their intentions and perform their intentions regarding surrender of property. Indeed, Section 521(a)(6) provides that the debtor “shall . . . not retain possession of personal property” absent a reaffirmation agreement or redemption.

The lender argued that the word “surrender” in Section 521(a)(2) was sufficient to justify the requested relief. Noting that “surrender” is not defined in the Code, Judge Mullin cited the First Circuit for saying that “surrender” is not synonymous with “deliver.” It means, he said, that the debtors will take “no action to resist any effort by the creditor to gain its collateral.”

Therefore, Judge Mullin said, “the Debtors are not required to affirmatively deliver the Mobile Home to [the lender].” Aside from modifying the stay to permit foreclosure if there were a default, Judge Mullin said the “Bankruptcy Code does not provide any other remedy . . . resulting from the Debtors’ failure to comply with Section 521(a)(2).”

Likewise, Section 521(a)(6) did not give the lender a remedy. That section says that “a debtor shall . . . not retain possession of personal property . . . unless the debtor . . . either” signs a reaffirmation agreement or redeems the property.

For violation of Section 521(a)(6), Judge Mullin said the remedy is in the hanging paragraph following Section 521(a)(7). In addition to modifying the automatic stay, the hanging paragraph allows the trustee to require “the debtor to deliver any collateral in the debtor’s possession to the trustee.”

The trustee is entitled to seek delivery of the property, Judge Mullin said, but the Code does not give a similar remedy to creditors.

Also in the 2005 amendments, Section 521(d) gave creditors an additional remedy: If a debtor has violated Section 521(a)(6), ipso facto clauses become enforceable. Unfortunately, the lender had no ipso facto clause, so even Section 521(d) provided no effective remedy.

With regard to delaying discharge, Judge Mullin said that Section 727(a) contains 12 grounds for delaying discharge, but none applied to the case. Absent grounds for delay, Rule 4004(c) requires the court to enter discharge “forthwith.” The statute and rules therefore did not permit delaying discharge as a remedy for violating Section 521(a)(2).

In sum, the Code does not contain a remedy of the sort the lender requested. The court, Judge Mullin said, does not have the prerogative to provide a remedy not authorized by Congress.

In November 2017, Bankruptcy Judge Phillip J. Shefferly of Detroit reached a similar result in a similar case. See In re McCray, 578 B.R. 403 (Bankr. E.D. Mich. Nov. 30, 2017). Judge Mullin cited McCray among the authorities supporting his conclusions. For ABI’s discussion of McCray, click here.