Fundamentals of Bankruptcy for Lenders
Chapter 7 Bankruptcy
2. SECURED DEBTS IN CHAPTER 7
a. Prior to the enactment of BAPACPA, a Chapter 7 debtor had several options for dealing with secured debts:
(1) The debtor could always: (i) surrender the collateral to the secured creditor; (ii) reaffirm the debt; or (iii) redeem tangible personal property securing a consumer loan.
(2) In some jurisdictions, the debtor could simply retain the collateral and continue to make payments to the creditor on the discharged debt.
(3) Significant changes to this practice arise under BAPCPA.
b. Options under BAPCPA:
(1) The Debtor has 30 days from the filing of the petition to file a statement of intention specifying whether it will reaffirm, surrender, or redeem collateral.
(2) The Debtor has 30 days from the first date set for the meeting of creditors to perform the intention described in the statement of intention.
(3) The automatic stay is lifted as to personal property if the debtor fails to timely file the statement of intention or timely take the specified action (unless the Trustee requests a hearing because he/she believes that there is value in the property).
(4) If a Chapter 7 debtor fails to perform its stated intention as to a purchase money security interest in personal property within 45 days after the first date set for the meeting of creditors, the stay is automatically lifted and the debtor is required to surrender possession of the collateral.
c. Reaffirmation
(1) The Debtor signs a Reaffirmation Agreement voluntarily agreeing not to discharge debt (usually secured) in bankruptcy.
(2) Under current law, many debtors reaffirm debt because they are in arrears on a loan secured by collateral that they wish to keep. In a Reaffirmation Agreement a creditor often will let a debtor put arrearages at the end of the Note or pay them off over a period of time.
(3) BAPCPA makes extensive revisions to the terms of reaffirmation agreements and makes significant changes to the legal standards and procedures used to affect a reaffirmation agreement. BAPCPA contains model form language that must be added to all reaffirmation agreements.
d. Retention of Collateral [CURRENT LAW: Only available in some jurisdictions; effective October 17, 2005, a debtor will no longer have this option]
(1) The discharge wipes out the debtor's personal liability on the obligation¬, but the lien remains on the collateral, without recourse.
(2) If a debtor is not in default, the creditor cannot foreclose upon its lien. If the debtor defaults, the creditor can exercise the lien rights; however, the debtor has no personal liability to the creditor.
e. Redemption
(1) The debtor may redeem tangible, personal property intended for personal, family or household use from a lien securing a dischargeable, consumer debt by paying the holder of the lien the amount of the allowed secured claim (i.e. the value of the collateral) in full at the time of redemption.
(2) A number of sub-prime lenders specialize in offering “redemption financing” to debtors.
NOTE: Under BAPCPA, if a debtor does not choose to reaffirm or redeem, the Debtor MUST surrender the collateral.
f. Leases
(1) Real Property
(a) Residential:
(i) In a chapter 7 case, the trustee or the debtor must assume or reject any unexpired lease of residential real property within 60 days of the petition date (or such extensions as the Court grants) or the lease is deemed rejected.
(ii) In a case under chapter 11, 12 or 13, the trustee or the debtor may assume or reject an unexpired lease of residential real property at any time prior to confirmation of a plan. A party to the contract may request that the Court set a date sooner than the confirmation date for assumption or rejection of the lease. If the trustee or the debtor fail to act, the lease shall be deemed rejected.
(b) Non-residential
(i) In cases under any chapter, the trustee or the debtor must assume or reject an unexpired lease of non-residential real property by the earlier of: 120 days after the order for relief; or the date on which an order confirming a plan is entered. If the trustee or the debtor fail to act, the lease will be deemed rejected
(ii) The court may extend the deadline to assumer or reject the unexpired lease for 90 days on the motion of the trustee or lessor for good cause shown.
(iii) Any subsequent extensions may only be granted upon prior written consent of the lessor.
NOTE: The sections above reflect the changes effected by BAPCPA. With regard to Non-residential Real Property leases, this is a significant change from the current law.
(2) Personal Property
(a) In a case under chapter 7, the trustee or the debtor must assume or reject a lease for personal property within 60 days of the petition date (or such extensions as the Court grants) or the lease is deemed rejected.
(b) In a case under chapter 11, 12 or 13, the trustee or the debtor may assume or reject an unexpired lease of personal property at any time prior to confirmation of a plan. A party to the contract may request that the Court set a date sooner than the confirmation date for assumption or rejection of the lease. If the trustee or the debtor fail to act, the lease shall be deemed rejected.
For more information or to request a presentation regarding BAPCPA, please contact Spotts Fain attorneys, Robert H. Chappell, III (804) 697-2025 or Jennifer J. West (804) 697-2094.
