Ride-through is Still Alive, With a Twist

Before the advent of BAPCPA (2005), Chapter 7 debtors in the Ninth Circuit (which includes California) did not have to reaffirm a car loan in order to keep the car. As long as the debtor was current on payments, the debtor could keep the car, even if the installment contract stated that bankruptcy was an event of default. Things are different under BAPCPA, however. One of the sweeping changes made by BAPCPA was to require debtors to require debtors to reaffirm if they wish to keep a car.

Almost all car installment purchase agreements provide that bankruptcy is an event of default, thus allowing the creditor to repossess the car. Under prior law, these "ipso facto" (by the very fact) provisions had no effect. However, BAPCPA allows these provisions to have effect if the Debtor fails to either (1) timely file a statement of intention, or (2) timely fulfill that statement of intention. What this means is that if the debtor fails to timely file the statement of intention or follow through on the statement of intention, arguably, the creditor can repossess the car, even if the debtor is current.

This presents a significant conundrum often to debtors who are current on their car payments. The effect of reaffirmation is harsh. If you reaffirm, you probably can't discharge the debt in a subsequent bankruptcy, even if your car blows up or you lose your job and can't make the payments.

A recent case, however, indicates that the "ride-through" is still alive, if the debtor does everything he is supposed to do and the court declines to approve the reaffirmation agreement. The case is In re Moustafi, --- B.R. ----, 2007 WL 1592965 (Bkrtcy.D.Ariz.,2007). (Must have Westlaw to view.) In that case, the debtor timely filed the statement of intention and timely signed a reaffirmation agreement. The court declined to approve the reaffirmation agreement, because it was not in the debtor's best interest. Then the court stated that because the debtor had done everything that was required, 11 U.S.C. Sec. 521(d) does not allow the ipso facto clause to be valid. If the ipso facto clause is not valid, then there is no default and the creditor cannot repossess the car.

Negative Equity Does Not Count for 910 Claims

In In re Acaya, --- B.R. ----, 2007 WL 1492475 (Bkrtcy.N.D.Cal.,2007) (must have Westlaw subscription to view), the Northern District of California Bankruptcy Court determined that negative equity does not qualify as "purchase money" to protect what would otherwise be a 910 day creditor.

This is a situation that often happens. A debtor trades in his car, but he owes more than it is worth. The dealer allows him to take his "negative equity" with him to the next car he purchases. It is kind of like a reverse down payment. Instead of putting money down for the car, you take more debt with you that you add on to the car.

Under the old (pre 2005) law, debtors could cram down, i.e., pay only what the car is worth, in a Chapter 13 plan. Under the new law (2005 to present), if a car was purchased within the last 910 days, you have to pay the full amount owed on the car, not just what it was worth. However, you have to pay the full value of a "purchase money" loan. The court in Acaya determined that this roll-over of negative equity was not "purchase money" and therefore, it could be stripped off if the value of the car was less than what was owed.

Sale While in Foreclosure Rescinded 18 months After Contract and 14 months After Close of Escrow

In this case, In re Lloyd, --- B.R. ----, 2007 WL 1346553 (Bkrtcy.N.D.Cal.,2007), out of the Northern District of California, the Court held that a rescission of a home purchase contract was valid 18 months after the contract was signed and 14 months after close of escrow. The reason is that under the Home Equity Sales Contracts Act (HESCA), if a sale of a home in foreclosure is going to be completed, the seller needs to be given notice (next to his signature) stating that he has a 5-day right to rescind (cancel) the contract. That was not done in this case and the court found that the seller/debtor could rescind the contract and get his house back, even though the rescission was done over a year after close of escrow on the property.

Kansas Case Determines that 910 Claims Are Not Entitled to Interest!

This bankruptcy case out of Kansas, In re Kinsey, states that 910 car claims are not entitled to interest, because they are not "allowed secured claims" which would otherwise be entitled to interest under the Code. The case substantially relies on the Dewsnup v. Timm Supreme Court case. I am not aware of any other jurisdictions that have taken the same stance and I know that this issue has not been decided by the Fresno Bankruptcy Court. As a matter of practice, most Chapter 13 plans in the Fresno division contain the contract or Till interest rate.