Bankruptcy debtors may opt to retain vehicles by keeping current on loan payments

Law Reporter, Nov 2004

Price v. Delaware State Police Fed. Credit Union U.S. Trustee, 370 F.3d 362 (3d Cir. 2004).

The Third Circuit Court of Appeals held bankruptcy debtors' options are not limited to surrender of the vehicle, reaffirmation of the loan, or purchase with a lump-sum payment, but instead may include retention of the vehicle by keeping current on their loan payments.

Here, the Prices filed for chapter seven bankruptcy. They had two automobile loans with a credit union, and they advised the credit union that they opted to retain their vehicles and make regular payments. The credit union informed the Prices that, under the bankruptcy code, their only options were to surrender the vehicles, redeem them by making a lump-sum payment, or reaffirm the loan. The Prices continued to keep the vehicles and make their payments. The credit union filed a motion to compel the Prices to exercise one of their three listed options. A federal bankruptcy court granted the motion, and a U.S. district court affirmed.

Reversing, the Third Circuit noted this issue has caused a split among the federal appellate courts. The federal bankruptcy code, 11 U.S.C. § 521, provides that debtors must file a statement of intention regarding whether they wish to surrender and, "if applicable," specify which of the three listed options they wish to pursue. The court said the phrase "if applicable" is the phrase that complicates the issue. Some circuits have taken that to mean that if retention is applicable, the parties must opt for one of the three possibilities. Other circuits have determined the phrase means that, if the debtor plans to choose any of the three options, the debtor must so specify within the given time frame.

The court agreed with the second interpretation, reasoning that the plain language of the statute as a whole supports the position that debtors may retain their property if they stay current in their payments. section 521 specifies that it does not alter rights enumerated in other sections of the code. The code gives debtors the right to retain their property as long as the creditor is protected and debtors make consistent monthly payments, the court found. Further, several other sections provide options for dealing with property, but are not listed in § 521, indicating the section is not meant to be exclusive. Rather, § 521 deals with options that require immediate notice so that the creditors may take appropriate action, but no action is necessary if the debtor opts to keep the property and make payments.

Finally, the court said this interpretation comports with the "fresh start" policy of the code, because a limited reading of the code would practically force debtors to reaffirm their obligations, as bankrupt debtors are usually unable to make lump-sum payments.

Plaintiffs' Counsel

Andrea G. Green, Dover, Del.

Eric L. Frank, Philadelphia, Pa.