I. Introduction

Section 521(2) of the United States Bankruptcy Code appears on the surface to be a fairly straightforward statutory provision. Notwithstanding its apparent clarity, however, courts and commentators have wrestled with the proper interpretation of § 521(2) as it relates to an individual debtor in bankruptcy who has a consumer loan that is secured by property of the estate. This article will first examine whether an individual debtor with a secured consumer loan obligation has the unstated right simply to retain a creditor’s collateral and maintain current payments on the loan, a so-called "fourth option," without electing to "perform" one of the three specified options under § 521(2).1 Next, this article will address the potential consequences of a debtor’s failure to perform timely his or her stated intention under § 521(2)(B) within the context of the debtor’s pending bankruptcy case. Finally, this article will conclude with an analysis of the potential ramifications under applicable state law of a consumer debtor’s decision simply to retain the collateral and make current payments, without reaffirming the obligation or redeeming the collateral.

II. Section 521(2) and the "Fourth Option"

Section 521(2) of the Bankruptcy Code provides that an individual chapter 72 debtor whose "schedule of assets and liabilities includes consumer debts which are secured by property of the estate . . . shall file with the clerk a statement of his intention with respect to the retention or surrender of such property and, if applicable, specifying that such property is claimed as exempt, that the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property . . . ." This statement must be filed "within thirty days after the date of the filing of a petition under chapter 7 of this title or on or before the date of the meeting of creditors, whichever is earlier, or within such additional time as the court, for cause, within such period fixes . . . ." Section 521(2)(B) then provides that, "within forty-five days after the filing of a notice of intent under this section, or within such additional time as the court, for cause, within such forty-five day period fixes, the debtor shall perform his intention with respect to such property, as specified by subparagraph (A) of this paragraph . . . ."

The debtor must prepare the statement of intention in conformity with the appropriate Official Form and must serve the statement on the chapter 7 trustee and the creditors named in the statement on or before the filing of the statement with the bankruptcy court. The debtor may amend the statement at any time before the expiration of the period for performance of his or her intention under § 521(2)(B), and, if the debtor amends the statement, he or she must provide notice of the amendment to the chapter 7 trustee and to any entity affected by the amendment.

As an initial matter, courts have been called upon to resolve the issue as to whether, in filing a statement of intention, a consumer debtor is limited to the three options stated in § 521(2)(A), namely surrendering the property,3 redeeming the property,4 or reaffirming the obligation secured by the property. This thorny question has caused bankruptcy courts the most trouble, dividing even the circuit courts of appeal that have considered this issue. In one camp are the circuit courts that have held that the debtor’s options as stated in § 521(2) are not exclusive. These courts have based their respective holdings on their reading of applicable legislative history, as well as on the section’s plain language, namely the phrase "if applicable" contained in § 521(2)(A), or the statement in § 521(2)(C) that "nothing . . . shall alter the debtor’s . . . rights with regard to such property under this title."5 Pursuant to this line of authority, the debtor has a fourth option – simply stating his or her intention to keep the loan obligation current and to retain the collateral post-petition, without either executing a reaffirmation agreement or redeeming the collateral. At least one court has adopted the term "reinstatement" to describe this option,6 although this is not a term utilized by the Bankruptcy Code.

Circuit courts in the other camp take a stricter view of § 521(2), holding that a consumer debtor must confine himself or herself to the choices expressly indicated in § 521(2), and that "reinstatement" is not a viable option for a debtor who wishes to retain possession of the secured collateral.7 For purposes of this article, we need not pause here for long, as the First Circuit has sided with those courts that have rejected the so-called "fourth option," holding that, based "on the plain language of the statute, . . . § 521(2) unambiguously requires chapter 7 debtors wishing to retain property of the estate that secures a consumer debt to elect one of the retention options specified in 11 U.S.C. § 521(2)(A), and then to perform the elected option in accordance with 11 U.S.C. § 521(2)(B)."8

Nevertheless, the analysis of each of these courts should be kept in mind going forward, as their view of the correct reading of § 521(2) is generally determinative as to the outcome of the related issues outlined below regarding the effect of the debtor’s noncompliance.

III. Potential Consequences to the Debtor Under the Bankruptcy Code for Failure to Perform Under § 521(2)(B)

Assuming that the debtor complies with § 521(2)(A),9 and files a timely statement of intention that indicates one of the three specified options as an initial matter, what is the consequence of the debtor’s subsequent failure to "perform" his or her stated intention within the time period required under § 521(2)(B)? More to the point, what remedies are available to the secured creditor in the face of the consumer debtor’s noncompliance with § 521(2)(B)? Any attempt to answer these questions conclusively is frustrated by the fact that § 521(2) contains no enforcement mechanism on its face.10 For those courts that hold that the debtor has available the "fourth option" of retaining the collateral and maintaining current payments, however, the statement of intention serves merely a notice function.11 For these courts, § 521(2)’s central purpose is served when the debtor files his or her statement of intention, thereby indicating to the creditor how the debtor intends to treat the consumer loan and collateral at issue. Obviously, these courts impose no penalty at all for noncompliance.

The consequences of a debtor’s failure to "perform" under § 521(2)(B) vary, however, for those courts that read § 521(2) more narrowly. Since the First Circuit’s decision in Burr, which did not address the issue directly, at least one court12 within the jurisdiction of the First Circuit has held that a debtor’s failure to perform under § 521(2)(B) normally entitles the creditor to relief from the automatic stay for "cause" under § 362(d)(1) of the Bankruptcy Code. In In re Donnell, Judge Deasey of the United States Bankruptcy Court for the District of New Hampshire reviewed the decisions that had addressed this issue and, after considering the available alternatives,13 concluded that "relief from the automatic stay is the preferred remedy for a debtor’s failure to comply with the requirements of § 521(2)(B). Such a violation will constitute ‘cause’ for purposes of § 362(d)(1) in all but the most unusual cases." Although Judge Deasey ultimately held that "[r]elief from the automatic stay constitutes the appropriate remedy for ‘garden variety’ violations of § 521(2)(B)," the court also stated that:

Whether a given case is a "garden variety" one turns on its individual facts. For example, if collateral cannot be reasonably obtained through state law self-help measures, then relief from the stay alone may be ineffectual and thus may not be the appropriate remedy. Instead, a more serious remedy, such as an order to compel surrender or a motion for an order to show cause why the case should not be dismissed, may be appropriate.

Accordingly, it appears that the most likely consequence of the debtor’s failure to comply with § 521(2)(B) is that the bankruptcy court will grant relief from the automatic stay.

Prior to pursuing a motion for relief from stay based on a debtor’s noncompliance with § 521(2)(B), however, it is advisable for the creditor to be prepared to establish to the bankruptcy court that it first attempted to enlist the aid of the chapter 7 trustee in seeking the debtor’s compliance.14 Section 704(3) of the Bankruptcy Code provides that the chapter 7 trustee shall "ensure that the debtor shall perform his intention as specified in § 521(2)(B) of this title." Of course, this step is likely to be more perfunctory than effective because the chapter 7 trustee will generally have little incentive to assist the creditor in this context.15 Moreover, as noted above, the chapter 7 trustee has no designated enforcement powers under the Bankruptcy Code.16 Finally, it should be noted that not all courts are willing to grant a creditor relief from the automatic stay for cause in this situation.17

IV. Ipso Facto Clauses and Potential Consequences to the Debtor Under Applicable State Law for Noncompliance Under § 521(2)(B)

For purposes of this section of the article, we will assume the following scenario: 1) the debtor has filed a proper statement of intention under § 521(2)(A); 2) during the bankruptcy case, the debtor has not performed his or her stated intention under § 521(2)(B) within the required time period;18 and 3) subsequently, either the creditor has obtained relief from the automatic stay by motion or the stay has lapsed under § 362(c). An important question then looms: if the loan documents contain an "ipso facto" default clause, may the debtor retain the collateral post-discharge if he or she continues to make current payments when due under the loan documents? Such a clause typically provides that the loan will be in default and/or the creditor can accelerate the entire balance due if: (a) the borrower files bankruptcy; (b) the borrower becomes insolvent; or (c) any event occurs or fact appears that causes the creditor to deem itself insecure, or impairs the prospect of payment or realization upon the collateral. These types of clauses are also called bankruptcy default, technical default, or insecurity clauses. This question is unsettled in the First Circuit.19

The starting point for the analysis of this question must begin with the effect of the debtor’s bankruptcy filing on an ipso facto clause in the loan agreement between the debtor and the creditor. It is widely held that the Bankruptcy Code conditionally invalidates such clauses as of the filing date,20 usually pursuant to § 541(c)(1). Whether an ipso facto clause continues to be invalid once the automatic stay has terminated is a question that has divided the courts. Some courts that have examined this question have held that the Bankruptcy Code invalidates ipso facto clauses even after the automatic stay has terminated.21 Accordingly, for these courts, a debtor’s bankruptcy filing cannot be an event of default under the loan documents between the parties, either as of the filing date or thereafter.

Other courts, however, have concluded that nothing in the Bankruptcy Code invalidates ipso facto clauses post-discharge and, therefore, such clauses remain enforceable as long as they do not violate applicable state law.22 In these jurisdictions, a debtor who fails to comply with § 521(2)(B), by either reaffirming his or her obligation to the creditor, or by redeeming the collateral, runs the risk of the creditor treating the loan as in default and proceeding to repossess its collateral. This would be true even if the debtor continues to make current payments under the loan documents, since the creditor is proceeding against its collateral based on a ground other than a payment default.23

The Maine Consumer Credit Code expressly permits bankruptcy or insolvency to constitute an event of default24 in a consumer credit transaction.25 New Hampshire adopted a similar provision effective January 1, 1999.26 Based on these statutory provisions, it would seem that bankruptcy default clauses are generally enforceable post-discharge in these two jurisdictions, barring a successful argument that these clauses otherwise violate applicable public policy or are somehow unconscionable. Accordingly, debtors in these states will need to reaffirm their obligations or redeem the collateral in order to ensure their ability to retain it. A debtor who relies upon merely making current payments to the creditor post-petition runs the risk that the creditor will decide that repossession better protects its interests.27

Well in advance of filing bankruptcy, debtors with secured loans (and their counsel) would be well advised to consider the potential options of reaffirmation and redemption. Sufficient funds to allow redemption of the collateral by paying its present value to the secured creditor are rarely available to a debtor, often leaving reaffirmation as the only viable option. As noted by the Burr court,

[w]e do not doubt that redemption is beyond the means of most chapter 7 debtors, and that chapter 7 debtors wishing to retain consumer goods on which they owe money will, as a practical matter, be compelled to enter into reaffirmation agreements with their secured creditors. Nor do we doubt that some oversecured creditors may use their superior bargaining power to attempt to impose additional, creditor-friendly terms in any new agreement. But strictly speaking, debtors are never "forced" to enter into reaffirmation agreements . . . .

In the case of reaffirmation, however, the Bankruptcy Code provides that, among other requirements, a reaffirmation agreement is enforceable only if "such agreement does not impose an undue hardship on the debtor or a dependent of the debtor . . . ." Moreover, § 524(c)(3)(B) of the Bankruptcy Code requires, where the debtor has counsel, that the attorney file with the reaffirmation agreement a declaration or affidavit stating, among other things, that the "agreement does not impose an undue hardship on the debtor or a dependent of the debtor . . . ." At least two courts28 within the jurisdiction of the First Circuit, both in the District of Massachusetts, have held that bankruptcy counsel for the debtor has potential liability under Federal Rule of Bankruptcy Procedure 9011(b)(3) and (c) for filing such a declaration or affidavit without undertaking a thorough investigation as to whether the execution of a reaffirmation agreement will impose an "undue hardship" on the debtor. According to the In re Melendez court, debtor’s counsel: (i) must be fully conversant with the financial circumstances of the debtor and the debtor’s dependents; (ii) should conduct an analysis of the income and expenses of the debtor’s household; (iii) must review any contract granting the creditor a security interest and verify that the creditor indeed has a valid security interest that cannot be avoided; (iv) must be satisfied that the debtor is still in possession of the collateral; (v) verify the amount of the creditor’s claim; (vi) become reasonably conversant with the replacement value of the collateral; (vii) verify the date on which the debtor purchased the collateral; (viii) must be familiar with and disclose to the debtor, in terms familiar to lay persons, the financial terms of the reaffirmation agreement; (ix) should insist that the creditor provide the debtor with requisite written financial disclosures, including an amortization schedule of payments due and information regarding any additional credit that will become available as the principal balance of the reaffirmed debt is reduced; and (x) must determine whether the creditor claiming to be secured has in fact decided to pursue repossession of the collateral if the debt is not reaffirmed (and must perform a risk assessment regarding the same). These requirements, of course, supplement those detailed specifically in § 524(c) of the Bankruptcy Code.

Of particular concern to the Melendez court was the situation where it appears that the debtor’s expenses will exceed his or her postpetition income, and if reaffirmation of the debt is not necessary to retain an item which the debtor or his or her dependents require for their well-being--or if the item itself is not necessary--then payment of the reaffirmed debt in addition to the debtor’s existing expenses would clearly jeopardize the debtor’s ability to pay for necessary living expenses and impose an undue hardship on the debtor or his or her dependents.

In light of Melendez and BankBoston, N.A. v. Nanton, when counseling an individual who is considering a chapter 7 bankruptcy filing, bankruptcy counsel must advise the client that, if household income does not exceed expenses, then the bankruptcy court may well refuse to approve a reaffirmation agreement regarding a secured consumer loan. Depending on applicable state law, the debtor may therefore be unable to retain the subject collateral post-petition merely by continuing to make current payments when due. Moreover, if the debtor’s income is exceeded by his or her expenses, then debtor’s counsel may not be able to execute the declaration or affidavit of counsel required under § 524(c)(3) of the Bankruptcy Code. Finally, any attempt to amend the debtor’s income and expense schedules post-petition, in the absence of demonstrably changed circumstances, may well be met with a query from the bankruptcy court as to which set of schedules is the correct one.

In contrast to Maine and New Hampshire law, Massachusetts law provides that, "[i]n any consumer credit transaction involving a loan that is secured by a non-possessory security interest in consumer goods a provision relating to default is enforceable only to the extent that the default is material and consists of the debtor’s failure to make one or more payments as required by the agreement, or the occurrence of an event which substantially impairs the value of the collateral."29 As a result, under Massachusetts law, it appears that a creditor may not proceed to repossess its collateral based solely on the borrower’s bankruptcy filing or insolvency.30

V. Conclusion

Debtors who have consumer loans secured by either real or personal property, and who wish to retain that property post-petition, must pay heed to the requirements of § 521(2) of the Bankruptcy Code. First, the debtor must file a statement of intention under § 521(2)(A). Thereafter, if the debtor’s bankruptcy case falls within the jurisdiction of the First Circuit, the debtor must perform his or her stated intention within the statutory period under § 521(2)(B). If the debtor’s bankruptcy case is pending outside of the First Circuit, the debtor may be able to indicate that he or she intends simply to retain the secured collateral and maintain current payments on the loan, without reaffirming or redeeming.

Debtors who fail to perform as indicated in their statement of intention in a timely manner (or who fail to amend the statement within the time to perform), run the risk that the bankruptcy court, upon a motion made by the creditor, may take remedial action. The bankruptcy court may, alternatively, force the debtor to comply with the statement of intention, dismiss the debtor’s case, declare the consumer debt nondischargeable or, most likely, grant the effected creditor relief from the automatic stay. Assuming that the bankruptcy court chooses this final option, and grants the creditor relief from the automatic stay, the creditor will then be free to pursue its available state law rights and remedies as to its collateral. These remedies include repossession of the collateral based on the debtor’s bankruptcy filing, even if payments are current under the loan documents (assuming that the loan documents contain an ipso facto default clause that has not been declared invalid under the Bankruptcy Code or applicable state law).

A debtor within the jurisdiction of the First Circuit, which does not allow the use of the "fourth option" under § 521(2) of the Bankruptcy Code, must consider utilizing either redemption or reaffirmation in his or her efforts to retain collateral securing a consumer loan. Since reaffirmation is much more likely than redemption to be a viable option, care must be taken at the outset by debtor’s counsel in meeting with the client. Debtor’s counsel must be sure to examine the client’s financial situation and explain the client’s retention options and the attendant consequences flowing from those options. In preparing the debtor’s bankruptcy schedules, Debtor’s counsel should carefully review the debtor’s income and expenses to ensure that reaffirmation remains as an available avenue after the debtor files bankruptcy. If an initial draft of the debtor’s schedules indicates a net deficit in income less expenses, and the debtor is still making current payments to the creditor on the secured loan at issue, debtor’s counsel may wish to explore the debtor’s financial situation further to determine whether reaffirming the secured loan at issue can be accomplished effectively. As discussed above, attempting to reaffirm a secured obligation in the face of filed schedules that indicate that the debtor’s current expenses exceed his or her current income may lead to unpleasant repercussions from either the client (who may not be able to retain the property) or the bankruptcy court (which might seek to sanction debtor’s counsel). Attorneys are thus well advised to pay careful attention to the requirements of § 521(2) of the Bankruptcy Code and applicable federal and state law in their jurisdiction when advising clients who are considering a bankruptcy filing and who have property that serves as collateral for a secured consumer obligation.

1 In analyzing applicable case law in this area, this article will focus on decisions issued by the United States Court of Appeals for the First Circuit [hereinafter the "First Circuit"], other circuit courts of appeal, bankruptcy appellate panels, and applicable decisions from the United States Bankruptcy Courts for Districts of Maine, New Hampshire, and Massachusetts, since these are the jurisdictions in which I am currently admitted to practice. In analyzing state law, the scope of this article is limited to the applicable laws of Maine, New Hampshire, and Massachusetts.

2 See 4 Collier on Bankruptcy ¶ 521.10[2] (15th rev. ed. 2003) ("By its own terms, section 521(2) does not apply in any other chapter.") [hereinafter "___ Collier ¶ ___"]; see also Fed. R. Bankr. P. 1007(b)(2).

3 It is unclear whether a debtor who indicates that he or she intends to surrender the creditor’s collateral must actually do so within the statutory timeframe, in light of the protection afforded to the debtor by the automatic stay under the Bankruptcy Code. See generally In re Boodrow, 126 F.3d 43, 48 (2d Cir. 1997) ("[S]urrender requires a debtor to return the collateral to the creditor."); In re Taylor, 3 F.3d 1512, 1514 n.2 (11th Cir. 1993) ("Surrender provides that a debtor surrender the collateral to the lienholder who then disposes of it pursuant to the requirements of state law."); see also In re Theobald, 218 B.R. 133 (B.A.P. 10th Cir. 1998) (affirming bankruptcy court order denying creditor’s motion to compel debtors to execute and deliver deed to mobile home that debtors had indicated they would surrender in their statement of intention under § 521(2) of Bankruptcy Code, physical possession of which mobile home debtors had relinquished to creditor); In re Lair, 235 B.R. 1, 68 (Bankr. M.D. La. 1999) ("The required ‘surrender’ is therefore probably best seen as a prohibiting obligation, the obligation not to ignore the legal fact of the creation of the bankruptcy estate. ‘Surrender’ is not, within the bankruptcy context, synonymous with actual delivery, but is better seen as a version of constructive delivery (to the estate)."). Even if the debtor physically surrenders and delivers the collateral to the creditor, the creditor still needs to obtain relief from the automatic stay in order to sell or otherwise foreclose its lien in the collateral. See, e.g., In re Mayton, 208 B.R. 61, 66 (B.A.P. 9th Cir. 1997) ("It is not likely that Congress intended to abrogate or dispense with the requirement that the secured creditor move for termination of the stay in order to permit the creditor to seek the remedy of foreclosure in state court . . . by its use of the term ‘surrender’ [in § 521(2)].").

4 Section 722 of the Bankruptcy Code governs the redemption of "tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt" by allowing the debtor to redeem such property "by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien." 11 U.S.C. § 722; see also Fed. R. Bankr. P. 6008. The vast majority of courts that have considered the issue of a debtor’s use of redemption, however, have held that the debtor must redeem by making a single lump-sum payment, and that redemption cannot be accomplished by the use of installment payments unless the creditor agrees. See, e.g., In re Bell, 700 F.2d 1053 (6th Cir. 1983); Edwards v. Merchants Nat’l Bank, 95 B.R. 97 (S.D. Ind. 1988), aff’d, 901 F.2d 1383 (7th Cir. 1990); In re Avila, 83 B.R. 6, 7 (B.A.P. 9th Cir. 1987) ("Although Section 722 does not specifically so provide, redemption may not be made by periodic installment payments."); see also 10 Collier ¶ 6008.02 ("Redemption generally requires a lump sum payment of the amount of the allowed secured claim . . . .") (footnote omitted). As a result, for almost all consumer debtors, redemption is little more that a theoretical option at best.

5 See In re Parker, 139 F.3d 668, 673 (9th Cir. 1998) ("Our interpretation of [§ 521(2)(A)] is that the only mandatory act is the filing of the statement of intention, which the debtor ‘shall’ file. Then, ‘if applicable,’— that is, if the debtor plans to choose any of the three options listed later in the statute (claiming the property as exempt, redeeming the property, or reaffirming the debt)--the debtor must so specify in the statement of intention. The debtor’s other options remain available, as unambiguously stated in § 521(2)(C) . . ."); In re Boodrow, 126 F.3d at 53 ("[W]e hold that § 521(2) does not prevent a bankruptcy court from allowing a debtor who is current on loan obligations to retain the collateral and keep making payments under the original loan agreement."); In re Belanger, 962 F.2d 345, 346 (4th Cir. 1992) (affirming "district court[’s] [holding] that by giving notice of retention and intent to continue paying the loan according to the contract, the debtor complied with § 521(2)"); see also 4 Collier ¶ 521.10[2] ("Nothing in section 521(2) requires the debtor to choose redemption, reaffirmation or surrender of the property to the exclusion of all other alternatives. Section 521(2) merely requires a statement of whether the debtor intends to choose any of those options, if applicable.") (emphasis in original) (footnote omitted). Both versions of the proposed bankruptcy reform legislation currently pending before Congress would add the phrase "except as provided in section 362(h)" to the end of § 521(2)(C). See H.R. 833, 106th Cong. § 521 (1999); S. 625, 106th Cong. § 521 (1999). Both Bills add new § 362(h) to the Bankruptcy Code, which would provide that, in an individual case pursuant to chapter 7, 11, or 13, the automatic stay is terminated as to personal property of the debtor if the debtor fails within the applicable time set by § 521(a)(2): (a) to file timely his or her statement of intention; (b) to indicate therein that he or she intends to surrender, redeem or reaffirm; or (c) to take timely action the action specified therein, unless the statement specifies reaffirmation and the creditor refuses to reaffirm on the original contract terms.

6 Boodrow, 126 F.3d at 49.

7 See In re Johnson, 89 F.3d 249 (5th Cir. 1996) (per curiam); Taylor, 3 F.3d at 1516 ("Section 521 mandates that a debtor who intends to retain secured property must specify an intention to redeem or reaffirm. Nothing in the plain language of the statute provides a debtor with an option to retain the property and to continue to make payments."); In re Edwards, 901 F.2d 1383, 1386 (7th Cir. 1990) ("[W]e hold that 11 U.S.C. § 521 requires a debtor to choose between the reaffirmation, redemption or surrender of property. . . ."); cf. Bell, 700 F.2d at 1058 (holding, prior to 1984 amendments to Bankruptcy Code, which added § 521(2), that debtor who wishes to retain secured property must redeem or reaffirm, and that redemption cannot be accomplished through installment payments). One circuit court has uniquely held that, "although we regard as mandatory the provisions of Code § 521(b), we do not believe those provisions make redemption or reaffirmation the exclusive means by which a bankruptcy court can allow a debtor to retain secured property. When the state of the evidence indicates neither the debtor nor the creditor would be prejudiced, a bankruptcy court may allow retention conditioned upon performance of the duties of the security agreement as a condition of retention." Lowry Fed. Credit Union v. West, 882 F.2d 1543, 1546 (10th Cir. 1989).

8 In re Burr, 160 F.3d 843, 849 (1st Cir. 1998).

9 "The statement of intention under § 521(2) is mandatory." Sears Roebuck & Co. v. Lamirande, 199 B.R. 221, 223 (D. Mass. 1996) (citation omitted); accord In re Ogando, 203 B.R. 14, 17 (Bankr. D. Mass. 1996).

10 See Lowry, 882 F.2d at 1546 ("Congress provided neither a penalty for a debtor's failure to comply with § 521(2) nor a specific remedy for a creditor as a consequence of such a failure.") (footnote omitted); In re Burr, 218 B.R. 267, 272 (B.A.P. 1st Cir. 1998) (noting "the statute’s silence as to the consequences of a debtor’s default of § 521(2) duties"), rev’d on other grounds, 160 F.3d 843 (1st Cir.); In re Irvine, 192 B.R. 920, 921 (Bankr. N.D. Ill. 1996) ("Furthermore, there is no statutory sanction for failure to comply with Sections 521(2)(A) and (B).").

11 See, e.g., Parker, 139 F.3d at 673 ("[T]he only mandatory act is the filing of the statement of intention, which the debtor ‘shall’ file."); Boodrow, 126 F.3d at 51 (section 521(2) "appears to serve primarily a notice function"); Belanger, 962 F.2d at 347 (affirming "district court[’s] conclu[sion] that § 521(2) was a procedural provision requiring notice in order to inform the lien creditor promptly of the debtor's intention"); Mayton, 208 B.R. at 68 (concluding that § 521(2) "is essentially a notice statute").

12 In re Donnell, 234 B.R. 567 (Bankr. D.N.H. 1999); see also American Nat’l Bank & Trust Co. v. DeJournette, 222 B.R. 86, 97 (W.D. Va. 1998) ("In general, the preferred remedy [for noncompliance under § 521(B)] is modification of the automatic stay to permit the creditor to pursue his state law remedies.") (dicta); In re Bushey, 204 B.R. 661, 664 (Bankr. N.D.N.Y. 1997) (noting that, although relief from stay is "the standard remedy for a violation of section 521(2)(B)," on facts before court, debtors were subject to potential entry of summary judgment against them declaring debt nondischargeable); Irvine, 192 B.R. at 921 ("The most logical and legally sensible answer to this question is that the Debtors’ failure to perform the duties imposed within Section 521(2) provides grounds for vacating the automatic stay") (dicta); In re Greer, 189 B.R. 219, 222 n.1 (Bankr. S.D. Fla. 1995) (same in dicta); In re Tameling, 173 B.R. 627, 628-29 (Bankr. W.D. Mich. 1994) (same in dicta); In re Crooks, 148 B.R. 867, 873-74 (Bankr. N.D. Ill. 1993) (same); In re Logan, 124 B.R. 729, 734 (Bankr. S.D. Ohio 1991) (same).

13 The Donnell court considered and rejected (on the facts before the court) the following alternative creditor remedies for noncompliance, noting that others courts had authorized each of these potential remedies: compelling the debtor to comply with the statement of intention pursuant to § 105(a) of the Bankruptcy Code; dismissing the debtor’s bankruptcy case pursuant to § 707(a) of there Bankruptcy Code; and rendering the underlying debt nondischargeable pursuant to § 523(a) of the Bankruptcy Code. See In re Donnell, 234 B.R. at 571-72.

14 See, e.g., In re Donnell, 234 B.R. at 575 ("The Court also notes that before requesting a court-ordered remedy for a debtor’s noncompliance with § 521(2)(B), a creditor should ordinarily make an effort to seek compliance through debtor’s counsel and/or the trustee. If the debtor is pro se or if seeking compliance through debtor's counsel proves to be ineffective, then a creditor should involve the trustee. As discussed, § 704(3) charges the trustee to ensure performance. Pursuing compliance through the trustee may include requesting that the trustee remind the debtor of the duty to perform his or her stated intention. If seeking involvement of the trustee proves to be unsuccessful, a creditor may then seek the appropriate remedy from the Court."); see also 4 Collier ¶ 521.10[4].

15 See 4 Collier ¶ 521.10[4] ("However, no particular enforcement powers are given to the trustee. It is also unlikely that the trustee will make much of an effort solely on behalf of a secured creditor unless that creditor is willing to compensate the trustee for services rendered.").

16 See Lowry, 882 F.2d at 1546 ("When the debtor fails to comply with the § 521(2) requirements, the trustee is vested by 11 U.S.C. § 704(3) with ensuring the debtor’s compliance with § 521(2). That responsibility, however, is not coupled with any power of enforcement.").

17 See, e.g., Boodrow, 126 F.3d at 53 (collateral value exceeded amount outstanding on loan by 10 percent); Lowry, 882 F.2d at 1546; In re Stefano, 134 B.R. 824 (Bankr. W.D. Pa. 1991).

18 For purposes of this article, it is assumed that the intention that the debtor fails to perform is either reaffirmation or redemption. If the debtor redeems the collateral, by definition, the debtor has paid off all sums due under the loan documents and neither the loan documents nor the creditor’s lien are in force going forward. If the debtor reaffirms the loan, presumably the reaffirmation agreement, either expressly or constructively, waives the debtor’s bankruptcy or insolvency as an event of default under the loan documents.

19 Although the Burr court stated that "[w]e set to one side the dispute over whether debtors may retain the collateral post-discharge if they remain current on their payments under the original loan agreement," see Burr, 160 F.3d at 845, the court arguably later provided a good indication of how it might rule on this issue. See Burr, 160 F.3d at 848 ("Chapter 7 debtors do not, of course, enjoy a freestanding right under the Bankruptcy Code to retain property securing a consumer debt merely by keeping current on their payments under old loan agreements. Nor do they maintain a freestanding right under the Code to maintain with their secured creditors advantageous arrangements in place prior to filing. For this reason, we see as beside the point the [Bankruptcy Appellate Panel]’s concern that giving effect to § 521(2)(A) and (B) might alter the rights of those extraordinarily rare debtors with consumer loan agreements that are either nonrecourse or that lack ipso facto clauses. After all, any such rights altered by operation of the directives of § 521(2)(A) and (B) do not derive from the Bankruptcy Code; they are enforceable only under state law. And the loss of such state law rights is one of the costs of a chapter 7 discharge."). Under the pending bankruptcy legislation, a chapter 7 individual debtor who fails to either reaffirm the debt or redeem the personal property collateral may not retain possession of the property. This is apparently true even if the loan documents do not contain an "ipso facto" default clause.

20 Riggs Nat’l Bank v. Perry, 729 F.2d 982, 984 (4th Cir. 1984) ("default-upon-filing clause[] unenforceable as a matter of law" for duration of automatic stay) (citations omitted); In re Windham, 136 B.R. 878, 881 (Bankr. M.D. Fla. 1992) (acceleration of sums due under loan documents upon filing does "not put [the debtor] in any more jeopardy than that which existed prior to the filing of the petition.") (citing Lowry, 882 F.2d at 1546) (internal quotations omitted).

21 See, e.g., Boodrow, 126 F.3d at 49 n.6 (citing with approval concept that bankruptcy clause defaults are "‘technical defaults’" and that "‘reinstatement . . . prevents foreclosure and reinstates the contract’") (citing Joann Henderson, The Gaglia-Lowry Brief: A Quantum Leap from Strip Down to Chapter 7, 8 Bankr. Dev. J. 131, 137 (1991)); In re Sokolowski, 227 B.R. 16 (Bankr. D. Conn. 1998) ("extending" Boodrow to invalidate post-petition use of bankruptcy default clause under Bankruptcy Code); Stefano, 134 B.R. at 827 ("due on bankruptcy" clause unenforceable post-bankruptcy under Bankruptcy Code); In re Peacock, 87 B.R. 657, 659 (Bankr. D. Colo. 1988) ("Since this ipso facto clause is not enforceable, it cannot be used to constitute a default on the Contract by the Debtors. Therefore, the Debtors are not in default and the Creditor cannot enforce its rights under the default portion of the Contract which permits possession of the security.") (emphasis in original); In re Winters, 69 B.R. 145 (Bankr. D. Or. 1986) (bankruptcy default clause invalid post-bankruptcy as violative of section 524(a)(2) of Bankruptcy Code); In re Bryant, 43 B.R. 189, 195 (Bankr. E.D. Mich. 1984) ("The enforcement of default upon bankruptcy clause [post-petition] would create a penalty upon individuals who seek the protection afforded by the Bankruptcy Code.") (dictum); In re Cassell, 41 B.R. 737 (Bankr. E.D. Va. 1984); In re Brock, 23 B.R. 998, 1002 (Bankr. D.D.C. 1982) ("Moreover, in the absence of an actual default [post-discharge], the creditor should not be able to avail itself of a claimed default by reason of the debtor’s filing of a voluntary petition in bankruptcy."); see also 6 Collier ¶ 722.05[3] ("Even when the secured creditor does not specifically agree to refrain from repossessing if payments are made, most courts have held that attempts to take possession of the property after the bankruptcy petition are prohibited as long as the debtor is current in payments on the obligation. These decisions have been premised on several different grounds. Some hold that clauses creating a contractual default upon filing of a bankruptcy petition are void as contrary to the fresh start policy of the Code. Others have held that attempts to repossess are actions to coerce reaffirmation or payment of discharged debts, in violation of the automatic stay of section 362 or the discharge injunction of section 524. Moreover, under section 541(c) of the Code, property of the estate is freed of bankruptcy default clauses upon filing of the bankruptcy petition and there is no reason that they should again come into being when the property is exempted or abandoned.") (footnotes omitted).

22 See, e.g., Bell, 700 F.2d at 1058 ("[T]he § 541(c) prohibition against such a bankruptcy clause has been abandoned from the estate. Accordingly, the bankruptcy clause became effective upon abandonment, the debtors were in default of the security agreement and therefore no longer entitled to the primary possessory interest in the van.") (dictum); Forlini v. Northeast Sav., F.A., 200 B.R. 9, 12 n.1 (D.R.I. 1996) ("It is well established that the provisions of § 541(c) apply only during the pendency of the bankruptcy proceeding. Once the proceeding has been concluded, the prohibition against enforcement of default on filing clauses ‘is no longer operative.’") (quoting In re Schweitzer, 19 B.R. 860, 867 (Bankr. E.D.N.Y. 1982)); Lair, 235 B.R. at 75 ("[O]ur analysis compels the conclusion that nothing in the Bankruptcy Code invalidates default clauses in loan or security agreements, and therefore they are enforceable unless some bankruptcy avenue (redemption, reaffirmation, exemption/lien avoidance) has had a preemptive effect or unless applicable non-bankruptcy law applied in a non-bankruptcy forum renders them unenforceable.") (dictum); In re Gerling, 175 B.R. 295, 298 (Bankr. W.D. Mo. 1994) (Bankruptcy Code does not invalidate ipso facto clauses once automatic stay expires) (dictum); In re Mitchell, 85 B.R. 564 (Bankr. D. Nev. 1998) (same; creditor’s motion for relief from stay denied; debtor who was making current payments given 20 days to negotiate reaffirmation agreement or stay would be lifted); In re Whatley, 16 B.R. 394 (Bankr. N.D. Ohio 1982) (ipso facto clause valid once stay expires); cf. In re Hunter, 121 B.R. 609 (Bankr. N.D. Ala. 1990) (finding that Bankruptcy Code initially invalidates ipso facto clauses, and stating that contract rights and what constitutes default post-bankruptcy will be determined under applicable state law).

23 A creditor that decides to adopt this strategy should be aware that there are bankruptcy decisions in which a creditor’s continued acceptance of loan payments post-petition has been deemed to constitute a waiver of the bankruptcy default clause under the loan documents. See, e.g., In re Rose, 21 B.R. 272, 279 (Bankr. D.N.J. 1982). Other courts have equated repossession with an attempt to coerce either a reaffirmation agreement or payment of a discharged debt, in violation of section 524(a)(2) of the Bankruptcy Code. See, e.g., Winters, 69 B.R. at 146. Finally, "[i]n the context of a repossession when the debtor is current in contractual payments, there would also be possible grounds for finding the creditor in violation of the good faith requirement of the Uniform Consumer Code or a state unfair and deceptive practices statute, especially if the creditor has arguably waived the default by accepting payments after the bankruptcy." 6 Collier ¶ 722.05[3] (footnote omitted).

24 The Maine Consumer Credit Code provides, in pertinent part, as follows:

An agreement of the parties to a consumer credit transaction with respect to default on the part of the consumer is enforceable only to the extent that:

1. The consumer fails to make a payment as required by agreement; or

2. The prospect of payment, performance or realization of collateral is significantly impaired. The burden of establishing the prospect of significant impairment is on the creditor.

3. The following without limitation shall constitute a significant impairment of the prospect of payment, performance or realization of collateral:

A. Death, insolvency, assignment for the benefit of creditors, the commencement of any proceeding under any bankruptcy or insolvency laws by or against debtors . . . ."

9-A M.R.S.A. § 5-109(1).

25 The Maine Consumer Credit Code states that a consumer credit transaction "means a consumer credit sale, consumer lease or consumer loan or a modification thereof including a refinancing, consolidation or deferral." 9-A M.R.S.A. § 1-301(12).

A consumer credit sale is "a sale of goods, services or an interest in land in which:

(i) Credit is granted either pursuant to a credit card other than a lender credit card or by a seller who regularly engages as a seller in credit transactions of the same kind;

(ii) The buyer is a person other than an organization;

(iii) The goods, services or interest in land are purchased primarily for a personal, family or household purpose;

(iv) Either the debt is payable in installments or a finance charge is made;

(v) With respect to a sale of goods or services, not including manufactured housing or a motor vehicle, the amount financed does not exceed $25,000; and

(vi) With respect to a sale of a motor vehicle as defined in Title 29-A, section 101, subsection 42, the amount financed does not exceed $35,000."

9-A M.R.S.A. § 1-301(11).

A consumer loan "is a loan made by a person regularly engaged in the business of making loans in which:

(i) the debtor is a person other than an organization;

(ii) the debt is incurred primarily for a personal, family or household purpose;

(iii) either the debt is payable in installments or a finance charge is made; and

(iv) for loans made by:

(a) A supervised financial organization, either the amount financed does not exceed $25,000 or the debt is secured by manufactured housing or an interest in land; or

(b) A supervised lender other than a supervised financial organization, either the amount financed does not exceed $35,000 or the debt is secured by manufactured housing or an interest in land."

9-A M.R.S.A. § 1-301(14)(A); see also 9-A M.R.S.A. § 1-301(14)(B) ("A ‘consumer loan’ does not include: (i) a sale or lease in which the seller or lessor allows the buyer or lessee to purchase or lease pursuant to a credit card other than a lender credit card; (ii) except for the purposes of article VIII, or unless the loan is made subject to this Act by agreement, section 1-109, a loan secured by an interest in land, if made by a supervised financial organization and if the security interest is bona fide and not for the purpose of circumvention or evasion of this Act and the finance charge does not exceed 12 1/4% per year calculated according to the actuarial method on the unpaid balances of the amount financed on the assumption that the debt will be paid according to the agreed terms and not be paid before the end of the agreed term.").

26 Applicable New Hampshire law states as follows:

The following provisions are prohibited in retail installment contracts and shall not be enforceable:

. . .

(b) Any provision permitting the holder to accelerate the principal balance under the contract for default for any cause other than:

. . .

(5) Commencement of a proceeding in bankruptcy by or against the buyer.

N.H. Rev. Stat. Ann. § 361-A:7(IX)(b)(5).

27 The creditor may decide to pursue the repossession of its collateral based on financial considerations, see 6 Collier ¶ 722.05[3] ("Nonetheless, it is not always to a debtor’s advantage simply to continue contractual payments, since in many cases the property securing the loan is worth a good deal less than the present value of those payments."), or out of a concern that a debtor whose personal liability on the loan has been discharged lacks sufficient incentive to properly maintain the collateral, see, e.g., Taylor, 3 F.3d at 1516 ("Allowing a debtor to retain property without reaffirming or redeeming gives the debtor not a ‘fresh start’ but a ‘head start’ since the debtor effectively converts his secured obligation from recourse to nonrecourse with no downside risk for failing to maintain or insure the lender’s collateral."); Edwards, 901 F.2d at 1386 ("When a debtor is relieved of personal liability on loans secured by collateral, the debtor has little or no incentive to insure or maintain the property in which a creditor retains a security interest.").

28 In re Melendez, 235 B.R. 173 (Bankr. D. Mass. 1999); BankBoston, N.A. v. Nanton, 239 B.R. 419, 424 n.3, 425 (D. Mass. 1999) ("Rule 9011 clearly authorizes sua sponte inquiry into § 524(c)(3) attorney declarations. . . . In light of the statutory language, the legislative history and the case law discussed above, this Court concludes that, under the Bankruptcy Code, as amended, bankruptcy courts possess an independent obligation to review reaffirmation agreements to ensure that the elements of Section 524(c) are satisfied.") (citations omitted); see also Bank of Boston v. Wallace, 218 B.R. 654 (Bankr. D. Mass. 1998) (appeal from bankruptcy court’s denial of creditor’s motion to reconsider and vacate show cause order issued by bankruptcy court regarding proposed reaffirmation agreement between debtors and creditor dismissed as moot where, after holding show cause hearing, bankruptcy court approved reaffirmation agreement between debtors and creditor), aff’d per curiam, 187 F.3d 621 (1st Cir. 1998).

29 Mass. Gen. Laws ch. 255, § 13I(a); see also Mass. Gen. Laws ch. 255B, § 20A(a) (same language) (applicable to "retail installment contracts" under Massachusetts Motor Vehicle Installment Sales Act); Mass. Gen. Laws ch. 255D, § 21(a) (same language) (applicable to "retail installment contracts" under Massachusetts Retail Installment Sales Act).

30 See Mass. Gen. Laws ch. 255, § 13J(a) ("Subject to the provisions of this section a secured creditor under a consumer credit transaction may take possession of collateral. In taking possession the secured creditor under a consumer credit transaction may proceed without a prior hearing only if the default is material and consists of the debtor’s failure to make one or more payments as required by the agreement or the occurrence of an event which substantially impairs the value of the collateral . . . ."); see also Mass. Gen. Laws ch. 255B, § 20B(a) (same language); Mass. Gen. Laws ch. 255D, § 22(a) (same language).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.