In last month's "Consumer Corner" column, Tom Ray discussed the significant split among the Courts of Appeal over whether a debtor is required to reaffirm an indebtedness in order to retain collateral, or whether the debtor can simply retain the property and continue making the installment payments. Since that article went to press, the Second Circuit has deepened the split in In re Boodrow, 1997 WL564226 (Second Circuit 1997), decided September 12, 1997. The Second Circuit joined the Fourth and the Tenth Circuits in holding that a consumer debtor has a "fourth option" under §521(2) of retaining the collateral, and keeping the payments on that collateral current. The Fifth, Seventh and Eleventh Circuits are on the other side of the fence, concluding that a chapter 7 consumer debtor is limited to reaffirmation, redemption or surrender of collateral.

In Boodrow, a chapter 7 consumer debtor (who had become disabled prior to filing) opposed the motion for relief from stay filed by the secured creditor holding a lien on his car. Mr. Boodrow was current on his payments, since the payments were being made by his disability insurance policy. Mr. Boodrow had received his discharge in his chapter 7 case, and apparently the trustee had abandoned any interest in Mr. Boodrow's vehicle. Despite the entry of the discharge and the trustee's abandonment, the secured creditor continued in its request for relief under §362(d)(1), asserting that cause existed for relief from stay because Mr. Boodrow had not made an appropriate election under §521(2).

The vigorous dissent to the Second Circuit's decision argued that the entire proceeding was moot, since the automatic stay was no longer in effect by operation of law, under §362(c)(2)(C). The majority sidestepped this mootness argument by noting first that the record did not indicate whether or not the trustee had abandoned his potential interest in the vehicle, and second that there was no evidence that the bankruptcy case was closed. (There is possibly a lesson here regarding the completeness of records on appeal.) Rather, the majority, at the urging of all of the parties (including the secured creditor) converted the motion for relief into effectively a motion to compel the debtor to elect one of the options set forth in §521(2)(A).

In reviewing the debtors obligations under §521, the Second Circuit closely followed the reasoning of In re Belanger, 962 F.2d 345 (4th Cir. 1992). The Second Circuit limited §521(2) to a "notice function," and found the section to be "ambiguous," thus allowing for judicial interpretation.

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This split makes the issue ripe for consideration by the Supreme Court, or for clarification by Congress...

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The judicial interpretation supplied by the Second Circuit focused on the needs of the chapter 7 debtor following his discharge. "Confining an individual chapter 7 debtor to the choices of surrender, redemption or reaffirmation can severely interfere with providing the debtor a fresh startƒ[S]urrender may deprive a debtor of much-needed property, such as disabled debtor Boodrow's vehicle in this case." Critics of this decision may debate whether this constitutes a usurpation of the legislative power to determine exemption limits and the parameters of a "fresh start."

The secured creditor did not attempt to obtain relief from stay under §362(d)(2) because the value of the vehicle in question exceeded the amount outstanding on the loan by 10 percent. This apparently was a concession by the secured creditor in the district court, but not in the bankruptcy court; one wonders how the outcome might have differed if the secured creditor had been able to demonstrate that the value of the vehicle was less than the amount of the debt. Perhaps an enterprising debtor's attorney would have argued that the secured creditor's collateral also extended to the stream of payments to be received from the disability insurance policy, thus enhancing the collateral value beyond the amount of the debt.

Surprisingly absent from the Second Circuit's discussion of the issues presented in Boodrow was the relationship of these chapter 7 issues to chapter 13. The so-called "fourth option" desired by many debtors—retaining the collateral on a non-recourse basis while maintaining the payments—already exists to a certain extent under chapter 13. Further, practical experience indicates that most debtors who seek relief under chapter 13 do so in order to retain items of value, such as cars and homes, which have a substantial amount of debt against them. A review of chapter 7 filings in those circuits adopting the "fourth option" might reveal an increase in chapter 7 filings by debtors who are current on their house and car payments, but who have taken substantial cash advances on credit cards in order to fund living expenses in the months prior to filing. This "fourth option" would seem to strengthen the fresh start of consumer debtors, to lessen substantially the recovery of unsecured creditors in chapter 13 (while simultaneously increasing the amount of unsecured debt discharged in chapter 7), and to force secured creditors into non-recourse loans.

The Boodrow decision evens the split among the circuits on the effect of §521(2), and simultaneously makes chapter 13 less beneficial to consumer debtors in the Second Circuit. This split makes the issue ripe for consideration by the Supreme Court, or for clarification by Congress as it takes up the National Bankruptcy Review Commission's recommendations.