Under §521 of the Bankruptcy Code, if an individual debtor's schedule of assets and liabilities includes consumer debts that are secured by property of the estate, the debtor shall, within 30 days after the date of the filing of the petition under chapter 7 or on or before the date of the meeting of the creditors, whichever is earlier, or within such additional time as the court, for cause, within such period fixes, file 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. 11 U.S.C. §521(2)(A) (emphasis added).

The various circuit courts are currently split with regard to the meaning of the language of §521(2)(A). While some courts hold that the statute requires a debtor to choose among the alternatives set forth therein, other courts hold that redemption and reaffirmation are not the only alternatives under §521 and that a debtor may retain property and continue paying on the debt without stating an intention to reaffirm or to redeem. As shown below, the split seems to revolve around the interpretation of the terms "shall" and "if applicable" contained in the statute.

The Majority View

A slight majority of the circuit courts have held that the alternatives of redemption and reaffirmation set forth in §521 are not exclusive. Specifically, the Second, Fourth, Ninth and Tenth Circuit Courts of Appeal have held that a debtor may retain collateral and continue making payments without electing to redeem or reaffirm.

One of the first decisions from the circuit court of appeals interpreting the language of §521 was Lowry Federal Credit Union v. West, 882 F.2d 1543 (10th Cir. 1989). In that case, the Tenth Circuit Court of Appeals held that the statutory provision allowing bankruptcy debtors who wish to retain secured property to redeem such property or reaffirm the debt secured by such property is non-exclusive, and thus the bankruptcy court has jurisdiction to fashion other relief to allow debtors to retain the secured property. Although the Tenth Circuit noted that the requirement of §521(2) that every debtor-in-possession of collateral shall make an election whether to retain or relinquish the property is mandatory and that there is no room within the direct language of the section to presume otherwise, it held that a debtor's right to retain possession of collateral is not limited to redemption or reaffirmation. Id. at 1545-1546. The Tenth Circuit reasoned that §521 provides for no consequences in the event a debtor fails to state an intent to redeem or reaffirm, thus a secured creditor has no automatic right to repossess collateral in the event the debtor fails to comply. Id. at 1546. The Tenth Circuit then noted that "[w]hile a debtor may redeem property, subject to 11 U.S.C. §722, or reaffirm a debt, subject to 11 U.S.C. §524(c)(4), nothing within the Code makes either course exclusive." Id. In conclusion, the Tenth Circuit stated that when the state of the evidence indicates that 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. Id. at 1547.

In Homeowner's Funding Corp. of America v. Belanger (In re Belanger), 962 F.2d 345 (4th Cir. 1992), the Fourth Circuit Court of Appeals held that chapter 7 debtors who were current in their payments could retain collateral after their discharge without either redeeming the collateral or reaffirming the debt. The court noted that the lower courts' conclusion that §521(2) was merely a procedural provision requiring notice was consistent with §521(C), which provides that "nothing in subparagraphs (A) and (B) of this paragraph shall alter the debtor's or the trustee's rights with regard to such property under this title." Id. at 346-347. Furthermore, the court noted that the legislative history discloses that Congress rejected a proposal to lift the automatic stay if the debtor did not timely redeem or reaffirm. Id. (Citing 3 Collier on Bankruptcy §521.09A, at 521-49 (Lawrence P. King ed., 15th ed. 1991) and H.R. 4786, 97 Cong., 1st Sess. §7 (1981)). Finally, the Fourth Circuit noted that the language "if applicable" in the text of §521(2) would be redundant if the options of redemption or reaffirmation were considered to be exclusive. If these words were given effect, however, the court noted that the statute would be interpreted to mean that the debtor must specify a choice of the options if applicable. If the options are not applicable, the debtor need not specify them. Id. at 348.

In the case of Capital Communications Federal Credit Union v. Boodrow (In re Boodrow), 126 F.3d 43 (2nd Cir. 1997), the Second Circuit Court of Appeals examined the language of §521 and the legislative history behind it. It concluded that the language of the statute was ambiguous but that the legislative history implied that the statute was enacted primarily as a notice function and not to restrict the substantive options available to a debtor wishing to retain collateral. Id. at 50-51. It then noted that to confine a debtor to the choices of surrender, redemption or reaffirmation would severely interfere with providing the debtor a fresh start because a debtor would not likely be able to come up with the lump sum necessary to redeem the collateral, and in order to reaffirm the debt, the debtor would have to obtain the creditor's consent, thus subjecting the debtor to any terms the creditor chooses. Id. at 51. The Second Circuit then found that a creditor would not be prejudiced by allowing a debtor who was current on a debt to retain collateral and continue making payments without redeeming the collateral or reaffirming the debt. Id. at 52-53.

The Ninth Circuit Court of Appeals recently held in McClellan Federal Credit Union v. Parker (In re Parker), 139 F.2d. 668 (9th Cir. 1998), that the plain language of §521(2) dictates only that the debtor shall file a statement of intention. Like the Fourth Circuit, the Ninth Circuit found the language "if applicable" to mean that if the debtor plans to choose any of the options listed, then the debtor must specify so in the statement of intention. Id. at 673. If, however, the debtor does not choose one of those options, then the debtor's other options remain available as "unambiguously" stated in §521(2)(C) that "nothing...shall alter the debtor's...rights with regard to such property..." Id.

The Minority View

Unlike the circuit decisions discussed above, the Fifth Circuit, Seventh Circuit and Eleventh Circuit Courts of Appeals have held that under 11 U.S.C. §521(2), a debtor must file a statement of his intention to redeem or reaffirm and that redemption and reaffirmation are the only options available if the property is not exempt. In Matter of Edwards, 901 F.2d 1383 (7th Cir. 1990), the Seventh Circuit Court of Appeals held that a debtor is limited to the options set forth in §521(2). Id. at 1385. In so holding, the Seventh Circuit interpreted the language "shall" in §521(2) to mean that the language is mandatory. Id. at 1386 (citing In re Bell, 700 F.2d 1053, 1056-1057, 1058 (6th Cir. 1983)). The Seventh Circuit noted that the purpose behind the 1984 Amendment enacting §521 was "to protect creditors from the risks of quickly depreciating assets and to keep credit costs from escalating because of the too-ready availability of discharge." Id. at 1386. The Seventh Circuit concluded that to permit a debtor to retain property while maintaining installment payments without a reaffirmation of personal liability would allow a debtor to force a new arrangement on the creditor, and this would negate the volunteerism contemplated by the statute. Id.

In the case of Taylor v. Age Federal Credit Union (In re Taylor), 3 F.3d 1512 (11th Cir. 1993), the Eleventh Circuit, following the holding of the Seventh Circuit in Edwards, held that the debtors could not retain the property without reaffirming or redeeming the collateral. It held that "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 a secured obligation from recourse to non-recourse with no downside risk for failing to maintain or insure the lender's collateral." Id. at 1516.

In the case of Johnson v. Sun Finance Co. (In re Johnson), 89 F.3d 249 (5th Cir. 1996), the Fifth Circuit Court of Appeals held that chapter 7 debtors cannot retain collateral securing their consumer debt without either redeeming the property or reaffirming the debt. In Johnson, unlike the other cases, the debtors were in default with regard to their payments on the collateral. Nonetheless, the debtors argued that they could retain the property until the trustee requested turnover, the property was seized pursuant to the state court process, or the creditor rescinded the contract. The court disagreed and held that the language of §521(2) was clear that the debtor "shall" file with the clerk a statement of his intention. Choosing to follow the Eleventh Circuit's decision in Taylor, the Fifth Circuit held that the debtors were limited to the three options set forth in the statute. Id. at 252. The court then concluded that if the debtors did not notify the creditor within 10 days of the entry of the order of their intention to reaffirm the debt, redeem or surrender the collateral, the court could either dismiss the case or deny the debtors their discharge. Id.

A Middle Ground?

In a recent decision, American National Bank & Trust Co. v. Dejournette, 222 B.R. 86 (W.D.Va. 1998), a district court took a middle ground from the two conflicting views discussed above. Specifically, the court noted that the circuit court cases that allowed retention of collateral without reaffirmation or redemption involved situations in which the debtors were current at the time they filed for bankruptcy protection. Rather than taking the view that debtors must under all circumstances elect either to redeem or retain collateral, as the Fifth Circuit had done in Johnson, the American National Bank court held that the election to redeem or reaffirm must be made only in circumstances in which the debtor has defaulted on its obligations to a secured creditor. Id. at 94.

The American National Bank court noted that possible penalties for a defaulting debtor's failure to comply with §521(2) are as follows:

1. Compel the debtor to perform pursuant to 11 U.S.C. §105;
2. Dismiss the case pursuant to 11 U.S.C. §707(a);
3. Modify the stay pursuant to 11 U.S.C. §362;
4. Render the debt non-dischargeable pursuant to 11 U.S.C. §523(a); and/or
5. Award costs and/or attorney fees to the pursuing creditor.

Id. at 96-97.

Conclusion

An end to the confusion concerning §521(2) may be in sight, for it appears that Congress has noted the ambiguity of §521(2) and is working toward a resolution of the problem. Pursuant to the most recent version of the proposed "Bankruptcy Reform Act of 1998," the House of Representatives has proposed that §362 of the current Bankruptcy Code be amended to add a section (h), which provides that the stay shall be lifted if the debtor fails, within the applicable time set by §521(a)(2), to timely file the statement of intention or to indicate therein that the debtor will either surrender the property or retain it and, if retaining it, either redeem the property or reaffirm the debt it secures. See H.R. 3150, 105th Cong., 2d Sess. §124 (1998).

The bill adopts the minority view that reaffirmation and redemption are the exclusive remedies under 11 U.S.C. §521 and that the penalty for a debtor's retention of collateral without reaffirming the debt or redemption of the property is relief from the automatic stay.