Ride Through Option for Real Property Survived BAPCPA

By: James Lynch

St. John's Law Student

American Bankruptcy Institute Law Review Staff

 

Although the Bankruptcy Abuse Protection Act of 2005 (“BAPCPA”) largely eliminated the so-called “ride through” option for security interests in personal property, the Connecticut Bankruptcy Court in In re Caraballo

[1]

held that the option remains available for liens secured by real estate.  Under the ride through, a debtor whose real estate mortgage is not in default does not have to reaffirm the debt or surrender the real estate, but can retain the real estate by continuing to make the scheduled mortgage payments.

[2]

  Thus, since the debtor in Caraballo was not in default, the Court disapproved the debtor’s mortgage reaffirmation agreement as not being in her best interests “because she could retain the subject real property without reaffirming the [d]ebt.”

[3]

 

The two issues presented to the Court were whether the ride through option still existed for real property and whether the mortgage holder could foreclose if the debtor did not reaffirm.

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  Although BAPCPA eliminated the ride through option for personal property, the Court reasoned that the real property ride through option still existed.

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 Congress was aware that the option existed for both and personal property, but the language of the anti-ride through BAPCPA amendments specifically eliminated it only for personal property.

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Prior to BAPCPA, Second Circuit authority established that a ride through option existed for both personal and real property.

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  BAPCPA amended Bankruptcy Code sections 521(a)(6)

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and 362(h)

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to substantially change the ride through option.

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  However, the amendments by their terms applied only to “personal property.”  The Caraballo found support for its view in bankruptcy court decisions from other circuits that have also recognized that while the personal property ride through option has been abrogated, the real property ride through option still exists.

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The Caraballo holding is important because it gives debtors an additional option to retain their homes.  In the current environment where it is not uncommon that a mortgage exceeds the value of the home, the debtor has few desirable options.  While reaffirmation can preserve the home, the debtor must agree to pay the full debt, an amount that may greatly exceed the home’s current value.  In addition, the lender may insist upon inserting new terms into the reaffirmation agreement.  Further, since most home mortgages cannot be modified in bankruptcy, the debtor can do little more than reinstate the mortgage on its original terms in a Chapter 11 or Chapter 13 case.  At least in those cases where the debtor is not yet in default, the ride through allows the debtor to remain in the home as long as scheduled mortgage payments are made, without giving up the right to discharge the underlying debt.  The effect of this is to convert the mortgage into a non-recourse obligation.