Debt Secured by Vehicle May Be Restructured in Chapter 20

The  debtor filed for chapter 13 relief after having received a discharge in chapter 7 less than one year earlier. During her chapter 7 she neither reaffirmed the non-purchase money loan secured by her truck nor redeemed it. In her chapter 13 she sought to pay the debt secured by the truck, as well as other debt. The lender objected to confirmation of the plan and sought relief from stay to exercise its rights against the truck. The court denied the motions by the trustee and confirmed the debtor’s plan. In re Francis, No. 14-42974 (Bankr. N.D. Tex. Jan. 7, 2015).

The lender argued that once the debtor received her chapter 7 discharge, she no longer had personal liability on the debt and, therefore, she had nothing to provide for in the plan. The court disagreed finding that Johnson v. Home State Bank, 501 U.S. 78 (1991) foreclosed that argument. Johnson established that unlike other serial filings, Congress did not prohibit filing a chapter 13 case on the heels of a chapter 7 discharge. There, the Court held that even after the debtor no long had personal liability on a claim, the claim itself did not cease to exist and could be treated in a subsequent chapter 13.

The lender next argued that once the debtor filed for chapter 7, she was required by section 521, to reaffirm, redeem or surrender the collateral. Because she did neither of the first two, the lender argued that she was now forced to do the third—surrender. Finding that this issue was not directly resolved in Johnson, the court looked elsewhere for guidance.

The court found that this case required it to reconcile the Fifth Circuit’s prohibition against ride through (citing In re Tequilla Marie Law, 497 B.R. 843, 850 n. 8 (Bankr. N.D. Tex. 2013)), section 521(a)(6)’s admonition that property not redeemed or reaffirmed may not be retained, and the Supreme Court’s finding in Johnson that “(1) a secured creditor whose claim has been discharged in a prior chapter 7 still has a claim under section 101(5) of the Bankruptcy Code in a subsequent chapter 13, (2) such a claim can be restructured in chapter 13, and (3) chapter 20 cases are not improper per se.” The court found that interpreting section 521(a)(6) to preclude chapter 13 treatment of an in rem claim where personal liability on the debt has been discharged would require a finding that that section effectively overturned Johnson.

The court explored other provision of BAPCPA for indications of such congressional intent. It found that, at least with respect to the facts before it, section 521(a)(6) would not preclude this debtor from treating the claim in her chapter 13 because section 521(a)(6) applies to purchase money security interests in personal property and this case involved a loan secured by the truck but not used to purchase the truck. Nor would section 521(d) preclude restructuring of the lien. That provision establishes congressional intent to support ipso facto clauses, but it does not create such clauses and the lending agreement in this case did not contain an ipso facto clause.

The court found that sections 521(a)(2) and 362(h), were applicable to this case, however. Section 521(a)(2) requires a debtor to state whether she intends to retain or surrender property and if she intends to retain, to specify whether she will reaffirm the debt or redeem the property. Section 362(h) provides that if a debtor fails to comply with section 521 the automatic stay no longer applies and, in fact, the property is no longer part of the bankruptcy estate, leaving the lender free to pursue its rights. Turning to whether these provisions indicate an intent to overturn Johnson, the court thought not. The requirements set forth in BAPCPA’s section 521(a)(2) are sufficiently similar to the comparable provision as it stood when Johnson was decided. Therefore, the amendment did not change the law as Johnson interpreted it. Likewise, section 362(h), does not take away what Johnson allows. While its operation caused the debtor to lose the benefit of the automatic stay in her chapter 7 case and, in fact, the truck became non-estate property, that did not alter the status of the claim in the subsequent chapter 13 case. In chapter 13 the truck was part of the estate property under section 541 and 1306, and the automatic stay was temporarily in place.

The court turned finally to section 1328(f)(1) which prohibits discharge in a “chapter 20” case. The court found that this provision, if anything, supported the debtor’s position by confirming congressional intent to permit a chapter 13 case to follow closely upon a chapter 7 discharge. The court concluded that “[h]ad Congress chosen to overrule Johnson v. Home State Bank, it would have made that intent clear. Because it failed to do so, this court can only conclude that Johnson v. Home State Bank remains viable. And, here, where sections 521(a)(6) and (d) are not called into question, that case governs the outcome.” For those reasons, the court confirmed the debtor’s plan.

The lender’s motion for reconsideration is currently pending and a hearing is scheduled for February 19, 2015.

Francis Bankr ND Tex opinion