Section 521 of the Bankruptcy Code requires a Chapter 7 bankruptcy debtor to file a statement of intention which is laid out as the following:

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

There is even a bankruptcy form for filing the debtor’s statement, Official Form 8.

The statement of intention announces the debtor’s intent with regard to secured property only (a loan secured by property like a car or house). The Bankruptcy Code allows the debtor to choose one of the following actions:

  1. surrender the collateral back to the creditor and discharge any personal liability;
  2. reaffirm the debt and retain the collateral in exchange for continued personal liability on the original debt;
  3. redeem the collateral by paying the current fair market value in a lump sum; or
  4. some other treatment. For instance, non-purchase money security interests (when property you already own is pledged as collateral to secure a loan) may be avoided or stripped away, if the property is for household purposes and is fully exempt. The debtor eliminates the creditor’s security interest and keeps the property

The Bankruptcy Code requires the Chapter 7 debtor to file his or her statement of intention either on or before the 341 Meeting, or within 30 days after filing the petition, whichever is earlier.

You also have to remember that the Bankruptcy Code also requires the debtor to take action to reaffirm or redeem purchase money interest property within 45 days of the first 341 meeting date, or 30 days in the case of non-purchase money interest property.

If the debtor fails to either file a statement of intention or take action within the prescribed time periods, the property is removed from the debtor’s estate and is no longer protected by the automatic stay.

This means that a creditor is free to assert it’s state law collection rights against the property, including repossession or foreclosure. Debtors is still personally protected, so the creditor may not sue the debtor or garnish wages until the automatic stay is lifted or terminates.

When is stating intention not enough?

Section 362(h)(1)(B) allows the stay protection to continue, but requires the debtor “to take timely the action specified” in the statement of intention, which is some action beyond simply filing the statement of intention.

In one case (re Hardin, __ B.R. __, 2011 WL 1656094) merely stating an intention to reaffirm a debt and expressing interest in negotiating payment terms is not enough.

In another case (re Beard, No 10-51592), taking action to perform the debtor’s statement of intention is either (a) actually signing a reaffirmation agreement; or (b) evidencing a willingness and ability to execute a reaffirmation agreement prepared by the creditor.

The safe harbor identified in 11 U.S.C. §362(h)(1)(B) is only effective if the debtor indicates his willingness to reaffirm the debt on the original contract terms and the creditor refuses.

Ipso Facto clauses

Having property removed from the debtor’s bankruptcy estate may create additional trouble for the debtor in the case of ipso facto clauses.

The term ipso facto is a latin phrase meaning “by the fact itself.”

An ipso facto clause in a contract is a provision that creates a default on a loan by the fact of the debtor filing a bankruptcy.

Section 365 of the Bankruptcy Code expressly nullifies ipso facto clauses, but only for property of the bankruptcy estate.

Most courts find that ipso facto clauses are enforceable under state law when property is no longer a part of the bankruptcy estate.

Consequently, if the debtor’s property is removed from the estate due to a statement of intention failure, the ipso facto clause may cause a state law default and the creditor may repossess the property even if the debtor has not defaulted on the payments!

This type of situation was recently discussed in a Ninth Circuit Court of Appeals case (Dumont v. Ford Motor Credit Company).

The bankruptcy Ride Through

Some states do not allow creditors to repossess collateral or cause a default as long as the debtor is current on payments. This is often called a “ride-through” during bankruptcy because the debtor does not personally reaffirm the debt, but the creditor may not repossess the collateral because the payments are being made on time.

Congress, with the help of creditor lobbyists, attempted to eliminate the ride-through option during the 2005 amendments to the Bankruptcy Code, but it has survived as a practical matter through state law and it remains as such.

Even though the property is no longer under bankruptcy protection, the creditor cannot collect due to state law prohibitions.

When available, the ride-through is very beneficial to debtors because collateral is retained (as long as monthly payments are continuing to be made) while any personal obligation is discharged through bankruptcy.

This is often called a “non-recourse” obligation because should the debtor decide to walk away from the collateral in the future, there is no recourse for the creditor. It only receives the property and cannot sue the debtor due to the discharge injunction.