liens: redemption and reaffirmation

Chapter 7: LiensRedemption and Reaffirmation

Debtor’s Options

U.S.C. 722 – Redemption

• 11 USC § 722 “An individual debtor may… redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt… by paying the holder of such a lien the amount of the allowed secured claim… that is secured by such lien in full at the time of redemption.”

So, what do we have to pay the creditor?

• “… the amount of the allowed secured claim…”

• What does that mean?

• What is the correct value to use?• Kelly Blue Book?• Private party• Retail

• NADA?• Auctioneer appraisal?

Remember that the value websites do not consider the condition.

2003 VW Jetta TDI with 52,000 miles

2003 VW Jetta TDI with52,000 miles

2003 VW Jetta TDI with 52,000 miles

2003 VW Jetta TDI with 52,000 miles

So, what do we have to pay the creditor?

• “… the amount of the allowed secured claim…”

• What does that mean?

• What is the correct value to use?• Kelly Blue Book?• Private party• Retail

• NADA?• Auctioneer appraisal?

Case Law – Cox

• In re Cox, No. 95-13575 (Bankr.S.D.Ohio Feb. 6, 1996)

• The Split-the-Difference Approach• Difference between NADA retail and wholesale

value• 2003 VW Jetta with 52,000 miles• NADA retail = $10,150

• This case restated the existing practice in this district

Case law – Rash

• Associates Commercial Corp. v. Rash, 117 S.Ct. 1879 (1997)

• Cannot use Split-the-Difference approach for Chapter 13 “cram down” valuation

• The value of the retained property "is the price a willing buyer will pay to obtain like property from a willing seller.”

Case Law – Donley

• In re Donley, 217 B.R. 1004 (Bankr.S.D.Ohio 1998)

• Denounced Rash’s retail approach when applying § 722 to a mobile home

• Looked at legislative history to determine that redemption value ≠ replacement value

• Redemption value “…amounts to a right of first refusal on a foreclosure sale of the property…”

Case Law - Williams

• In re Williams, 224 B.R. 873 (Bankr.S.D.Ohio, 1998)

• Applied Donley to cars

• Redemption “…represents the fair market value that the creditor would receive if the redemption did not occur and it were forced to repossess and to sell the car…”

• Wouldn’t this imply auction value?

Case law – Weathington

• In re Weathington, 254 B.R. 895 (B.A.P. 6th Cir., 2000)

• Creditor again tried to apply the Rash decision to redemption

• Replacement/retail value vs. Liquidation/wholesale value

• “…commercial reality is that… repossess[ed] vehicles most often sell… wholesale at auctions”

Case law – Weathington (cont’d)

• In re Weathington, 254 B.R. 895 (B.A.P. 6th Cir., 2000)

• “…because the process of repossessing and selling a vehicle involves some additional cost to the creditor, it is likely that when a debtor pays the creditor the liquidation value of a vehicle to redeem it, the creditor may actually receive more money than if it had repossessed the vehicle.”

2003 VW Jetta TDI with 52,000 miles

“Cram-down” vs. Redemption

• Below median income debtor

• Car loan is more than 910 days old

• Retail value vs. auction value?

• 2003 Jetta• Blue Book retail is $11,603• Auctioned for $6,800• Which, by the way, was equal to NADA “Average

Trade-In” value

Keep in mind:

• Our cases all clearly distinguished the redemption valuation analysis from Chapter 13 “cram-down” situations

• The only issue in theses cases was the appropriate valuation standard for determination of the allowed secured claim

• None of our cases involved disputes over the right to redeem or condition

BAPCPA - § 506(a)(2)

• Replacement value: the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time of filing

• Retail merchant, not private private party

• Code’s definition of retail includes an adjustment for age and condition, whereas KBB defines retail as “excellent” condition

BAPCPA - § 506(a)(2)

• Retail value is the starting point

• Certain expenses, including reconditioning must be factored into the calculation

• Value calculated as of the date of the petition, not the hearing date

How will we KNOW what the retail value is?

• Battling appraisers?

How will we KNOW what the retail value is?

• Will the court defer to auctioneer appraisals?

How will we KNOW what the retail value is?

• How much weight will be given to debtor testimony?

Is Redemption worth it?

• Jetta worth $6800 with $11,000 lien at 5% interest

• Debtor does not have $6800 to redeem car, especially after filing for Chapter 7

• Bankruptcy loan company • $6800 over 48 months at 25% interest • $225/mo adding up to $10,800 total• Don’t forget attorney fees

• Cross-collateralization might make it worth it

Reaffirmation of Mortgages

• Benefit of NOT signing the agreement: Debtor can walk away from house without further obligation

• Benefit of signing the agreement: can continue relationship with mortgagee

• Things to consider:• Future ability to modify will require

reaffirmation• Most banks are forgoing deficiency collection

• Other considerations?