The debtor purchased a car from the seller and signed a sales contract, which granted the seller a purchase-money security interest (PMSI) in the car to secure financing. The sales contract also contained an ipso facto clause. The seller later assigned its PMSI to the creditor. The debtor filed for Chapter 7 bankruptcy and during that case stated that she intended to reaffirm her debt to the creditor. However, the creditor did not receive the signed reaffirmation agreement before the debtor’s § 341 meeting, and the agreement was never filed with the court as required by § 524(c). Later, the debtor received a discharge in her Chapter 7 case. Within one week, the debtor filed for bankruptcy again, this time under Chapter 13. The debtor listed the car as a secured claim in her Chapter 13 plan. The creditor objected and filed a motion to lift the automatic stay, arguing that under § 521(a), the debtor had no right to retain the car because it was subject to the creditor’s PMSI, and the debtor had failed to reaffirm or redeem the debt. The debtor argued that § 521(a) only applied to Chapter 7 debtors because the statute does not have “language [that] would preclude a Chapter 13 debtor that was previously in a Chapter 7 from retaining such collateral if the debtor failed to reaffirm or redeem.” Additionally, the debtor argued that § 362(c), which removes protections of the automatic stay, was only intended to apply to debtors who had their Chapter 7 case dismissed, rather than completed with a discharge. Next, the debtor argued that Congress did not intend to categorically preclude so-called “Chapter 20 filings,” which refer to filing a Chapter 13 case shortly after receiving a Chapter 7 discharge. She cited Johnson v. Home State Bank, 501 U.S. 78, 87 (1991), in support of her position. The creditor countered and argued that the debtor acted in bad faith and attempted to “circumvent[] the requirements of her Chapter 7 case…[and] to avoid the consequences of failing to redeem or reaffirm the debt.” Therefore, the creditor filed a motion arguing that the debtor’s bad faith was grounds to lift the automatic stay.
In In re Rashidi, Case No. 24-32587-mvl13, 2025 WL 73067, 2025 Bankr. LEXIS 40 (Bankr. N.D. Tex. Jan. 10, 2025) (opinion not yet released for publication), the court granted the creditor relief from the automatic stay due to the debtor’s bad faith Chapter 13 filing. The court had to determine whether the debtor, who had failed to reaffirm or redeem her debt, could rely on the protections of the automatic stay to keep her car and “cram down the secured creditor.” First, the court addressed whether the debtor’s failure to reaffirm or redeem within the statutory 45-day deadline violated § 521(a)(6). Specifically, the question was whether the debtor could “ride-through” and keep her car while making payments without complying with the bankruptcy code. Under § 521(a)(6), “a debtor in Chapter 7 has three options for dealing with her personal property…that is subject to a lender’s lien: (a) she can reaffirm the indebtedness…(b) she can redeem the vehicle by paying the lender the amount of its secured claim…(c) she can surrender the vehicle.” In re Law, 497 B.R. 843, 850 (Bankr. N.D. Tex. 2013). Failure to comply with one of the three options could result in the lifting of the automatic stay, and the property would no longer be considered part of the estate. 11 U.S.C. § 521(a)(6). Further, creditors are permitted “to take ‘whatever action’ they could under ‘applicable nonbankruptcy law.’” Id. Therefore, the debtor could not “ride-through” by keeping her car and making payments without reaffirming or redeeming the collateral and “had no right to retain the [car].” Additionally, the debtor’s failure to “substantially compl[y]” with § 521(a)(6) precluded a “backdoor ride-through” option, which would apply if the debtor had attempted to comply, but the court had prevented her from doing so. Thus, the debtor violated § 521(a)(6), and the court then addressed what remedies were available to the creditor “in the face of the Debtor’s chapter 13 filing.” The creditor argued that the debtor’s violations of § 521(a)(6) compelled the lifting of the automatic stay in this case. The debtor argued that Congress had not overruled Johnson and therefore she was not prevented from keeping possession of her car despite her failure to reaffirm or redeem. The debtor supported her argument and cited a case with similar circumstances to her own, where the judge held that “Johnson suggests that a debtor is ‘entitled’ to retain their collateral and restructure the debt on it in a subsequent Chapter 13.” In re Francis, No. 14-42974-RFN, 2015 Bankr. LEXIS 69, 2015 WL 139520, at *3 (Bankr. N.D. Tex. Jan. 7, 2015). The creditor argued that Francis is distinguishable because the creditor did not have a PMSI or an ipso facto clause in the sales contract; therefore, § 521(a)(6) was inapplicable in that case. Thus, the creditor argued that these two circumstances together “effectively overrule Johnson.” In addition, the creditor argued that the language “not retain possession” compelled the lifting of the automatic stay. § 521(a)(6). The court disagreed with the creditor’s assertion because the “explicit and exclusive remedy” under § 521(a)(6) was available during the Chapter 7 case and was no longer available during the Chapter 13 case because a “new” automatic stay applied. Francis, 2015 WL 139520, at *5. The court found that there was no clear congressional intent to overrule Johnson, nor that the termination of the automatic stay in the Chapter 7 case applied to “all subsequent filings by that Debtor.” Therefore, the court denied the request to lift the automatic stay on the basis of a violation of § 521(a)(6). However, the court ultimately lifted the automatic stay under § 105 and § 362(d)(1). The court noted that a bad faith filing of a bankruptcy case was “cause” sufficient to justify relief under § 362(d)(1). In re Little Creek Dev. Co., 779 F.2d 1068, 1072 (5th Cir. 1986). While the debtor’s “Chapter 20” [a Chapter 13 case following a Chapter 7 case] filing was not “per se” bad faith, the failure to comply with § 521(a) resulted in “a heightened scrutiny of good faith.” The court described the four facts to determine good faith in a Chapter 20 filing as: “[1] The proximity in time of the chapter 13 filing to the chapter 7 filing; [2] Whether the debtor has incurred some change in circumstances between the filings that suggests a second filing was appropriate and that the debtor will be able to comply with the terms of a chapter 13 plan; [3] Whether the two filings accomplish a result that is not permitted in either chapter standing alone; and [4] Whether the two filings treat creditors in a fundamentally fair and equitable manner or whether they are rather an attempt to manipulate the bankruptcy system or are an abuse of the purpose and spirit of the Bankruptcy Code.” In re Pollard, No. 10-17396, 2011 Bankr. LEXIS 595, 2011 WL 576599, at *2 (Bankr. D. Md. Feb. 9, 2011). Here, the debtor filed her Chapter 13 case one week after she received her Chapter 7 discharge and had no “significant financial change,” which suggested bad faith. The court held that the “most dispositive factor” was that the debtor attempted to achieve redemption by making installment payments, which is prohibited by § 722. In addition, the court found that the debtor’s failure to reaffirm the debt after the debtor expressed an intention to do so was “not conducive with bankruptcy policy.” Therefore, considering all the factors, the court held that “the [d]ebtor’s Chapter 13 filing lacks any indicia of good faith.” Regardless, the bankruptcy court had authority under § 105(a) to lift the automatic stay to “prevent abuse of process.” And the debtor’s violations of the bankruptcy code and attempts to avoid the consequences by filing for Chapter 13 qualified as an abuse of process. Ultimately, the court granted the creditor relief from the automatic stay.
By Hayden Mariott [email protected]
Edited By Olivia Lewis [email protected]