The Kansas Supreme Court has resolved a recurring issue facing lenders in consumer bankruptcies. In Hall v. Ford Motor Credit Company, LLC, decided on April 29, 2011, the Court ruled that a “significant impairment” of collateral exists – even in cases in which monthly payments are current – when a borrower files bankruptcy, refuses to reaffirm the obligation, obtains a discharge and the value of the collateral is less than the debt. Fleeson, Gooing’s Tom Lasater represented the successful creditor throughout the case and presented the Supreme Court oral argument, while Bill Tretbar and Adam Burrus assisted with the Supreme Court briefing.
The decision interprets the Kansas version of the Uniform Consumer Credit Code (UCCC) and clarifies an issue that came into sharper focus with the adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Under prior bankruptcy law, a borrower was in most cases able to retain secured collateral so long as he or she remained current on required payments. Under these circumstances, the creditor could not obtain relief from the automatic stay to protect its interests. This encouraged borrowers to retain secured collateral without reaffirming their agreements with creditors.
Under Hall, this is no longer the case, and “pay and drive,” as the former practice was referred to, is no longer an option available to debtors in Kansas, at least not in cases in which the amount of the debt exceeds the value of the secured collateral, and the lender decides to declare a default and exercise its remedies. If the lender is undersecured and the borrower refuses to reaffirm his or her obligations post-bankruptcy, the holding in Hall supports the lender’s declaration of default and exercise of its contractual remedies, even in cases in which the payments are current.