Can you keep your secured property after bankruptcy so long as you continue to make payments?  In the old days (i.e., before the bankruptcy laws changed in 2005) the answer was a resounding YES.  But the new Code cast a shadow of that with the advent of Section 362(h).  For over two years, the consumer debtor’s lawyer has had to answer that question with a shrug crossed fingers.

Now comes the Connecticut case of In re Caraballo, Case No. 07-32469 (D. Conn. 2008) which faced head on the question of whether, after the enactment of BAPCPA, Capital Communications Federal Credit Union v. Boodrow (In re Boodrow), 126 F.3d 43 (2d Cir. 1997), cert. denied, 522 U.S. 1117 (1998) and BankBoston, N.A. v. Sokolowski (In re Sokolowski), 205 F.3d 532 (2d Cir. 2000), remain binding authority that (1) a debtor has an option (the “ride through option”) to retain real property collateral and maintain current performance under the subject loan documents and (2) the secured creditor may not foreclose based solely on the debtor’s filing of the bankruptcy petition and failure to reaffirm.

Caraballo involved a debtor who sought to reaffirm a mortgage owed to HSBC Mortgage Services.  Though the court found no reason to deny the reaffirmation, it raised the issue sua sponte of whether such a move was necessary at all.

The court used Northwest Airlines Corp. v. Association of Flight Attendants-CWA (In re Northwest Airlines Corp)., 483 F.3d 160, 169 (2d Cir. 2007) and Garcia v. Teitler, 443 F.3d 202, 207 (2d Cir. 2006) to determine that Congress would have been aware of the pre-BAPCPA “existing landscape” of Boodrow and Sokolowski allowing ride-through for real property and personal property.  Noting that Congress eliminated the ride through option for personal property in BAPCPA, the court assumed that by failing to specifically do so as to real property in BAPCPA the intention was to leave it intact post-BAPCPA.

The question, then, is how the court could have affirmed the so-called fourth option for real property but not for personal property?  True, BAPCPA eliminated the automatic stay for unreaffirmed personal personal but did it provide a secured lender with the ability to repossess based solely on the bankruptcy trigger?

Here’s the thing - Boodrow and Sokoloski both accepted that it was a stream of payment, not a “technical default” such as bankruptcy, that prohibited a secured creditor from repossessing property.  There is nothing in BAPCPA that changed those rules; in fact, BAPCPA merely addressed the automatic stay.  It gave a creditor the ability to seek non-bankruptcy recourse to the extent permitted by law.  In the Second Circuit, such non-bankruptcy law is a non-starter.  So in my mind, the secured creditor is left with nothing but an empty bag; no automatic stay, but no ability to repossess in the face of current payments.

In re Caraballo is attached for your review.