Ride Through Option Eliminated

Definition - Ride Through Option - Bankruptcy debtor continues to make vehicle loan payments to lender without having to give the vehicle back or sign another agreement with the lender.

Before 2005, a bankruptcy debtor with a vehicle loan had four (4) options as to the vehicle:

(1) surrender the vehicle to the lender;
(2) redeem the vehicle (pay the lender the fair market value of the vehicle);
(3) reaffirm the debt (debtor and lender create new terms by which the debtor would be bound after the close of the bankruptcy case); and
(4) the "ride through" or "pay and drive" option where the debtor continues to make payments to the lender as if bankruptcy never occurred. 

The most obvious benefit of the ride through option is that, if allowed, should a debtor stop making payments on the vehicle loan, the lender could reclaim the car, but could not obtain a "deficiency judgment."  A deficiency judgment would generally be allowed where the vehicle sells for less than the debtor owes.

The main problem with cars is that they are so essential to so many people, especially here in the Bay Area.  Also, when people file for bankruptcy, the fear is that they will not be able to afford a vehicle.  Alternatively, if they are given credit to purchase a car, the terms are usually outrageous. 

The Ninth Circuit (California bankruptcy courts are part of this federal appellate court system), prior to 2005, allowed this ride through option, even though other circuits stated that such an option violated the Bankruptcy Code.  Recently, a Delaware Bankruptcy Court ruled that congressional changes to the Bankruptcy Code in 2005 specifically eliminated the ride through option for bankruptcy debtors.  The court held that "creditors holding security interests to file a statement of intention to surrender the collateral, redeem it, reaffirm the debt or, in the case of leased property, assume an unexpired lease."  In their opinion, a debtor cannot simply assert that payments will continue on the loan or lease.  Further, debtors must make an affirmative declaration of their intentions with the vehicle.  If not, the court can grant relief from the automatic stay that prevents repossession of the vehicle.  

This decision does not have the force of law in California bankruptcy courts.  However, the Ninth Circuit in In re Dumont (a 2009 decision) has held that Congress, through the 2005 legislation, intended to eliminate - or at least restrict - the ride through option.  Under this statement there may be situations where the ride through maybe allowed.  


The bottom line is that if you want to keep your car after bankruptcy, you have a few options.  Speak with the Henshaw Law Office today to see which option is best for your situation.


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