Consumer Bankruptcy

An increasing number of debtors in bankruptcy are raising Truth in Lending Act (“TILA”) rescission issues in an attempt to avoid the security interest of their mortgage lenders. Recently, the Federal District Court for the District of Kansas weighed in on this issue. It held that a bankruptcy court may condition a borrower’s TILA rescission right on the return of the property the debtor received from the loan transaction. Quenzer v. Advanta Mortgage Corporation USA (In re Quenzer), 288 B.R. 884 (D. Kan. 2003). Currently, there is a split of authority among the bankruptcy courts as to whether the court has the authority, either statutory or equitable, to condition rescission in this manner. Compare Wepsic v. Josephson (In re Wepsic), 231 B.R. 768 (Bankr. S.D. Cal. 1998); Apaydin v.

Recently, several bankruptcy courts have reviewed the issue of whether a chapter 13 plan containing a provision requiring the release of a lien if the allowed secured claim has been paid in full prior to the completion of the chapter 13 plan may be confirmed. In re Smith, --- B.R. ---, 2002 WL 31954449 (Bankr. W.D. Tex. 2002) (decided December 20, 2002); In re Castro, 285 B.R. 703 (Bankr. D. Ariz. 2002)(decided November 17, 2002); In re Gray, 285 B.R. 379 (Bankr. N.D. Tex. 2002)(decided November 14, 2002); In re Parker, 285 B.R. 394 (Bankr. E.D. Tenn. 2002)(decided October 17, 2002); and In re Moore, 275 B.R. 390 (Bankr. D. Colo. 2002)(decided March 28, 2002). After evaluating the relevant Bankruptcy Code sections and case law, these courts reach differing conclusions.

Under §722 of the U.S. Bankruptcy Code, a debtor may redeem collateral from a lien by paying the secured creditor, in a lump sum, the value of the collateral. An increasing number of debtors have been obtaining loans to “redeem” collateral in chapter 7 cases. This article will examine what standard courts should use to determine the value of an asset that the debtor seeks to redeem.

Section 722 of the Bankruptcy Code provides: