Car Cares and the Chapter 13 Dilemma
While I often extol the virtues of Chapter 13 bankruptcy, there is one issue in them that can be most vexing to a Debtor in need of help. Nearly every Chapter 13 Debtor owns a car with a secured debt attached to it when they file. Previously I have talked about the benefit of being able to reduce the interest rate on high interest car loans through the Chapter 13 and even, when the debt is old enough, cram down the principal owed to the actual value of the car. These all remain true. However, there is a hidden danger to having a car loan in Chapter 13.
The danger lies in 11 USC Sect. 1235(a). This provision lists a number of things that must be true about a Chapter 13 plan for it to be confirmed. Conversely, if all the requirements of 1325 are met, the court must confirm the plan. Shaw v. Aurgroup Financial Credit Union, 552 F.3d 447 (6th Cir., 2009). The Sixth Circuit Court of Appeals has issued case law based on this code provision that severely restricts the flexibility of a Chapter 13 bankruptcy in this one area of car loans. Those decisions are In re Adkins, 425 F.3d 296, 300 (6th Cir.2005) and In re Nolan, 232 F.3d 528 (6th Cir.2000).
Essentially, these two court opinions determine that once a plan is confirmed and the car lender’s claim is allowed, then it shall always be a secured claim. This may not sound formidable, but here is how the scenario plays out: Debtor has a car worth $7,000.00 which is working okay at the start of the plan. The plan gets approved and the secured claim is filed by the lender for $7,000.00. Perhaps there is another claim for excess debt on the car that is treated unsecured, but that does not matter in this situation. A couple of years into the plan, the car starts messing up and it becomes more costly to fix than the car is now worth. The Debtor, who is paying all their disposable income into their Chapter 13 cannot get the car fixed. So, they seek to modify the plan, surrender the car, and purchase a more roadworthy vehicle. They can only manage this if they can reduce their plan payment. They can only reduce their plan payment if the deficiency of the car loan, what’s left after the car is surrendered and auctioned, is unsecured debt. However, In re Adkins and In re Nolan preclude this.
That $7,000.00 cannot be re-characterized as unsecured. Let’s say the loan after two years of payments through the Chapter 13 plan is now $6,000.00 but the car auctions only for $1,000.00. That leaves a $5,000.00 deficiency. That $5,000.00 remains a secured debt that MUST be paid in full during the remainder of the Chapter 13 plan. The Debtor still must pay the exact same amount in plan payments and thus cannot afford to buy another vehicle. Now they have no car but they still must pay for their surrendered car in full.
The Sixth Circuit used solid statutory construction and policy considerations in coming to this result. They wanted to keep a Debtor from being able to enjoy a car for a while and then shift the depreciation value to the creditor. However, because the creditor knows they will be paid in full regardless of what they do, they have no incentive to realize the actual fair mark value of the car that was surrendered. The Debtor cannot sell the car due to the lien in place and the because of the Chapter 13 bankruptcy so they are stuck. They might as well keep the car and make do for the life of the Chapter 13.
The main point in all of this is to do a careful assessment of one’s vehicles and car loans prior to filing. Going into a Chapter 13 with high value cars that also have a high debt load can leave one with almost no wiggle room for the life of the Chapter 13. It would be best surrender such vehicles prior to confirmation of the plan and obtain an inexpensive used car prior to filing. And, if they have cars with debt, the Debtor needs to have some comfort that the car will actually last the life of the bankruptcy.
No comments yet.
-
Recent
- Section 341 Meetings by Zoom in EDKY – Procedures
- The Impact of the CARES Act on Chapter 13 Cases
- “I Can’t Make My Plan Payments Right Now”: These Policy and Procedure Changes Might Help
- Secured Claims in a Chapter 13 Plan in the EDKY
- New Deadlines for Filing Tax Returns as Required by Section 1308
- Late Secured Claim Disallowed Under 12/01/2017 Amended Rules
- Increases in Prime Rate of Interest and in EDKY Trustee’s Fee
- Delinquent Property Taxes and the EDKY Chapter 13 Plan
- Chapter 7 and Student Loans
- Bitcoin and Bankruptcy
- The New Chapter 13 Plan in Operation: The Good, The Bad, and The Ugly
- Prime Rate; Bar Dates; & Other New Plan-Related Topics
-
Links
-
Archives
- April 2020 (1)
- March 2020 (2)
- March 2019 (1)
- January 2019 (1)
- November 2018 (1)
- October 2018 (1)
- May 2018 (1)
- January 2018 (3)
- December 2017 (2)
- November 2017 (1)
- September 2017 (2)
- July 2017 (1)
-
Categories
- Adoption
- Alternate Debt Relief
- attorney fees
- Bankruptcy
- Assets
- Automatic Stay
- Business debt
- Cash Advances
- Chapter 11
- Chapter 13
- Chapter 7
- Conversion
- Credit Counseling & Debtor Education
- Debt solution centers
- Discharge
- Disposable Income / Budget
- Exemptions
- Foreclosure
- Fraud
- Home Loan Modification
- Home loan modifications
- Means test
- Plan payments
- Planning
- Pre-filing planning
- Preference / Preferential payments
- Proof of Claim
- Property (exempt
- reaffirm or surrender)
- Redeem / Redemption
- Security interests
- Student loans
- Tax Debts
- The estate
- Blogroll
- Business & small business
- child custody
- child support
- Civil Procedure
- consumer bankruptcy
- consumer debt
- Debt collection
- dissipation of assets
- Divorce
- Estate Planning
- Family Law
- Financing
- Fraud
- Gratitude
- Guardianship
- Life & Law
- Marital Assets
- Mediation
- Negotaion & conflict resolution
- Parenting
- Paternity
- Politics
- property allocation
- Solo & Small Firm
- Spirituality
- Uncategorized
- Visitation/Time sharing
- Words & Phrases
-
RSS
Entries RSS
Comments RSS
Leave a Reply