Clifton R. Jessup, Jr. is a bankruptcy judge willing to change his mind. In an opinion on Nov. 2, he reversed course and held that a chapter 13 debtor may surrender collateral, modify the plan, and reclassify the resulting deficiency claim as unsecured.
In a prior opinion in June 2015, Judge Jessup, of Decatur, Ala., had precluded a chapter 13 debtor from surrendering collateral and reclassifying the deficiency claim as unsecured.
Judge Jessup said that the courts have been split on the issue for 25 years. The minority, he said, follow the 2000 Sixth Circuit decision in Nolan, which barred the debtor from modifying a plan to surrender collateral and reclassify the deficiency claim as unsecured.
Outside of the Sixth Circuit, the majority of courts find no bar to surrender, modification and reclassification, according to Judge Jessup. Those courts rely on the plain language of the statute, which says that a deficiency claim is unsecured, because the lender lost secured status when the collateral was surrendered and liquidated. With the claim no longer secured, treating the claim as unsecured and reducing plan payments is permissible.
In the case before him, the husband and wife debtors had reason for surrendering their car. One of them was no longer employed, significantly reducing family income and preventing them from paying the auto loan and required plan payments. They had previously surrendered their home and modified their plan to reduce plan payments.
The lender claimed there would be prejudice by allowing reclassification. Judge Jessup said that the good faith requirement for amending the plan under Sections 1329(b)(1) and 1325(a)(3) would “moderate” the risk to the secured creditor.
Judge Jessup called for a hearing to determine whether the amended plan, surrender, and classification were sought in good faith. There might be a lack of good faith, he said, if the debtor had abused the collateral, failed to maintain insurance, or “intentionally caused a substantial decrease in the value of the collateral.”
Judge Jessup adopted the logic by Chief Bankruptcy Judge William R. Sawyer of Montgomery, Ala., whose Scarver opinion this year permitted surrender, plan modification, and reclassification.
Clifton R. Jessup, Jr. is a bankruptcy judge willing to change his mind. In an opinion on Nov. 2, he reversed course and held that a chapter 13 debtor may surrender collateral, modify the plan, and reclassify the resulting deficiency claim as unsecured.