Post-Confirmation Surrender of a Vehicle

As attorneys are aware, the debtor almost always wants to keep a vehicle when filing a chapter 13 case. Then, post-confirmation, the debtor’s income changes, the vehicle has engine problems or the debtor hits a deer, and the debtor wants to give the vehicle back to the creditor and get a different one.

There has been a split in the bankruptcy courts and circuits for more than 25 years on the post-confir- mation modification of plans to surrender vehicles.[1] The reason for the split has been recognized as the Bankruptcy Code’s lack of clear statutory guidance on the subject.[2] The leading authorities on the subject of post-confirmation surrender of vehicles are pre- Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) decisions: In re Nolan, In re Adkins and In re Luellen.[3]

Plan confirmation provides the debtor with three options for secured vehicle claims pursuant to §§ 1325(a)(5) and 506(a) premise that a claim is only secured to the value of the vehicle on which the lien is attached. The debtor may (1) pay the claim in full with interest; (2) bifurcate the claim to pay only the value of the vehicle as secured with interest, and the balance of the claim as unsecured (cramdown); or (3) surrender the vehicle to the creditor and allow for an unsecured claim for any deficiency. BAPCPA add- ed a limitation through the hanging paragraph of § 1325(a)(9) in that a debtor is not allowed to bifurcate a claim of a secured creditor that holds a purchase-money security interest in a personal-use vehicle obtained by a debtor within 910 days of a chapter 13 filing (i.e., no cramdown to value (known as a “910 vehicle”)). At confirmation the debtor and each creditor are bound by the terms of the confirmed plan.[4]

Plan modification after confirmation pursuant to §§ 1329(a), (b) and (c) allows the movant (who might be the debtor, the trustee or an allowed unsecured claimant) to request by motion to (1) increase or decrease the payments on claims of a particular class in the plan; (2) increase or decrease the time for the plan pay- ments; (3) change the amount paid to a creditor on a claim provided for in the plan to take into account payment on the claim other than under the plan; or (4) decrease the plan payments due to purchasing health insurance for the debtor and/or dependents under certain circumstances; but (5) without cause, the plan may not be extended past the original term, and in no case may it be extended over 60 months from the date of the first payment due.

In addition, the plain language of § 1329(b)(1) provides that the modification must comply with the plan-confirmation rules of § 1325(a), which include the choices supra regarding secured claims, the good- faith requirement, plan feasibility, and the requirement that any fees have been paid and tax returns have been filed. Some courts follow the plain-meaning interpretation of § 1329(b)(1), whereas others do not be- lieve that § 1325(a) applies to the modification of plans that involve surrender of vehicles when the secured claim has been fixed in amount and status at confirmation.[5]

The courts that are opposed to the plain-meaning interpretation have held that it unfairly shifts the bur- den of depreciation to the creditor when the debtor elected to keep the vehicle at confirmation because at confirmation, the debtor and each creditor are bound by the terms of the confirmed plan.[6] The debate con- cerns whether post-confirmation the debtor, who is bound by the res judicata terms of the confirmed plan, may surrender the vehicle to the secured creditor and how the surrender affects the secured claim.

The Sixth Circuit is the only circuit to have ruled on this subject in two pre-BAPCPA cases: In re Nolan and In re Adkins.[7] In Nolan, there was a crammed down vehicle in the plan, and the debtor moved post-con- firmation to surrender the vehicle and reclassify the deficiency as an unsecured claim. The Sixth Circuit held that the binding effect of plan confirmation prevents a debtor from modifying a confirmed plan in or- der to surrender the collateral for the allowed secured claim, and reclassify the deficiency as an unsecured claim under § 506(a).[8] The Sixth Circuit reasoned that § 1329(a) only allows a debtor to modify the amount or timing of specific payments, but “not to alter, reduce or reclassify a previously allowed secured claim” as unsecured.[9] The Sixth Circuit further held that although § 1325(a) allows pre-confirmation surrender, in order to provide protection for the creditor, the secured claim was fixed as to amount and status at confir- mation and should not be subject to modification.[10]

The Adkins case determined how the Nolan decision applied when the creditor wanted the deficiency to be paid as a secured claim post-confirmation and post-repossession. In Adkins, there was a crammed down vehicle in the plan, but the debtor failed to make payments to the trustee so the creditor received no payments on its claim. There was no motion to modify filed; instead, the secured creditor moved to lift the stay and classify the deficiency claim as secured based on the confirmation status of the secured claim. The Sixth Circuit held that the facts were not distinguishable from Nolan because it was still the debtor’s fault — the lack of payments — that caused the vehicle to be repossessed.[11] Therefore, based on the debtor’s actions causing the repossession, the Sixth Circuit held that the res judicata effect of confirmation applied. The Sixth Circuit held that although the claim continued to be fully secured post-confirmation, it could not be reclassified or reconsidered.[12]

Post-BAPCPA, there is a split in the interpretation of the effect of the hanging paragraph on post-con- firmation modification in the cases that follow Nolan and Adkins, the minority view. Some courts have held that due to the res judicata effect of confirmation in § 1329, combined with the effect of the hanging para- graph, the fully secured 910 vehicle must keep its status and remain as fully secured (i.e., no surrender in full satisfaction post-confirmation).[13] Other courts have held that because of the hanging paragraph’s effect, the surrender is now in full satisfaction of the debt.[14] However, some courts have found that the hanging paragraph does not apply to the creditor’s claim upon post-confirmation sale of the vehicle because the lien is extinguished, so an unsecured deficiency is allowed.[15]

The pre-BAPCPA case of In re Leuellen leads the majority view. In Leuellen, the debtors had two ve- hicles and the confirmed plan proposed to pay the value plus interest on both. Six months later, one of the debtors became unemployed, and they filed a motion to modify to surrender one of the vehicles and reclas- sify the deficiency as an unsecured claim. The Leuellen court criticized the Sixth Circuit’s interpretation of § 1329 and held that the post-confirmation surrender and reclassification of the claim was allowed in § 1329(a)(3).[16] The Leuellen court reasoned that because § 1329(b)(1) specifically provides that Bankruptcy Code provisions that govern confirmation also govern post-confirmation modifications under § 1329(a) (in- cluding the option of surrender as a form of payment to a secured creditor under § 1325(a)(5)(C)), debtors should retain the right to surrender collateral post-confirmation.[17]

Leuellen also held that § 506(a) permits the reclassification of the claim because the surrender trans- forms the fully secured claim into a bifurcated claim — secured only to the extent of the value of the collateral with the deficiency being unsecured.[18] The Leuellen court also disagreed with the Sixth Circuit’s concern about the effect of post-confirmation surrender on shifting the risk to the creditors as long as debt- ors have good-faith reasons for seeking the modification, because to do otherwise forces debtors to predict the future at confirmation.[19]

Some of the most recent cases following the Leuellen reasoning that post-modification surrender is allowed under § 1329(a) also incorporate another pre-BAPCPA court’s decision allowing reclassification of the claim under § 502(j).[20] The Zeider court dealt with a crammed down vehicle that was surrendered post-confirmation after an accident and sold by the creditor, with the debtors moving to have the balance paid as unsecured. The Zeider court recognized that even though § 1329(a) expressly deals with neither the modification of payments on claims nor reclassification of claims, other Bankruptcy Code provisions do.[21] Section 502(j) specifically provides for reconsideration of a claim for cause, and the court held that the liquidation constituted the cause for reconsideration of the claim.[22] The court then looked at § 506(a), which provides that upon reconsidering the deficiency as unsecured, the value of the property distributed to the creditor equals the amount of the allowed secured claim under § 506(a).[23]

In Scarver, the debtor’s 910 vehicle was involved in an accident, and she moved to surrender and pay the insurance proceeds to the secured creditor, with the deficiency to be reclassified as unsecured. Her plan proposed to pay 0 percent to the unsecured, so the creditor objected. The court’s analysis began with the general rule that a claim is considered secured only to the extent of the value of the property held by the lien, with the remainder of the claim being unsecured. Therefore, the court held that the 910 hanging paragraph constituted an exception to the general rule.[24] The Scarver court considered post-confirmation modification to be an express exception under § 1329 to the binding effect of confirmation.[25] The court held that like plan modification, claim reconsideration is an exception to the binding effect of confirmation.[26]