A bankruptcy judge once said, “It’s an unwritten rule in this district that every chapter 13 debtor must total at least one car during the pendency of his or her case.”
Here’s the question: Who gets the insurance proceeds? Does the insurance go to creditors, or can the debtor use the money to buy a new car?
In the case before Chief Bankruptcy Judge Henry A. Callaway of Mobile, Ala., the debtor was allowed to keep the insurance to buy a new car. Judge Callaway explained how the result might be different in other situations.
The debtor confirmed a chapter 13 plan paying about $7,200 to the auto lender to cover the secured portion of the claim. The remainder of the lender’s claim was treated as unsecured. The recovery for unsecured creditors was about 15%.
When the debtor totaled the car, she still owed about $900 to the lender on the secured portion of the auto loan. The insurance company offered to pay about $5,400.
The debtor could still claim an exemption of about $1,700 from the insurance, but she wanted the entire $4,500 (after paying off the $900) to buy another car. Less the exemption and the remaining secured claim, the chapter 13 trustee wanted to pay the rest to creditors under the plan.
The debtor won in Judge Callaway’s June 28 opinion.
At first blush, the debtor had a tough row to hoe because the district’s plan modified Section 1327(b). The default rule under that section provides that estate property revests in the debtor on confirmation. Concededly, the car and insurance proceeds would be property belonging to the debtor and not creditors if Section 1327(b) were applicable.
However, the district’s plan did not revest property in the debtor until discharge. Judge Callaway explained that delayed revesting was designed to continue protecting the debtor’s property under the automatic stay.
The district’s plan was not a problem after all, because delayed revesting did not override Section 1306(b)’s provision that the debtor retains possession of estate property after confirmation.
The second hurdle for Judge Callaway was the trustee’s request to modify the plan and pay more to creditors, because the debtor had extra money that was estate property.
To answer the second question, Judge Callaway laid out the confirmation requirements for a modified plan — in particular, the best interests test under Sections 1325(a)(4) and 1329(b)(1).
In the case before him, the value of the car had been factored into the best interests test before it was totaled. Judge Callaway said that the “insurance proceeds are a substitute for the wrecked vehicle — not new assets or value coming into the estate.”
Furthermore, the insurance proceeds were less than the $7,200 secured claim, which had been mostly paid and already provided for in the plan. Judge Callaway said that the plan met the best interests test at confirmation “and meets it now.”
Judge Callaway saw no reason to modify the plan and allowed the debtor to keep the insurance proceeds after paying off the secured claim and the chapter 13 trustee’s fee.
Judge Callaway also explained when the result might be different.
Judge Callaway said that the debtor couldn’t keep everything if the insurance were more than the secured claim or if the car hadn’t been accounted for in the Section 1325(a)(4) liquidation analysis.
Or, if the debtor had a bad payment history, Judge Callaway said he would have considered “ordering that some or all of the nonexempt surplus insurance proceeds be paid to the trustee for application to the case even if the percentage to unsecured creditors did not change.”
A bankruptcy judge once said, “It’s an unwritten rule in this district that every chapter 13 debtor must total at least one car during the pendency of his or her case.”
Here’s the question: Who gets the insurance proceeds? Does the insurance go to creditors, or can the debtor use the money to buy a new car?
In the case before Chief Bankruptcy Judge Henry A. Callaway of Mobile, Ala., the debtor was allowed to keep the insurance to buy a new car. Judge Callaway explained how the result might be different in other situations.
The debtor confirmed a chapter 13 plan paying about $7,200 to the auto lender to cover the secured portion of the claim. The remainder of the lender’s claim was treated as unsecured. The recovery for unsecured creditors was about 15%.