The U.S. Bankruptcy Court for the Eastern District of North Carolina in In Re Reuben Samuel Royal, Case No, 14-07134-DMW (May 2, 2016) recently concluded that the Chapter 13 debtors cannot surrender a vehicle  back to the lender after confirmation of a Chapter 13 plan even though the vehicle was depreciating or declining in value. 

According to the Bankruptcy Court, Section 1329 of the Bankruptcy Code only permits post-confirmation modification of the amount and timing of the payments, not the total amount of a particular claim.  See, Chrysler Financial Corp. v. Nolan (In re Nolan), 232 F.2d 528, 532-33 (6th Cir. 2000). Thus, the debtors could not modify their confirmed plan by surrendering the vehicle and having any deficiency classified as an unsecured claim.

The Bankruptcy Court noted that the Debtors purchased a used vehicle shortly before filing their Chapter 13 case.  At the time of its purchase, it had considerable mileage.  The Debtors proposed to retain the vehicle and to pay the lender the full amount of its $4,263.80 claim, together with interest.  The plan further provided only a 3.4% distribution to unsecured creditors. The Debtors’ plan outlining the proposed treatment of the lender’s claim was confirmed in April, 2015. Less than 10 months later, the debtors filed a motion to modify the plan to surrender the vehicle to the lender contending that the vehicle needed repairs and to reclassify any deficiency claim as an unsecured claim.

Adopting the strict interpretation enunciated by the Sixth Circuit in Nolan,   the Bankruptcy Court stated that Section 1329(a) allows for a reduction in the payment of claims but not for a reduction or modification of the claim itself.  The Bankruptcy Court said that it was “not persuaded that Congress intended to allow a debtor to use § 1329 to essentially revalue collateral that has depreciated while the debtor had the benefit of possession of that collateral, leaving the creditor with an unsecured claim.” (quoting, In re Miller, 2002 WL 31115656 (Bankr. M.D.N.C. Apr. 19, 2002). Finding that the proposed modification was not supported by a substantial or unanticipated change in the debtors’ financial condition, the Court denied the debtors’ motion to modify their confirmed Chapter 13 plan to surrender the vehicle back to the lender.

Creditors should carefully consider their options once a Chapter 13 plan has been confirmed to determine whether modifications and/or surrender of collateral is permissible under the Bankruptcy Code.