Ch. 13 Debtor Can Reclassify Car Loan as Unsecured Debt

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By Diane Davis

Aug. 31 — A debtor may modify her confirmed Chapter 13 bankruptcy plan after her Toyota Corolla was totalled in an accident and reclassify any deficiency balance as an unsecured claim, a bankruptcy court in Alabama held Aug. 24 ( In re Scarver, 2016 BL 275834, Bankr. M.D. Ala., No. 14-10150-WRS, 8/23/16 ).

For more than 25 years, courts have been divided on whether a Chapter 13 debtor has the power to reclassify a secured claim after plan confirmation, Judge William R Sawyer of the U.S. Bankruptcy Court for the Middle District of Alabama said.

The court concluded that based on the majority view on post-confirmation surrender of collateral and claim reclassification, creditor 1st Franklin Financial Corporation's claim lost its secured status when the collateral (the car) was liquidated. Thus, 1st Franklin retains an unsecured claim for its deficiency balance, the court said.

Debtor Alesha Scarver obtained a $6,931 loan from 1st Franklin that was secured by her 2001 Toyota Corolla. She later filed for Chapter 13 protection, which allows individuals receiving regular income to obtain debt relief while retaining their property. To do so, however, the debtor must propose a plan that uses future income to repay all or a portion of her debts over a three to five year period.

After the debtor was involved in a car accident and the Corolla was totalled, she wanted to give the creditor the insurance proceeds of $2,800 in full satisfaction of the claim. 1st Franklin, however, asked the court to treat the remaining balance on its claim as secured.

The debtor then asked the court to modify her plan to stop payment on 1st Franklin's secured claim and to surrender the insurance proceeds.

The court found that her modification complied with Bankruptcy Code Section 1329(a)(1) and (a)(3) because the debtor intended to reduce payment on 1st Franklin's specially-classed secured claim and sought to offset payments made outside the plan on the claim (insurance proceeds). Section 1325(a)(5), which deals with “cramdown,” no longer applies because 1st Franklin no longer has a secured claim, and the debtor can pay the creditor nothing on its now-unsecured claim, the court said. The “cramdown” process is involved when a Chapter 13 debtor wants to keep collateral securing a claim over a creditor's objection by paying the claimant the replacement value of the collateral.

The court also found that the debtor met the good faith requirement and had a legitimate reason to modify her plan due to the accident.

Debtor Alesha Scarver was represented by Michael D. Brock, Brock & Stout, Enterprise, Ala.; Trustee Curtis C. Reding, Montgomery, Ala., Acting Trustee Sabrina L. McKinney, Montgomery, Ala.

To contact the reporter on this story: Diane Davis in Washington at To contact the editor responsible for this story: Jay Horowitz at

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