Ch. 13 Debtors Can't Modify Plan to Surrender Clunker

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May 5 — An automobile service professional and his wife were not permitted to modify their confirmed Chapter 13 plan to surrender the joint debtors' 15-year old, high mileage car to the secured lender, the U.S. Bankruptcy Court for the Eastern District of North Carolina ruled May 2.

In a May 2 order, Judge David W. Warren denied the debtors' motion to amend their confirmed Chapter 13 plan, strictly construing the rule that a motion to amend a confirmed plan must be supported by a demonstration that the debtors experienced a “substantial” and “unanticipated” change (subsequent to the original confirmation of the plan) in their financial condition.

Car Bought Before Filing

In June 2014, just five months prior to filing their Chapter 13 petition, Reuben and Rachel Royal bought a 2001 Mitsubishi Eclipse with more than 144,000 miles on it. Chapter 13 bankruptcy allows individuals receiving regular income to obtain debt relief while retaining their property. To do so, the debtors must propose a plan that uses future income to repay a portion of their debts over a three to five year period.

The car was purchased with a loan from Home Credit Corporation, which properly perfected its security interest in the vehicle. The debtors then confirmed their plan, which provided for payments to Home Credit on account of its secured claim, on April 13, 2015.

However, the car had many mechanical problems, including failing to pass a state inspection, which caused the state to decline to register the vehicle (thereby rendering it non-operational for the debtors).

The debtor husband, a “service consultant” at a car dealership, determined that it would cost more than a thousand dollars to make the necessary repairs, and the debtors consequently moved to modify their plan to lower their monthly contribution to the Chapter 13 trustee from $568 to $465 a month.

According to the proposed modification, the debtors would surrender their car, and Home Credit would be entitled to a deficiency claim (the difference of their allowed claim less the value of the surrendered car) as an unsecured debt. Unsecured claims were to receive a 3.4 percent distribution under the plan. Home Credit, apparently preferring to be paid its claim in full ($4263, plus interest) under the original plan, objected.

‘Substantial, Unanticipated Change' Requirement

The dispute between the debtors and Home Credit centered on whether there was a “substantial and unanticipated change” in the debtors' post-confirmation financial condition, the standard required by the Fourth Circuit’s interpretation of Section 1329(a) of the Bankruptcy Code, the court said, citing Arnold v. Weast (In re Arnold), 869 F.2d 240 (4th Cir. 1989).

Basically, the court decided that it was not reasonably unanticipated (in fact it found it was “certainly foreseeable”) that the high mileage, 15-year old car would encounter mechanical difficulties, especially considering the debtor's background in the auto service industry.

Similarly, the court found that the projected cost to repair the car, although likely to strain the debtors' budget, was not significant enough to support a determination of “substantial” change to the debtors' financial condition.

Debtors Not Without Other Remedies

The bankruptcy court also concluded that the debtor could not use a Section 1329 plan modification to surrender collateral and change the nature of the secured lender's claim, following the Sixth Circuit's decision in Chrysler Financial Corp. v. Nolan (In re Nolan), 232 F.3d 528 (6th Cir. 2000). The court quoted another North Carolina bankruptcy court which adopted the Nolan decision (In re Miller, 2002 BL 26474 (Bankr. M.D.N.C. 2002)).

The court in Miller noted that debtors faced with similar quandaries had other alternatives. They could convert to Chapter 7 or dismiss their bankruptcy case and refile after the collateral was repossessed. Section 502(j) of the Code allows courts to reconsider claim allowances for cause, and of course a debtor could turn to Section 506(a) to affect whether and to what extent the creditor is in fact secured. However, the Royal case did not consider any of these remedies, as they were not before the court on the motion to amend the plan.

Roger A. Moore, Jacksonville, N.C., appeared on behalf of the debtors. William F. Hill, Greenville, N.C., appeared for Home Credit. The Chapter 13 trustee, Joseph A. Bledsoe III, New Bern, N.C., appeared on his own behalf.

To contact the reporter on this story: Daniel Gill in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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