26 Jun Trustee Holds Feher Proceeds Until Completion or Dismissal of Chapter 13
When an insurance policy pays a damage claim for a totaled car that is involved to a chapter 13, the bankruptcy trustee is required to hold excess money over the amount of the lender’s secured claim according to In re Feher, Southern District of Illinois case Bankruptcy Number 95-30444, Adversary Number 96-3133. Consequently, the money is referred to as “Feher” proceeds.
A debt is paid in bankruptcy up to the extent that debt is allowed as a claim against the bankruptcy estate. Often, a secured car claim is allowed at an amount less than the original debt. One example of such reduced claims includes a claim that is crammed down from a higher contractual balance to the lesser amount of the value of the vehicle. Another example occurs when the original contract interest rate is lowered to a reasonable rate under the Till case. An interest rate reduction results in less money being paid on the claim than that called for under the contract. A third situation where the claim is reduced occurs when the lien is stripped for lack of perfection and the claim is classified as Unsecured.
In each of the above examples, an otherwise secured debt will be paid less in bankruptcy than the original contract amount. But what if the bankruptcy does not complete? What if the case is dismissed? The answer is the original lien is reinstated under 11 U.S.C. 506(d) according to the original contract terms.
In order to protect the creditor against dissipation of insurance proceeds, the trustee is directed to hold excess insurance proceeds in trust until the chapter 13 case ends. If the debtor does not complete the Plan, the creditor is entitled to payment of the held money, the “Feher” proceeds.
Andy Miofsky, Esq.
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