18 Sep Surrendering Cars in Ch. 13: Western Missouri Hints at Rejecting Nolan
What happens if you are in Chapter 13 and need to surrender the car to the lender? In Western Missouri, you might be able to modify the car lender’s claim and save some money.
If you’re committed to a Chapter 13 for five years, a lot can happen. What if you’re paying for a car under the plan and it shoots craps? Or you simply have a drop in income so you can’t keep up the payments? Sometimes there’s room to get a lower payment but often you need to change the plan and get rid of the car you can’t afford any more.
But what is the car lender entitled to? In 2000, the Sixth Circuit held in Chrysler Financial v. Nolan (In re Nolan), 232 F.3d 528, that you could surrender the car to the lender but the balance of their secured claim — after applying whatever proceeds they receive from the wholesale auction of the car — will remain secured. That’s usually little comfort to the debtor because their payments will not go down much in most cases. They are in effect still committed to paying almost everything for a car they don’t have. And it left the other creditors getting less while the car lender got more. It is a recipe for failure of the case, many times.
Judge Dennis Dow in Missouri concluded that the court still had the power to revisit the amount and status of the car lender’s claim. So when the car lender sought relief from the stay because payments were slow or not made under the plan, they got the car back — but the court allowed the debtor to knock out their secured claim and leave only an unsecured claim. This wold leave the debtors more room to modify their plan to survive in Chapter 13 and repay other creditors.
Judge Dow did not reject Nolan because he didn’t have to reach the issue but, in a way, he did. Nolan concluded that Section 1329, which provides for post-confirmation modification of a plan did not allow a debtor to “reclassify” a claim from “secured” to unsecured.” Since no motion under Sec. 1329 was pending, technically Nolan was not implicated. And yet Judge Dow was able to conclude the debtors could reclassify a claim from secured to unsecured by filing an objection to claim under Sec. 502(j) after relief was granted to the car lender.
The courts that have rejected Nolan have done so by walking this same path, most recently the Western District of Pennsylvania as described by my friend Stephen Otto here. It would take some very creative reasoning to accept the line of cases which reject Nolan and then follow the Sixth Circuit anyway. Allowing this modification increases the debtor’s chances of success while also increasing the potential for repayment of other creditors (albeit at the expense of the secured car lender). It just makes more sense.
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