Imagine that you have the good fortune to find
and repossess a vehicle which secures a delinquent obligation. You are
home free. . . or are you? Then you get a phone call or a letter from the
customer’s bankruptcy attorney asking you to turn over the vehicle that you
were about to sell. Refusal is a natural response. However, there might be
a good reason for you to give that vehicle back.
Under the amendments to the Bankruptcy Abuse
Prevention & Consumer Protection Act of 2005 (“BAPCPA”), Congress allows a
creditor with a purchase money security interest in a vehicle that was
purchased within 910 days prior to the bankruptcy filing to retain a secured
claim for the full amount due and owing as of the date of the bankruptcy
filing. (One additional requirement is that the vehicle must have been
acquired for the personal use of the debtor.) Your security interest cannot
be reduced or “stripped” even if the value of the car is less than the loan
balance. This positive change to the Bankruptcy Code was designed to
protect lenders who extend credit to a customer, only to have the customer
file bankruptcy soon after purchasing the vehicle. Under this new
provision, it is to the lender’s advantage to turn over a repossessed
vehicle to the Chapter 13 debtor who requests this action and then require
the debtor to make payments on the fully secured claim, with interest,
through the plan. This strategy provides a steady stream of payments
eventually equal to the total debt, which is far better than the alternative
of selling the vehicle at an auto auction and realizing an amount much less
than the debt.
Let’s take the scenario a step further.
Imagine that you have a situation in which you have repossessed a vehicle
prior to a Chapter 13 filing, but you do not have a pure purchase money
security interest in the vehicle or the vehicle was not purchased within 910
days of the bankruptcy filing. If you do not qualify for the new
protections under the Section 1325(a), you may not be completely out of
luck. If the debtor files a motion to recover the vehicle, you may still
have an opportunity to recover all your debt. Under the recent Nicholson
decision from the Western District of North Carolina, the debtor cannot cram
down the value of the car he regains post-petition. Therefore, the claim
must be paid in full. The lender is still better off returning the car to
the debtor.
In the Nicholson case, the bankruptcy court
held that the debtors could not both regain possession of the vehicle and
cram down the value of the vehicle in their plan. In order for a debtor to
regain possession of a vehicle repossessed pre-petition, the debtor must
redeem it under North Carolina state law. The North Carolina statutes
require fulfillment of all obligations secured by the vehicle, plus payment
of fees and costs. The Nicholson court stated that the debtors could
restructure the timing of payments in order to exercise their right of
redemption through the Chapter 13 plan. Further, the court stated that a
plan for redemption could adequately protect the secured creditor either
by: (1) continuation of direct payments outside of the plan, with
arrearages, expenses and fees paid through the plan; or (2) providing for
full payment of the entire claim inside the plan. However, the plan cannot
modify the terms of the obligation (including the amount or interest rate).
Likewise, in the Eastern District of North
Carolina, the bankruptcy court in the Jackovich case ruled that if the
debtor seeks to recover a repossessed vehicle, the debtors must provide for
redemption under North Carolina law. This may be accomplished if the debtor
continues to pay the lender directly, with any arrearage, repossession and
storage fees paid through the plan, or, alternatively, by providing for
payment of the entire claim inside the plan.
These two decisions were followed on the
Fourth Circuit Court of Appeals’ ruling in Tidewater Finance Co. v.
Moffett. In Tidewater, the debtor’s bankruptcy estate included the debtor’s
state law equitable right of redemption with respect to an automobile that
was repossessed prior to the bankruptcy filing. The Court of Appeals ruled
that the bankruptcy court was correct in requiring the repossessing secured
creditor to turn over the automobile to the debtor after ensuring that the
creditor’s interest in the automobile was adequately protected through the
debtor’s chapter 13 plan. According to the Court of Appeals, the
creditor’s security interest in the automobile was adequately protected
because the debtor’s right to redeem the vehicle was being exercised in the
bankruptcy case. Because the jurisdiction of the Fourth Circuit Court of
Appeals encompasses North Carolina, South Carolina, Virginia, Maryland, and
West Virginia, we expect to see similar decisions in this region in the near
future.
Thus, if you are confronted with a motion for
turnover of a repossessed automobile, always contact your attorney to assess
whether your interests will be better served by returning the vehicle to the
debtor and receiving payments through the Chapter 13 plan.
If you have any questions regarding this
alert or other bankruptcy law issues, please contact
Deborah
Crowder at 704.342.5316 or
dcrowder@poynerspruill.com.
