Bankruptcy law is a balancing act between the rights of the debtor and his creditors. In Chapter 7 liquidation cases, the judicial calculus is fairly simple: take everything you own, subtract legal exemptions, sell what’s left to pay creditors, and discharge the rest. Because Chapter 7 debtors are generally “broke,” most Chapter 7 debtors lose no property and pay no creditors.
Chapter 13 cases are different. In a Chapter 13 case, the debtor keeps all of his property, but must pay creditors what amounts to a fair share according to his ability to pay over three to five years. That sounds easy enough, only life does not exist in a vacuum. Circumstances change. However, the Bankruptcy Code and its interpretation is not always fair when dealing with these changes.
For instance, suppose a debtor wins the lottery during the Chapter 13 repayment period. Generally the debtor will have to commit all of these winnings to the bankruptcy plan. Sounds fair so far, but what if the debtor agrees to pay the arrearage and future mortgage payments on his upside-down house, but then his employer transfers him to a different state? Can the debtor surrender the house after he has promised to pay the debt? In other words, can the debtor surrender the property after the Chapter 13 plan is confirmed?
The majority of bankruptcy courts, including those in the Sixth and Eleventh Districts, do not allow debtors to modify their bankruptcy plans to surrender collateral to their secured creditors. This issue is very complicated because of the competing policies of the binding effect of the court’s order confirming the Chapter 13 plan and the desire to promote the consumer debtor’s reorganization. In essence, the majority of courts point to the fact that the debtor received a benefit by modifying payment terms or even reducing principal balances through the Chapter 13 plan. It is not fair to allow the debtor to modify the original contract and make the creditor assume the risk of the collateral’s depreciation. These courts say that the debtor can’t have his cake, and then make the creditor bake him another cake several years down the road.
A minority of bankruptcy courts, including courts in the Fifth and Eighth Districts, have found that the risk of depreciation “is inherent in every installment loan and most
creditors have structured their businesses around this fact.” See In re Coates, 180 B.R.
110, 199 (Bankr. D.S.C. 1995). Consequently, both parties bear the risk of depreciation, even after confirmation. These minority courts allow modification of the bankruptcy plan to allow surrender of collateral except in situations of bad faith or excessive or abusive depreciation caused by the debtor (e.g. if the debtor wrecked the vehicle and did not maintain insurance).
Chapter 13 bankruptcy law is not for the part-time attorney and is certainly not an opportunity for a lay person to play lawyer. Bankruptcy law can be very complicated, and there are risks. If you need bankruptcy relief, don’t place your income or property in jeopardy. Find an experienced bankruptcy attorney and protect your rights and interests.