by So long as the modification is proposed in good faith a debtor may modify a plan which originally provided for a “910 Claim” to be paid off in its entirety, to one in which she surrenders the vehicle and treats any deficiency as unsecured. In re Fayson, No. 16-10013 (Bankr. D. Del. July 13, 2017).
After experiencing maintenance problems and a dispute relating to an undelivered warranty on her 910 vehicle, Tabitha Fayson sought to modify her chapter 13 plan to surrender the vehicle and treat the deficiency as unsecured. Citing In re Nolan. 232 F.3d 528 (6th Cir. 2000), the creditor argued that modification she sought was prohibited under the Code. The court disagreed and joined the majority of bankruptcy courts finding that treatment of 910 claims may be modified in the manner sought by Ms. Fayson.
The court began its analysis with a look at the history of the treatment of undersecured vehicles in bankruptcy. Prior to BAPCPA, a debtor could cram down an undersecured car loan, birfurcating the claim into secured and unsecured portions. In the hanging paragraph to section 1325(a), BAPCPA created an exception to that practice by providing that a loan secured by a vehicle purchased within two and a half years (910 days) of the bankruptcy could not be bifurcated under section 506(a).
The court turned to section 1329(a)(3), which provides that a plan may be modified to “alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim other than under the plan.” The court reasoned that surrender of the collateral constituted a payment “other than under the plan.” It went on to find that that payment satisfied the secured portion of the debt and that treating the deficiency as unsecured did not offend the Code even though, under operation of section 1325(a), the entire debt was treated as secured in the originally confirmed plan.
The court found support for this finding in other provisions of the Code. Section 1322(b)(8) permits a plan to “provide for the payment of all or part of a claim against the debtor from property of the estate or property of the debtor.” Section 1325(a)(5)(C) provides that a debtor may surrender collateral securing a claim. Section 502(j) permits a court to reconsider allowance of a secured claim “for cause according to the equities of the case.” Such cause may include surrender of the collateral.
The court disagreed with the holding in Nolan, that a court’s power to modify extends only to payments not to the claims themselves, and therefore, a court cannot change treatment of a claim from secured to unsecured. To the contrary, the court found that section 1329(a)(1) permits modification of classes of claims including, albeit without expressly stating, secured claims. Section 502(j) with its grant of power to alter allowance of a claim to conform to the equities of the case lends support to the court’s power to change the nature of a claim from secured to unsecured.
The court recognized the Nolan court’s concern that a modification like the one proposed by Ms. Fayson may permit a debtor to shift the burden of depreciation onto the creditor, but found that the creditor had protection in its ability to object to the plan or to challenge the plan as being proposed in bad faith.
The court found, therefore, that the proposed modification was not prohibited by the Code and it retained the remaining question of whether this particular plan modification was proposed in good faith for an evidentiary hearing to be held later.