Summary:
The Royals sought to modify their Chapter 13 plan to surrender a 15-year old motor vehicle that was increasingly expensive to maintain due to mechanical problems. The court denied this modification, first finding that the Royals had provided not evidence of a substantial and unanticipated change in financial circumstances beyond these mechanical problems. Following Chrysler Financial Corp. v. Nolan (In re Nolan), 232 F.2d 528, 532-33 (6th Cir. 2000), the court held that that 11 U.S.C. § 1329(a) allows for a reduction in the payment of claims but not for a reduction or modification of the claim itself.
Commentary:
AS the Royal opinion notes, following In re Miller, 2002 WL 31115656 (Bankr. M.D.N.C. Apr. 19, 2002) 11 U.S.C. § 502(j) allows a partial solution, since “[a] claim that has been allowed or disallowed may be reconsidered for cause. A reconsidered claim may be allowed or disallowed according to the equities of the case.” When collateral is surrendered through a modification, a debtor may use § 502(j) to reduce the previously allowed secured claim to reflect the value of the surrendered collateral and to reclassify the remainder of creditor’s claim as an unsecured deficiency under § 506(a). This may result in the creditor seeking an administrative super-priority claim for any amounts where the deficiency resulted from insufficient adequate protection, but that burden would be on the creditor to establish. See BB&T v. Construction Supervision Services.
For a copy of the opinion, please see:
Royal- Reclassification of Secured Claim in Plan Modification
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