[00:00:00] Jim Sorenson: Hello, listening audience and welcome to the Banking On Credit Unions podcast. I’m Jim Sorenson, your host, and this week we’re going to be discussing chapter 13 bankruptcies. In particular, we’re going to be discussing modifications after confirmation. And I have joining me on the show today is Blair Boyd.
[00:00:19] Blair is a partner here at the law firm at Sorensen Van Leeuwen. He heads up our bankruptcy area of the law firm. Blair, welcome to the show.
[00:00:26] Blair Boyd: Thank you, Jim. Always great to be able to sit down and talk with you about credit union matters. How’s everything?
[00:00:31] Jim Sorenson: It’s going good. Good. Going good. We often get questions about the debtor seeking to modify their plan post confirmation after the plan is confirmed and whether or not this is allowed, can the debtor do this? Under what circumstances can the debtor do this?
[00:00:51] Clients are often confused about their rights. But I wonder how many times clients get a motion to modify the plan, [00:01:00] see something about the debtor trying to modify their plan post confirmation, and they fail to do anything with it.
[00:01:07] It just goes in a file. It sits on someone’s desk. There’s no objection. There’s no analysis. What’s your thoughts on that? Have you seen that?
[00:01:16] Blair Boyd: Yeah, most certainly. As we always say, these things, it depends on the circumstances. It depends on the specific set of facts.
[00:01:24] There’s no one blanket rule for these modifications but normally what we see is where a debtor has a reduction in some sort of income and trying to surrender or change their plan based upon that. But the case that we’re going to talk about today is actually a really good case. I’m glad we have a chance to sit down and talk about it.
[00:01:45] Some good facts in it that, I think it will be interesting to to everyone to hear.
[00:01:49] Jim Sorenson: Yeah. As you alluded to, the idea for today’s show is based on a recent court opinion out of Chicago. It’s bankruptcy judge David Cleary and he ruled that [00:02:00] a Chapter 13 debtor could modify the plan after confirmation to provide for surrendering of collateral and allowing the reclassification claim from a secured claim to an unsecured claim.
[00:02:13] And the law is not settled on this issue at all. And so Blair, can you give us a summary of this case and the issues at play here?
[00:02:22] Blair Boyd: Certainly. So this involves a Chapter 13 case up in the 7th District, which is Illinois, Indiana, and Wisconsin. A creditor had a secured claim. They had a car loan.
[00:02:37] The value of the car was $9,500, but they were owed $12,000 on the car. The plan that was confirmed crammed down this claim from $12,000 to 9, 500. And classified the rest as unsecured, so it’s a bifurcated claim. About a year went by after the claim was confirmed and as the court [00:03:00] said stuff happens in life.
[00:03:01] In this case, the car was stolen, damaged then the police actually towed the car but then couldn’t find it later. And then after that, it was also came out that the debtor’s insurance had lapsed. So there was multiple issues with this vehicle. The debtor obviously needs a car to be able to get around and get to work.
[00:03:20] He asked the court for permission to purchase a new car, take out money to purchase a new car. And then also asked the court to modify the claim. What they was trying to do was surrender the vehicle. And switch the claim from being paid as secured and reclassifying it as unsecured. Now as Jim, as you said, the cases the law on this is not set, but what the court did find is that the debtor can modify a plan after confirmation by surrendering the collateral and reclassifying the remainder as unsecured.
[00:03:54] Jim Sorenson: Okay. Thanks Blair. Thanks for the summary. Now, as I indicated this [00:04:00] is a question in the law that is not settled. There is a Sixth Circuit Court of Appeals case that’s pretty well known out there. The Nolan case which says in this circumstance you could not modify the plan that the effect of the confirmed plan would be binding on the debtor and the creditor and the debtor can’t get out of a bad situation.
[00:04:23] The judge here obviously ruled different and Sixth Circuit case is not a case that is binding precedent for the court. I know that in the Eleventh Circuit where we are, Georgia, Florida, Alabama. There are cases not at the 11th circuit level, but at the bankruptcy court level, which suggests that you could not modify in this situation, but to give our audience a better understanding, I think it’s helpful to go back and talk generally about the timeline of a Chapter 13 case, or the steps in a Chapter 13 case, and [00:05:00] how we get to where we are now in this case.
[00:05:02] Can you do that for us, lay out the general steps or processes in a Chapter 13 case?
[00:05:08] Blair Boyd: Yeah, of course. Normally what our clients see are either a Chapter 7 or a Chapter 13 case. The Chapter 7, those are the liquidation bankruptcies, the quicker, shorter ones. But what we are dealing with is a Chapter 13 case.
[00:05:20] And that’s what we call a reorganization bankruptcy. When they file their petition the debtor has 15 days after filing to file their proposed plan of reorganization. This sets forth how are they going to treat all their secured creditors, how they’re going to list and pay for any unsecured creditors.
[00:05:38] And it goes through and lists, all the different claims that are out there. Now, all the creditors in the 13, they need to file their proof of claim which sets forth what they’re owed and establishes whether or not they have a secured or an unsecured claim. Within 45 days after the 341 meeting, the first initial confirmation is going to be held by the court.[00:06:00]
[00:06:00] Before this, the creditors and the trustees have a chance to object to the plan if they don’t agree with what’s being paid, with what’s being set forth. And the court can reject the plan as it is offered originally. Now, if it’s rejected at this initial hearing and it is not confirmed, which is usually the case.
[00:06:16] The debtors get another chance and it will be continued and it gives the parties time to work out a resolution on any type of objection, determine what the claims are for these creditors. So ultimately, after a period of time, the plan is either confirmed and the case goes forward or is unconfirmed and at that point the case is either dismissed or converted to a Chapter 7.
[00:06:37] Jim Sorenson: So what is so unique or important about the confirmation that kind of sets all of this up and sets this discussion up.
[00:06:45] Blair Boyd: Yeah. So prior to confirmation, the plan is just simply a proposal. The debtor is saying, hey, this is what I want to do and this is how I want to treat all of my claims. It’s not binding.
[00:06:55] Like I said, it’s just a proposal. The effect of the confirmation is makes this [00:07:00] plan binding on the debtor and the creditor unless it’s modified at a later term. So you get a court order saying, hey, creditor, ABC Credit Union, you have to accept and you are agreeing to these, this type of payment on these claims that you claim that you have.
[00:07:16] So this is why we always stress, one, file your proof of claims in a Chapter 13 case for every account that’s allowed under the law. And two, review these Chapter 13 plans very carefully. If you have any questions or concerns, you can always reach out to your attorney, hopefully us. And have us review it and we can discuss and see if there’s any options on it.
[00:07:38] Jim Sorenson: Yeah, and I think that’s such an important point that often gets overlooked. A lot of times clients don’t understand the importance of confirmation and, up to the point of confirmation, the plan is nothing more than a proposal. Of course, the creditor can accept that proposal by doing nothing and not objecting, or they [00:08:00] can object to the plan.
[00:08:01] Obviously, whether or not their objection would be valid or viable is going to depend upon the facts of the case and the law, whether the objection is based in the law, but the fact that the plan is not binding is important because that’s why we tell our clients not to modify how the loan is treated internally based just upon a chapter 13 plan.
[00:08:26] The fact that the debtor filed a plan or has amended a plan. isn’t binding yet on the creditor. So the creditor shouldn’t be adjusting their books to match the plan.
[00:08:37] Yeah, that’s a great point.
[00:08:38] Now there may be reasons why charge off is appropriate. That’s a different issue, and I’m not talking about that.
[00:08:43] But just matching the plan. Here in this case, obviously, just so we’re all on the same page, in this case, All of that had happened, everything Blair just went through had happened, the plan had been confirmed, I think it, the plan had been confirmed, and the [00:09:00] plan had been confirmed about a year and so this case arises a year into the case after confirmation where the debtor has been paying and performing under the plan.
[00:09:11] In this court opinion, we’ve been discussing N Ray Cook. Cook is the last name of the debtor and so often when we refer to these cases, they’re referred to by the debtor’s last name and they’re typically referenced as N. Ray the name of the debtor. So in this case, N. Ray Cook, the creditor’s claim involved an automobile loan. So just for those who maybe are listening to this podcast, they’re not familiar with what the law allows for the treatment of an auto loan in a chapter 13. Can you outline that Blair and lay that out?
[00:09:45] Blair Boyd: And we get this all the time. Credit unions ask, what are our options here? They ask, Can the, does it, can the debtor reaffirm in this Chapter 13 case a no reaffirmation agreement? That’s only in a Chapter 7. So in a Chapter 13, they have two [00:10:00] options.
[00:10:00] They can either keep the auto or surrender the auto. So if they want to keep the auto, they have a couple of options in that if they make that decision. Option one is to continue to pay the auto pursuant to the terms of the loan. So it’s going to stay the same monthly payment, interest rate, that type of thing.
[00:10:18] That’s usually done paying directly to the credit union so the debtor would continue to make their payments directly to the credit union. Or under circumstances they can actually modify the loan. So as a general rule, the debtor can retain the car and modify the loan by repaying the replacement value of the car over the life of the plan at a reasonable interest rate.
[00:10:41] And I’m actually writing a newsletter article about the interest rate coming up though for SVL soon, so you can, keep your eyes out for that. That’ll discuss that a little bit more, but what we call this situation is called a cram down. We’re actually cramming down the claim to what the value of the collateral.
[00:10:57] Say you’re owed 20, 000 on a [00:11:00] 2016 Kia, but it’s only worth 15, 000. Debtor has a right to say, no, I’m not going to pay the full 20. We’re going to just cram you down and only pay you 15 over the life of the plan. Now there is an exception to this cram down and that’s when the lien is a purchased money security interest and the loan is originated within 910 days of the bankruptcy filing.
[00:11:22] So you can’t do any type of refinancing that wouldn’t qualify and within two and a half years of the bankruptcy filing, they cannot cram you down.
[00:11:30] Jim Sorenson: Just an aside here on that 910 claim, because we get a lot of confusion about that. Purchase money means the lender, of course, lent the money to buy the car.
[00:11:40] As you indicated, it can’t be a refinance. And that 910 day period only applies to motor vehicles.
[00:11:48] Blair Boyd: Correct.
[00:11:48] Jim Sorenson: It’s got to be what is defined as a motor vehicle. So automobiles, trucks, motorcycles motor homes, the ones that drive, you can drive, not a pole [00:12:00] behind camper or trailer certainly not a boat, those types of things.
[00:12:04] It’s things that are meant to operate on their own on a highway. So I think that’s an important distinction. Another thing, and I think it’s funny, I’ll point this out you use the example of a Kia, and I think, we’ve all used that a lot. Kia’s is the example of cars that get crammed down a lot.
[00:12:22] Probably not fair to Kia anymore. I know I used to use that years ago when Kia’s weren’t very good. They’re now much more quality cars but nevertheless, any car can be crammed down because we know that in most time periods cars are depreciating faster than the loan. There have been some time periods where that wasn’t the case, but in most cases that is the case.
[00:12:43] In the Cook case, how was that claim treated? How was that lenders, the auto loan treated in that case?
[00:12:50] Blair Boyd: Sure. It was a crammed down. So the car was originally owed $12,000, but they valued it at [00:13:00] $9,250. So there was there’s a bifurcated claim, meaning part of it was secured, paying, and part of it was paid as unsecured.
[00:13:08] And in the plan, the unsecureds were only getting about 10 percent of what they owed. They’re getting a dime for every dollar that they’re owed.
[00:13:14] Jim Sorenson: Yeah, it’s interesting to me that when you read the facts of this case, the judge says, things happen.
[00:13:22] And this case does appear to have a comedy of events, if you will. The car stolen in the theft of the car gets damaged. There’s an indication the car was inoperable when the police recover it, then the police appear to misplace it. It’s not clear if it was ever found. I Don’t know how that happens.
[00:13:40] That’s a new one on me. I’ve never had the police misplace a car in all my years of representing credit unions. But the one that gets me is the debtor failed to maintain insurance on the vehicle. Presumably the debtor had, wasn’t at fault. for the stolen car. There’s no indication.
[00:13:58] He left the keys in it. He [00:14:00] left it unlocked. He did something that would, suggest that he made the car able to be stolen. There’s no indication that it wasn’t a robbery or a theft. Certainly he had no responsibility for the police losing the car, the damage done to the car while it was stolen, but the debtors required to maintain insurance under the loan documents.
[00:14:21] Presumably I’ve never seen an auto loan where that isn’t the case. And maybe even more importantly, in a Chapter 13 bankruptcy or in any bankruptcy, the debtors are required, one of the statutory duties that’s placed on a debtor is their requirement to maintain insurance on all property that is part of the estate.
[00:14:42] And that would include property like this car. The court doesn’t really go into why the insurance lapsed. We would assume because they’re a debtor in bankruptcy, it was non payment.
[00:14:53] Blair Boyd: Yeah.
[00:14:54] Jim Sorenson: I don’t know that.
[00:14:55] Blair Boyd: Whether that’s fair or not.
[00:14:56] Jim Sorenson: Yeah. But, if the debtor had insurance. [00:15:00] This would have been a completely different case. And it seems at least from my perspective or our perspective is representing lenders and bankruptcy. It seems a little unfair to place that burden or that damage on the lender in this case because the lender couldn’t have prevented any of these things.
[00:15:25] Blair Boyd: No, it’s hard with these appellate courts because you only get the facts that you see in the case that is written, so you don’t know the complete backstory, but it does seem like you said, it’s very convenient that the court bailed out the debtor on this matter.
[00:15:38] Jim Sorenson: What is the law or section of the bankruptcy code that addresses modifying a Chapter 13 plan post or after confirmation?
[00:15:48] Blair Boyd: So we’re looking at, it’s 11 U. S. C. Section 1329 is the section that allows and talks about modification after of the 13th plan.
[00:15:59] Jim Sorenson: And for the [00:16:00] listening audience and those who aren’t familiar, Title 11 is the bankruptcy code.
[00:16:05] And then this is section 1329, so it’s 13 because we’re in a chapter 13. That’s the way it works. And so, what does the statute provide in regards to modifications? When does the statute say modifications are allowed?
[00:16:21] Blair Boyd: Sure. The law allows modifications of the plan in one of four situations.
[00:16:26] First one is to increase or reduce the amount of payments on claims of a particular class provided for in the plan. Number two is to extend or reduce the time for such payments, that’s to either shorten or increase the length of the repayment. Three is to alter the amount to be paid to a creditor on account of payments made by the creditor other than made under the plan or number four to reduce the amounts paid in the plan because the debtor is spending more money on health insurance.
[00:16:58] Jim Sorenson: And that number four one is [00:17:00] not one that we see a lot. At least I don’t know that I’ve ever seen that. I’ve seen it based on what we’ll call the first three options. Yeah. In this case, did the creditor, the creditor who held the car, did they object to the plan modification?
[00:17:17] Blair Boyd: Actually, interesting enough, they did not. It was the trustee who actually objected to the modification. The creditor didn’t file anything in response to the motion to modify the plan.
[00:17:27] Jim Sorenson: And. I can’t help but wonder in reading this case, how much of that played into the judge’s decision? If the creditor had been there and objected, would the outcome have been different? Would they have pointed out?
[00:17:41] Hey, judge, between the two parties, we were the one who was we had no control over this situation while the debtor maybe didn’t control the car being stolen, the being damaged, the police losing it. The debtor did have an obligation to insure and didn’t insure the car and as a result now we’re being harmed by this.[00:18:00]
[00:18:00] Obviously that argument was never made, correct?
[00:18:03] Blair Boyd: No, that was never made and some of this is a practical matter, those of us who deal with this on a day to day basis and obviously credit unions, you can’t help but wonder, was force placed insurance placed on this vehicle?
[00:18:15] And so, the creditor actually was covered. They were made whole and so they didn’t really care what happened to this plan and, the surrender. That’s definitely could have happened. Again, some of this is speculation because we don’t know all of the facts of what happened.
[00:18:28] If there wasn’t a record made in the case, we wouldn’t know. But, it is an interesting point that, the creditor did not object to this, it was the trustee.
[00:18:37] Jim Sorenson: And, I can tell you on numerous occasions, I’ve objected on behalf of our clients on similar situations. This usually comes up with an automobile loan.
[00:18:50] We usually see this come up when the car has been damaged in an accident I don’t know if I particularly had this stolen issue [00:19:00] before, at least I don’t recall that. But usually it’s the car’s been damaged in an accident or, there’s been a catastrophic failure in the car. The transmission has gone out.
[00:19:10] The debtor can’t afford the new transmission or doesn’t want to afford it. The engine, needs to be completely overhauled. Or maybe replaced some huge repair on the car. And so in those situations, we see the debtor saying, I don’t want the car anymore. I want to give it back.
[00:19:27] And what they thought was a deal at the beginning of the bankruptcy now doesn’t look like a deal. And so normally in these situations, the car is being given back not with quote unquote normal wear and tear.
[00:19:40] Blair Boyd: Yeah.
[00:19:40] Jim Sorenson: It’s being given back in a much worse condition than it was, at the time the case was finalized.
[00:19:47] In other words, at the time of confirmation. At time of confirmation, the car was running. The debtor presumably wanted the car and that’s why they were proposing to pay it because of course they could have surrendered it and they didn’t.[00:20:00] And so in a lot of these cases, we go into court and object and the law in Florida, Georgia, while it’s not settled in most situations, judges have been reluctant to allow modifications in these situations, especially where there’s going to be substantial harm to the creditor.
[00:20:18] The creditor is going to suffer a bigger loss than had they just surrendered the car to begin with. At the beginning of the case but I think, I do wonder how many times creditors just overlook the option of responding and certainly like you indicated, if the lender has force placed insurance in place, collateral protection insurance in place, and that insurance is going to cover the majority of the loss.
[00:20:43] It might not make sense to pay the lawyer and get involved in the case. We do wonder about that in this case. My concern is obviously this sets a precedent. It gives debtors an argument. Look here’s a judge who said we could do this, and anytime we have that, that may cause a judge [00:21:00] to look at it and say.
[00:21:02] You know what? I like that result. . So that’s always my concern.
[00:21:06] Blair Boyd: Sure.
[00:21:06] Jim Sorenson: In these situations. What I do think we need to point out and people need to consider and they may be already thinking about this if you work in the credit union field or your work in the auto lending field you’re listening to this podcast, you may already think about this, there are some practical effects of objecting to such a motion, right?
[00:21:26] So in this in Ray Cook case, if the creditor had objected and was successful and the judge said, I’m sorry, you can’t modify the plan. Now, the debtor is paying for a car that is stolen. That presumably wasn’t returned to them. Again, we don’t know, but if it was returned inoperable, probably would cost thousands of dollars to do anything with.
[00:21:50] Maybe, worth only scrap metal. And so, practically speaking, in these situations, you can win the battle. But so to speak, [00:22:00] lose the war.
[00:22:01] And so if the debtor is upset that they can’t modify the plan, one of their options, of course, is they just stop paying under the plan. When they stop paying under the plan the trustee’s going to file a motion to dismiss and that’s the only remedy for nonpayment. The court’s not going to force the debtor to pay. The court’s not going to put the debtor in prison because they’re not paying.
[00:22:24] So the chapter 13 gets dismissed. Now, once it’s dismissed, the debtor can turn around and file a new case, whether it’s a seven or a 13. And they’re back at the beginning, right? And so now they’re going to surrender the car in the new case because and we wouldn’t have the argument. Hey, you’re trying to modify a confirmed plan So you end up at the same result potentially.
[00:22:51] Blair Boyd: Yeah, it’s an additional attorneys case.
[00:22:54] So no and like I said at the beginning, you know the in this case specifically the debtor had [00:23:00] already filed a motion to take on a new loan to buy a new vehicle because We know you need a vehicle to get to and from work or, just live your life.
[00:23:10] The practical sense is he’s not going to most likely be able to afford paying for two car payments for one car. And like you said, they’re going to stop paying and the case is going to dismiss, be dismissed.
[00:23:22] Jim Sorenson: Yeah. I think, there are times where the debtor may not be as prone to dismiss the case.
[00:23:30] This is where it’s a case by case analysis and you need to look at it. Certainly one of the scenarios that comes into play is, if they file bankruptcy to stop a foreclosure and they’re using the bankruptcy to cure the mortgage arrearage. If the case is dismissed and the case, they could face foreclosure again.
[00:23:54] Now, they can file again, but filing again is going to result in more attorney’s [00:24:00] fees. In the meantime, depending on how quick they file, the foreclosure could start back up. That results in more court cost having to be paid.
[00:24:09] So there can be situations where the debtor really doesn’t want to refile. Some of that can depend on how far along they are in the case too.
[00:24:17] In this case, they were a year into probably a five year plan. So not the same if this was four years into a five year plan. It may be different. The debtor may not want to start over. And so a lot of times what we see the best option in certain situations is to try to reach a settlement. So there have been times where we will file a objection to the plan, to the modification of the plan post confirmation, and then immediately reach out to the debtor’s lawyer and try to work out some sort of settlement, whether that settlement is directed towards how the unsecured claim is treated, how large the unsecured claim is, or maybe [00:25:00] increasing the payouts to unsecured creditors.
[00:25:02] It is possible. That the debtor’s income has changed and the debtor can pay more to unsecured creditors. So we’ll agree you can surrender, but instead of paying 10 cents on the dollar, which I believe was the payout to unsecured in the Cook case, maybe that increases to 20 cents on the dollar. I don’t know.
[00:25:23] Those are all things that can only be explored if we get involved, if you get a lawyer involved and you’re looking at this. Those are things that we’d want to talk through with our clients before just jumping off and pursuing this because sometimes filing the objection to the modification doesn’t make sense.
[00:25:41] Blair Boyd: Correct. But in a bankruptcy case, like I said before, filing your proof of claim cements your right as a claimant. In bankruptcy, there are all of these timelines that you have to comply with and if you fail object in a certain, a specific amount of time. You can’t go back and say, hey, I want to actually now object.
[00:25:59] You can’t [00:26:00] do that. That’s why it’s, imperative that you reach out to us, as soon as you get these so we can discuss our options. We have a time. We can actually sit down and go all of it, like you said, the key to these things is to be flexible, willing to negotiate. Like you said, you may win the battle, but eventually lose the war.
[00:26:17] And, that’s, it’s never a good thing.
[00:26:19] Jim Sorenson: Yep. So, to bring this to a close, I want to remind our listeners that, you always need to Consult an attorney when you’re dealing with these issues. They can vary depending on multiple factors and multiple cases We’re talking about a case out of Chicago.
[00:26:36] We talked about the law in Florida and Georgia But if you had a bankruptcy in Texas, the results could be different. There could be other facts. So Make sure you always consult with a lawyer. BLair, thank you for joining me today.
[00:26:49] Blair Boyd: My pleasure. It’s always good talking to you, man.
[00:26:51] Jim Sorenson: On the podcast. It is good to talk about. And we are weird. We enjoy talking about these bankruptcy issues. It is things we live in day out and help our [00:27:00] clients with. Hopefully you listeners found this helpful. If you did, I’m gonna ask you to please go and subscribe to the podcast and go ahead and hit like as well. And if you need more information or want more information about how we can help you, please go to our website, www. SVLLaw. com. With that, I’m gonna say goodbye and we hope you join us next time on our Banking on Credit Unions podcast.
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