Surrendering a Vehicle in a Bankruptcy

| Sep 18, 2010 | Bankruptcy |

In a recent case, the debtor purchased a vehicle in which the creditor had perfected a first priority purchase money security interest.  With 910 days of the initial contract’s signing, the debtor and his wife filed a Chapter 13 bankruptcy.  The debtors proposed to surrender the vehicle in full satisfaction of the debt.  The creditor timely filed a secured proof of claim and objected to the plan on the grounds the vehicle was worth less than the amount owed.

The bankruptcy court confirmed the plan.  The Fifth Circuit granted leave to take a direct appeal from the bankruptcy court.  
The issue before the Fifth Circuit was whether the hanging paragraph precludes a creditor with a PMSI in a “910 vehicle” from obtaining a state law deficiency judgment against a debtor under the Bankruptcy Code.  The Court analyzed the hanging paragraph and found that the paragraph prevents bifurcation for this type of secured claim.  However, the Court held that the hanging paragraph does not prevent the creditor from treating the deficiency as an unsecured claim in the plan.