Please Note:

The information contained in this web site, article or link may be outdated, incorrect or not applicable; it is your obligation to confirm the accuracy.

It is very important that you obtain legal advice from an experienced bankruptcy attorney regarding your particular situation. Consultation before you take action will certainly cost you less than it will cost to fix your unintentional errors.

The information in this web site is not intended to constitute legal advice or to create an attorney-client relationship.

VEHICLES AND BANKRUPTCY

IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO.

WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.

Cars and Bankruptcy: What you must know to get it right (article by Kathy Moran, on another website).


See also ABI article by Hon. Eugene Wedoff, (ret.) (4/2019) One of the significant unresolved issues in consumer bankruptcy law is the right of a chapter 13 debtor to obtain the return of a vehicle seized before the bankruptcy was filed. The majority of the courts that have ruled on the issue, including the Seventh Circuit in Thompson v. GMAC and several other circuit courts, have held that creditors have a duty to return the seized vehicle to the debtor under the automatic stay set out in § 362 (a) (3).1

However, the Tenth Circuit’s recent Cowen decision adopted a minority interpretation, holding that the automatic stay does not apply to vehicles seized pre-petition and that a creditor need only return the collateral to a chapter 13 debtor if the bankruptcy court grants a debtor’s motion for turnover.2 ABI’s Rochelle’s Daily Wire, in reporting both this decision and a subsequent one by the Tenth Circuit, noted the potential for a grant of certiorari to resolve the circuit split.3

Footnotes:
1) See Thompson v. Gen. Motors Acceptance Corp., 566 F.3d 699 (7th Cir. 2009); Weber v. SEFCU (In re Weber), 719 F.3d 72 (2d Cir. 2013); Calif. Emp’t Dev. Dep’t v. Taxel (In re Del Mission Ltd.), 98 F.3d 1147 (9th Cir. 1996) (expressly adopting Abrams v. Sw. Leasing & Rental Inc. (In re Abrams), 127 B.R. 239 (B.A.P. 9th Cir. 1991), which holds that failure to return repossessed car after receiving notice of debtor’s bankruptcy violates § 362 (a) (3)). Knaus v. Concordia Lumber Co. (In re Knaus), 889 F.2d 773 (8th Cir. 1989), applied the same reading of § 362 (a) (3) to require the return of collateral to a chapter 11 debtor. See also Motors Acceptance Corp. v. Rozier, 348 F.3d 1305 (11th Cir. 2003); Rozier v. Motors Acceptance Corp. (In re Rozier), 376 F.3d 1323 (11th Cir. 2004) (requiring return of col-lateral obtained pre-petition as long as collateral remained estate property after repossession). Accord, STMIMA v. Carrigg (In re Carrigg), 216 B.R. 303 (B.A.P. 1st Cir. 1998); TranSouth Fin. Corp. v. Sharon (In re Sharon), 234 B.R. 676 (B.A.P. 6th Cir. 1999).

2) WD Equip. v. Cowen (In re Cowen), 849 F.3d 943 (10th Cir. 2017), rejecting the contrary opinion, Unified People’s Fed. Credit Union v. Yates (In re Yates), 332 B.R. 1 (B.A.P. 10th Cir. 2005). A more extensive argument for the minority interpretation is set out in In re Hall, 502 B.R. 650 (Bankr. D.D.C. 2014).

3) Bill Rochelle, “Tenth Circuit’s Narrow View of Automatic Stay Erodes Estate Property,” Rochelle’s Daily Wire (July 14, 2017), available at abi.org/newsroom/daily-wire/tenth-circuit’s-narrow-view-of-automatic-stay-erodes-estate-property; Bill Rochelle, “Tenth Circuit Opinion Can Be the Springboard for a ‘Cert’ on the Automatic Stay,” Rochelle’s Daily Wire (Oct. 18, 2018), available at abi.org/newsroom/daily-wire/tenth-circuit-opinion-can-be-the-springboard-for-a-‘cert’-on-the-automatic-stay (unless otherwise specified, all links in this article were last visited on Jan. 25, 2019).

Failure to return vehicle after bankruptcy filed:

  • chapter 13 filed: Weber v. SEFCU, No. 12-1632 (2nd Cir, 05/08/2013) Judgment finding that defendant violated the Bankruptcy Code’s automatic stay provision, 11 U.S.C. section 362, is affirmed, where: 1) defendant exercised control over property of the debtor’s bankruptcy estate in contravention of section 362 when it failed to relinquish the debtor’s vehicle promptly after it learned that a Chapter 13 petition was filed; and 2) because defendant willfully violated section 362(a), it is liable under section 362(k) for debtor’s actual damages, costs, and attorney’s fees and the matter is remanded for a determination of the same.
  • chapter 13 filed: In Denby-Peterson, 18-3562 (3d Cir. Oct. 28, 2019) Judgment finding that defendant did not violate the Bankruptcy Code’s automatic stay provision, 11 U.S.C. section 362  “We are now presented with an issue of first impression for our Court: whether, upon notice of the debtor’s bankruptcy, a secured creditor’s failure to return collateral that was repossessed pre-bankruptcy petition is a violation of the automatic stay. We answer in the negative, and thus join the minority of our sister courts—the Tenth and D.C. Circuits—in holding that a secured creditor does not have an affirmative obligation under the automatic stay to return a debtor’s collateral to the bankruptcy estate immediately upon notice of the debtor’s bankruptcy because failure to return the collateral received pre-petition does not constitute “an[] act . . . to exercise control over property of the estate.”  Affirming District Court’s affirmation of bankruptcy court.

How should the debtor proceed?  “Under the majority position, held by the Second, Seventh, Eighth, Ninth, and Eleventh Circuits, a secured creditor, upon learning of the bankruptcy filing, must return the collateral to the debtor and failure to do so violates the automatic stay. However, both the Tenth and D.C. Circuits disagree with the majority’s interpretation of the automatic stay provision.  Under their view, a secured creditor is not obligated to return the collateral to the debtor until the debtor obtains a court order from the Bankruptcy Court requiring the creditor to do so. Thus, according to the minority, a creditor does not violate the automatic stay by retaining possession of the collateral after being notified of the bankruptcy filing.” See In re Denby-Peterson, 2019 U.S. App. LEXIS 32283, at *10 (3d Cir. Oct. 28, 2019).

In the vast majority of cases, creditors likely are committing a willful stay violation by refusing to return a vehicle to a debtor where the debtor has an interest in the vehicle, the debtor shows the vehicle is insured, and the demand for turnover is in writing. The Debtor can file an emergency motion or adversary proceeding seeking the Court order turnover of the vehicle.


Creditor repossesses car and Customer subsequently files Bankruptcy –
Does the Creditor Really have to immediately give the car back to the Debtor/Customer

Repossessed VehicleThe law applicable in bankruptcy cases in Florida allows an auto lender to retain and sell a vehicle lawfully repossessed pre-petition where the customer subsequently files bankruptcy. In Bell-Tel Federal Credit Union(In re Kalter), 292 F.3d 1350 (11th Cir. 2002). This is an  exception, because in most jurisdictions a secured creditor which repossesses a car pre-petition must return the car to the debtor after a bankruptcy filing. A common question by creditors in this situation is what conditions, if any, can be imposed before returning the car to the debtor.

Most creditors believe the debtor must first provide evidence of insurance or some other form of “adequate protection” before the creditor has to return the vehicle.  In a recent decision, however, the Second Circuit Court of Appeals found that a creditor cannot put conditions on returning a car once the debtor files Chapter 13.

In In re Weber, 719 F.3d 72 (2nd Cir. May 8, 2013), the creditor lawfully repossessed the car. Four days later, the customer filed Chapter 13 and his attorney sent written notice to the creditor requesting the car’s return. After a week the creditor failed to return the car, so the debtor filed an adversary action against the creditor for turnover and sanctions. After an order to show cause hearing, the car was returned to the debtor. At the show cause hearing, the creditor argued that it relied on a 2001 New York District Court opinion (In re Alberto, 271 B.R. 223 (N.D. N.Y. 2001)), which provided the creditor with a reasonable basis for declining to release the vehicle absent a court order issued pursuant to a turnover action under Bankruptcy Code Section 542. The Bankruptcy Court considered but denied the debtor’s request for sanctions, relying on the Alberto case. On appeal, the District Court reversed and found that the creditor had violated the automatic stay. On further appeal, the Second Circuit affirmed the finding of a violation of the stay. The Second Circuit in Weber found the following –
1. the secured creditor was required to deliver the car back to the trustee or debtor-in-possession promptly after receiving notice that the debtor filed Chapter 13.
2. the secured creditor’s refusal to return the vehicle to the debtor promptly upon learning of his
Chapter 13 filing constituted a willful and unlawful exercise of control over the property of the estate in violation of the automatic stay, and the creditor was liable for damages, costs and attorneys fees.
3. the secured creditor’s belief that the Chapter 13 debtor had not provided “adequate protection” for the creditor’s security interest in the debtor’s car did not excuse the creditor’s violation of automatic stay for failing to promptly return the repossessed car upon learning of the debtor’s Chapter 13 filing.
The Weber case suggests that auto lenders should take a very conservative approach in these situations, and not withhold the return of a vehicle lawfully repossessed pre-petition upon receiving notice of a Chapter 13 filing. A few take-away from the Weber case for most jurisdictions (this would not apply to Florida cases) –
1. Does the creditor have to give the car back to the debtor upon learning of a Chapter 13 bankruptcy filing? Yes
2. How Soon? Promptly
3. Should the creditor wait until the debtor asks for the car back? No; however, the creditor should always ask whether the debtor actually wants the car back (because he may not)
4. Should the creditor wait until the debtor files a motion for turnover before giving back the car? No
5. Should the creditor wait until it receives evidence that the vehicle is insured, or other “adequate protection” before returning the car? No, not according to the Weber case 6. What if the debtor was a skip, had not paid in several months, or had been arrested in the car – can the creditor do anything to avoid returning the car? Yes, the creditor can immediately file a Motion for relief from the automatic stay, set forth the reasons, and request an expedited or emergency hearing. There is no guaranty, however, that filing the Motion will completely protect the creditor from a sanctions motion
7. Should the creditor rely on a bankruptcy court or even a district court case in the jurisdiction which states the creditor does not have to immediately return the car to the debtor? According to the Weber case, relying on such a case may later be found to be a mistake.
8. Can the creditor take time to first consult with an attorney before returning the car to the debtor? Yes; however, the creditor must act within a reasonable period of time after receiving notice of the bankruptcy filing.  See In re Makowski, 2013 WL 2154788 (Bankr. D. Alaska 2013)
9. What if the creditor has knowledge of the bankruptcy filing, but the car is nevertheless sold by mistake at auction? Big trouble. See In re Carlton, 2013 WL 2297082 (Bankr. E.D. N.C. 2013)(creditor had knowledge of bankruptcy filing, but due to a mistake in their system allowed car to be sold at auction. Court awarded sanctions totaling $24,000)
10. Is the answer different in a chapter 7 case, as opposed to a chapter 11 or chapter 13 case? Maybe.  Since the Chapter 7 trustee arguably is the party in interest, and not the debtor, you should contact the Chapter 7 trustee and your bankruptcy counsel in this situation

Three recent cases illustrate this issue –

In re Castillo, 456 B.R. 719 (Bankr. N.D. Ga. 2011)
1/3 – Repo
1/7 – BK filed
1/13 – Demand for return of car
1/13 – Creditor advises debtor it wants proof of the bankruptcy filing and proof of insurance
1/15 – Creditor receives copy of the petition as proof of the bankruptcy filing
1/20 – Debtor files a Motion for Sanctions
1/27 – Hearing on Motion for Sanctions
2/3 – Debtor picks up car
The Court in In re Castillo held that the creditor violated the automatic stay by refusing to return the car upon the debtor’s request.  The Court stated that a creditor cannot unilaterally decide whether a debtor’s proposed Chapter 13 Plan provides adequate protection.  Under the Code, a creditor is required to file a Motion for adequate protection (which is determined by the Court).  The creditor can file an emergency motion.  The creditor cannot hold the car and force the debtor to take action (i.e. file a motion for turnover).  The Court awarded the debtor sanctions in the amount of $1,600 in actual damages, plus attorneys fees.

In re Makowski, 2013 WL 2154788 (Bankr. D. Alaska 2013)
10/4 – Repo
10/11 – BK filed
10/11 – Demand for return of car
10/12 – Creditor advises debtor it wants to consult counsel, and is given an extension to 10/15
10/15 – Creditor tells debtor’s atty they will not release the car
10/15 – Debtor files a Motion for Sanctions
10/15 – Creditor releases car
In In re Makowski, the creditor ultimately returned the car to the debtor, but the issue was whether the creditor did so timely.  The Court described timely as “within a reasonable period of time after notice of bankruptcy.”  The Court noted cases which recognize that there is no bright line to define how quickly a creditor must release a hold on collateral, and the answer will depend on the circumstances of each case.  The Court stated “It is incumbent upon the creditor to release its lien without delay as soon as it is aware of the bankruptcy and of the legal effects of that bankruptcy.  Naturally this Court would not chastise a creditor for seeking legal counsel before it acts. But any delay in obtaining that legal advice is unwarranted and a violation of the stay.”  While the Court found taking four days to consult with counsel was reasonable, once the creditor advised the debtor’s attorney that the car would not be returned, the creditor had willfully violated the automatic stay by exercising control over property of the estate. The Court was not impressed with the argument that the car was returned the same day, since that occurred only after the debtor filed a Motion for sanctions.

In re Stephens, 495 B.R. 608 (Bankr. D. Ga. 2013)
2/12 – repo.
2/15 – filed Chapter 13 case
2/15 – debtor’s attorney notified creditor, Guaranteed Auto
2/18 – attorney called creditor, advised of bankruptcy filing and requested return of the car
2/18 – creditor demands proof of full insurance coverage
2/19 – fax to creditor which included notice of the bankruptcy filing and proof of insurance 2/20 –
2/ 20 – creditor advised debtor’s the attorney that it would not return the vehicle because it had been repossessed before the Chapter 13 filing. Debtor’s counsel urged Mr. Hart to consult a bankruptcy attorney.
2/20 – debtor filed adversary against Guaranteed Auto, asserting a violation of the automatic stay and seeking turnover of the car.
2/20 – Court set an emergency hearing for 2/26 (copies of the complaint and notice of the hearing were sent by mail, facsimile, and hand delivery).
2/25 – creditor advised that it sold the car on 2/24
2/26 – creditor appears at hearing without an attorney, and hearing is continued.
After the continued hearing, the Court held that the creditor willfully violated the automatic stay by refusing to return the car, demanding proof of insurance without moving for an order requiring adequate protection, and ultimately selling the vehicle before the Court’s emergency hearing. The Court awarded $1,559 as actual damages, $4,325 as attorney fees, and punitive damages in the amount of $17,890 (i.e. twice the amount of the scheduled debt) based on the egregious nature of the stay violations.

Once the petition is filed, Debtor may go to the MVD with an official notice of bankruptcy filing, along with a Form SR22, and pay the applicable fees for reinstatement.  Form SR22 is a Certificate of Insurance from any insurance company licensed to conduct business in Arizona.

Additional information about that can be found here:


Article – Bankruptcy-Based Discrimination by Douglass G. Boshoff (provided for educational purposes only).

For bankruptcy purposes make sure to use private party value.

  • Kelly Blue Book
  • NADA
  • Edmunds
  • CarFax
  • KC Appraisal Service (623-780-0189)
  • Sierra Auction (one of the auction houses that some of the Arizona trustees use) (602- 242-7121).

Lender claiming purchase money secured interest in “negative equity” in vehicle traded during purchase of new vehicle. In re Penrod vs Americredit Financial, No. 08-60037 (9th Circuit Ct of Appeals) The bankruptcy court held that AmeriCredit did not have a purchase money security interest in the portion of the loan related to the negative equity charges. However, the bankruptcy court acknowledged that AmeriCredit had a purchase money security interest in the remaining balance. In doing so, the bankruptcy court adopted the dual status rule, which allows part of a loan to have non-purchase money status, while the remainder is covered by a purchase money security interest.2 BAP and 9th Cir upheld lower court’s decision. Disagreeing with the Second, Fourth, Fifth, Sixth, Seventh, Eighth, Tenth and Eleventh Circuits, the Ninth Circuit concluded that held a creditor which financed the debtor’s automobile purchase did not have a purchase money security interest in the “negative equity” of the debtor’s trade-in. Payment of the remaining debt on the trade-in was not an “expense” or “other similar obligation,” within the definition of “purchase-money obligation.”

In Re: Peaslee, No. 073962 U.S. 2nd Circuit Court of Appeals, October 20, 2008 In appeal from judgment reversing a Bankruptcy Court finding that negative equity on a trade-vehicle is included in the purchase money security accompanying a new car’s purchase and is therefore protected from cram down by the Hanging Paragraph of Section 1325 of the Bankruptcy code, the court here certifies the question of whether negative equity is included in a purchase money security interest under state’s interpretation of the Uniform Commercial code (UCC).

In re: Taylor, No. 08-60033 (U.S. 9th Circuit Court of Appeals, March 22, 2010) In debtors’ appeal from the bankruptcy court’s order avoiding a transfer of a security interest in an automobile to a bank, the order is reversed where the bankruptcy court’s determination of the value of the security interest was clearly erroneous, because there was no evidence to support the bankruptcy court’s finding that the value of the security interest equaled the amount of the original loan at the time the bank perfected its security interest.

A.R.S. 28-2133 Index and filing of liens, encumbrances or instruments; constructive notice


In re Roser, (C.A.10 (Colo.)) July 23, 2010: Avoidance – Trustee could not avoid, as hypothetical lien creditor, bank’s lien against debtor’s motor vehicle perfected postpetition. Pursuant to the bankruptcy statute making a trustee’s avoidance powers subject to any generally applicable law permitting the perfection of an interest in property to be effective against an entity acquiring rights in the property before the date of perfection, a Chapter 7 trustee could not avoid, as a hypothetical lien creditor under his strong-arm powers, the lien against a debtor’s motor vehicle held by a bank that had a purchase money security interest in the vehicle and filed its motor-vehicle lien within 20 days of the debtor obtaining the vehicle. Pursuant to Colorado’s version of the Uniform Commercial Code (UCC), the bank’s timely acts gave it priority over any interests in the vehicle that arose between the prepetition attachment of its security interest at the loan closing and its post-petition perfection of its lien, including the trustee’s hypothetical judgment lien that arose on the intervening petition date. In so holding, the Tenth Circuit Court of Appeals rejected an earlier decision in which a Bankruptcy Appellate Panel had ruled that the UCC provision did not apply to liens, such as that of the bank, that were perfected under the Colorado Certificate of Title Act (CCTA)

In re Anderson, 2007 WL 1839699 (D. Ariz. June 26, 2007). An auto dealer that sold the debtor a vehicle submitted a title application to the Tempe MVD that was rejected because the debtor had an outstanding fine owed to ADOT. The dealer then re-submitted the application with funds sufficient to pay the fine. After the application was re-submitted, the debtor filed her Chapter 7 bankruptcy. Subsequent to the debtor’s bankruptcy filing — and more than 10 days after the debtor and the dealer had signed the security agreement — the application was granted. On these facts, the District Court affirmed the Bankruptcy Court’s grant of summary judgment in favor of the Chapter 7 trustee, determining that the dealer’s claim was unsecured because (a) the dealer did not obtain perfection until after the debtor had filed her bankruptcy, and (b) the post-petition granting of the application did not relate back.

In re LETIZIA and CHEN, 3:13-bk-09233-RJH (AZ Bankruptcy court, January 14, 2014) In a Chapter 13 a creditor filed an objection to the debtor using the personal vehicle exemption on a vehicle used primarily for business purposes. The issue presented is whether the Debtors may exempt two vehicles, utilized primarily for business purposes in a sole proprietorship, using Arizona’s personal item exemptions provided in A.R.S. § 33-1125(8). As this specific question has not been addressed in Arizona case law, the Court took this matter under advisement. The Court holds that debtors in Arizona, doing business as sole proprietors, may not exempt vehicles used primarily for business using Arizona personal item exemptions, and instead must use Arizona’s tools of the trade exemptions.

A dump truck purchased less than one year prepetition was found to be covered by the hanging paragraph in In re Littlefield, 388 B.R. 1 (Bankr. D. Me. 2008). In that ruling, Judge Haines said “Reading the statute as I do means just this: Congress extended (910 days, as opposed to 1-year) anti-modification protection to creditors holding PMSIs in motor vehicles acquired for a debtor’s personal use. It did not target PMSIs in motor vehicles generally as a category of security that, but for the personal use proviso, would receive less anti-modification protection than all other things of value.”

NOTE – PERSONAL VERSUS NON-PERSONAL USE: The hanging paragraph of § 1325(a)(9) prevents bifurcation of a PMSI claim if the collateral securing it was purchased within certain time periods prepetition. A 910-day limitation applies to motor vehicles acquired for the debtor’s personal use. A one-year limitation applies all other PMSI collateral, including a vehicle purchased for non-personal use.

In re Quevedo, 345 B,R, 238 (Bankr.S.D.Cal. 2006). Decent case. Used background from Congressional proceedings, various changes as proposed to Sect. 1325 over the years, and Collier and Brown and Ahern comments.

In re Rodriguez, 375 B.R. 535, 2007 WL 2701295 (9th Cir. BAP August 28, 2007). Reversing the Bankruptcy Court for the Western District of Washington, the BAP decided to follow the minority line of decisions and held that under the “hanging paragraph” following §1325(a)(9), a Chapter 13 debtor surrendering a motor vehicle acquired within 910 days of the petition date cannot thereby eliminate any remaining deficiency claim.

Capital One Auto Fin. v. Osborn, No. 07-1726 (8th Cir Ct App, 2/5/08) The hanging paragraph in 11 U.S.C. section 1325 does not eliminate an under-secured creditor’s deficiency claim when, in a Chapter 13 plan, debtors propose to surrender a car purchased within 910 days before filing for bankruptcy. The creditor is entitled to an unsecured deficiency claim if there is a right to a deficiency judgment under state law.

In re Brown, 346 B.R. 868 (Bkrtcy.N.D.Fla. 2006) Lewis M. Killian, Jr., Bankruptcy Judge: creditor holding PMSI not entitled to deficiency claim in chapter 13 where debtor surrenders vehicle in full satisfaction of debt § 1325(a)5) (hanging paragraph), § 506, 502.

Debtor proposed to surrender a motor vehicle subject to a PMSI and purchased for personal use within 910 days of filing the petition, in full satisfaction of the undersecured debt. Creditor objected.

The court first held that despite language in § 1325(a) (hanging paragraph) that Code § 506 does not apply to a PMSI debt, the debt is still a secured debt. The court ruled that “just because § 506 does not apply does not mean that there is no secured claim. Section 506(a) simply provides for the bifurcation of claims into secured and unsecured portions in accordance with the value of the collateral; it does not form the basis for a secured debt.” The court essentially held that § 502 is the section that determines the secured status of a claim.

The court then observed that “Secured creditors, like every other party to a bankruptcy case, have to take both the good and the bad,” held that . . . the Hanging Paragraph following § 1325(a)(9) allows the Debtor to surrender his vehicle, which is the subject of a 910 claim, in full satisfaction of the debt owed to Wells Fargo.”

In re Gibson, 234 B.R. 776, 3 Cal. Bankr. Ct.Rep. 88 (Bankr.N.D.Cal. Jun 03, 1999) in which the court held that “Pursuant to choice of law clause contained in loan and security agreement executed by Chapter 13 debtors, Illinois law, not California law, governed determination of whether agreement’s dragnet clause was enforceable; although debtors’ collateral presumably had always been in California, enforceability of dragnet clause was not an issue of perfection or the effect of perfection or non-perfection”, then held that the dragnet clause was too vague and unenforceable. The Court said that: “agreement consisted of one page, with text on two sides and, although debtors expressly agreed to items and conditions on both sides of document, front side of agreement contained all key terms of agreement other than dragnet clause in conspicuous, easy-to-read print, dragnet clause was buried in long, complex paragraph on reverse side of document, which was packed from margin to margin with a multitude of single- spaced provisions in minute, difficult-to-read type, parties were of unequal bargaining power, and nothing called debtors’ attention to substance of the dragnet clause in particular.”

Additional Cross-Collateralization cases:

Also look at In re Dumlao, Slip Copy, 2011 WL 45014029th Cir.BAP (Nev.),2011 and In re Zaochney, 2011 WL 6148727, *3+, 76 UCC Rep.Serv.2d 340+ (Bankr.D.Alaska Dec 12, 2011) – “I conclude that the dragnet clauses found in the debtor’s loan documents with Alaska USA are valid and enforceable. The debtor’s vehicle is valued at $12,950.00. Because Alaska USA is owed less than this, $11,097.87, on the vehicle loan, it wants to use the balance of the equity in the vehicle to secure roughly $1,852.13 of the outstanding balance on the debtor’s credit line. It may do so under the terms of the loan documents. The debtor’s motion to value security interest is granted, in part. Alaska USA’s secured claim is valued at $12,950.00.”

10/08: The prevailing view is that BAPCPA eliminated the “fourth option” of staying current on collateral but not reaffirming. However, there are some recent decisions saying that while the automatic stay may terminate, there may be state law limitations on when a creditor may repossess the collateral. See In re Steinhaus, 349 B.R. 694 (Bankr. D. Idaho 2006) and In re Malachin, 2007 Pa. Dist. & Cnty. Dec. LEXIS 158 (October 2008), in which a state court refused a creditor’s efforts to repo a car post-bankruptcy when the debtor was current on payments. The case is a reminder that ride through may be a state law issue, not a bankruptcy issue.

· In re Dumont, 383 B.R. 481 (9th Cir. BAP 2007). In a decision authored by Judge Baum, the BAP joined all the other courts that have considered the issue in confirming that the former “ride-through” option for retaining collateral simply by continuing to make payments on the relevant debt was eliminated by BAPCPA’s changes to 11 U.S.C. §§362 and 521. The BAP also held that the bankruptcy court lacked jurisdiction to determine whether the creditor’s subsequent repossession of the debtor’s vehicle violated state law.

· In re Moustafi, 371 B.R. 434 (Bkrtcy. Ariz. 2007). In a case involving a pro-se Chapter 7 debtor, Judge Hollowell held that (a) a proposed reaffirmation agreement relating to a car loan where the debtor had no equity in the vehicle was not in the debtor’s best interest, and (b) despite §§362 and 521, because the debtor had made an effort to reaffirm (even though disapproved by the Bankruptcy Court), the car loan would “ride through” the bankruptcy and the debtor would be entitled to retain the vehicle so long as she met her obligations under the loan contract.

Physically disabled

Physically disabled, plus is motor home a motor vehicle: In re Sleeth, 300 B.R. 351, 30-00628-YUM-EWH Trustee had burden of proving that the debtors were not entitled to increased motor vehicle exemption (physically disabled). Court holds Trustee failed that burden. (pre-BAPCPA)

DEFINITION OF “VEHICLE” BROADLY INTERPRETED

Motor home is a vehicle and owner can use exemption (in Arizona) See In re Sleeth, 300 BR 351 (Bankr. D. Ariz 2003) (“Construing the motor vehicle exemption in favor of the debtor, the court holds that a motor home is a motor vehicle for purposes of Ariz.Rev.Stat. § 33–1125(8)“)

Judge Haines said the definition of “motor vehicle” is very broad. In re Buchberger, 311 BR 794 (Bankr. D. Ariz. 2004) (“All-terrain vehicle (ATV) qualified as “motor vehicle,” for purposes of Arizona exemption statute, since it was self-propelled vehicle and it was drawn by mechanical power, although it could serve only recreational purposes”).

Ransom v. MBNA Am. Bank, N.A., 380 B.R. 799 (B.A.P. 9th Cir., 2007, No. 08-15066 US Supreme Court 09-907 1-11-11 (affirmed) U.S. 9th Cir Ct of Appeals, August 14, 2009. Considered the issue of ownership allowance vs operation expenses in the context of a Chapter 13 plan confirmation rather than dismissal under Section 707(b). In an appeal from the Bankruptcy Court’s refusal to approve Debtor’s Chapter 13 plan, the Bankruptcy Court’s order is affirmed, where an above-median income debtor seeking bankruptcy relief under Chapter 13 may not deduct from his projected disposable income a vehicle “ownership cost” for a vehicle he owns free and clear. The BAP held that in determining projected disposable income for purposes of Chapter 13 plan confirmation, a debtor is not able to deduct a vehicle ownership expense pursuant to § 707(b)(2)(A)(ii)(I) when a debtor owns the vehicle free and clear of any liens or encumbrances. (Although Ransom deals with the confirmation of a plan under Chapter 13, it is instructive in Chapter 7 cases because § 1325 uses the means test under § 707(b)(2)(A) to determine the debtor’s projected disposable income.) In re Sawicki, Debtor., WL No. 2-07-bk-3493-CGC. (Feb. 12, 2008) Judge Case followed Ransum, but did not like it. (Thorough discussion on BAP decisions and why judges should follow despite their differences.)

· In re Chamberlain, 369 B.R. 519 (Bkrtcy. Ariz. 2007). Judge Haines held that where the debtor owned a vehicle free and clear, the debtor nevertheless could claim an ownership expense deduction in calculating “the debtor’s projected disposable income” under §707 for purposes of a Chapter 13 plan.

· In re Garcia, 2007 WL 2692232 (Bkrtcy. Ariz. September 11, 2007). In contrast to Judge Haines’ ruling in In re Chamberlain discussed immediately above, Judge Marlar held that where the debtor owned a vehicle free and clear, the debtor may not claim an ownership expense deduction in calculating “the debtor’s projected disposable income” under §707 for purposes of a Chapter 13 plan.

A lease payment should be deducted as ownership expense on lines 23 and/or 24 of the means test and is not deducted as a secured debt. The lease payment is limited to standard deduction.

WARNING: THE FOLLOWING IS PROBABLY OLD LAW:

Each of these cases were decided by a different Arizona bankruptcy judge.

  • In re LuedtkeMT-13-1313-KuPaJu (9th Cir BAP 3,14,2014)

Because we agree with the trustee that above-median-income debtors cannot claim the $200 older vehicle operating expense, we REVERSE and REMAND for further proceedings.

  • 1. In re Chamberlain, 369 B.R. 519 (Bankr.Ariz., 2007): This case touched upon the tired-iron deduction in footnotes 6 and 7. The heart of the case was whether an ownership expense could be taken on a free and clear vehicle. Judge Haines ruled in debtor’s favor, but this case has been overturned by In re Ransom, 577 F.3d 1026 (9th Cir., 2009) as to the ownership expense issue.
  • 2. In re Sawicki, Case No. 2-07-bk-343-CGC (Bankr.Ariz., 2008): Judge Case, in summarizing the U.S. Trustee’s position in the case on page 2, states that “The U.S. Trustee relies on the Internal Revenue Manual (IRM), 5.8.5 Financial Analysis, for a determination that Debtor is entitled only to a $200.00 monthly allowance under the vehicle ownership expense rather than a $471.00 expense allowance. The $200.00 is allowed under IRM (Internal Revenue Manual) 5.8.5 for vehicles, such as debtor’s, that are not encumbered with a loan or lease and are over six years old and/or have a reported 75,000 miles of usage.”
  • 3. In re Steven & Donna Watkins, Case No. 07-6317-PHX-SSC (Bankr.Ariz., 2008): Pages 9 and 10: ” The Debtors also urge that they should be allowed to take a vehicle ownership expense because their vehicles are older and unreliable. The Court notes that as of the petition date, the Debtors had a five-year-old vehicle; the other was three years old. The Ransom decision also addressed this issue, stating that the debtors might be entitled to an”older vehicle” expense for vehicles that were older than six years, or that had mileage above 75,000 miles. In this case, as of the petition date, neither of the Debtors’ vehicles was more than six years old. The Debtors have never alleged that either of the vehicles has high mileage, nor have they requested an evidentiary hearing on this issue.
  • Therefore, the Court declines to allow an “older vehicle” expense to the Debtors… Footnote 11: “Although the Debtors have never asserted, or requested an evidentiary hearing as to the mileage of their vehicles for purposes of claiming an “older vehicle” expense, the United States Trustee indicated that she would allow the Debtors to claim such an expense if appropriate. The Court notes that when the petition was filed in 2007, the Debtors’ 2002 Ford Focus would have been only five years old. Therefore, the only way the Debtors could claim the “older vehicle” deduction would be to show that the vehicle had more than 75,000 miles on it. As noted, the Court is unable to address this issue.”

The official cite for this IRS deduction is found in the Internal Revenue Manual § 5.8.5.5.2 (09-01-2005).

QUESTIONS: Can a debtor purchase a vehicle while in a chapter 13?  Does the debtor need court approval?

ANSWER: Depending on the policy of the chapter 13 trustee it might not be necessary to get the quote before filing the motion to incur new debt.  Will need to prepare the motion and have the trustee sign it, then file with the court.  No specific length of time for the court to sign, but normally done in a few days.  Once the order is signed the Debtor takes it to the car dealer and purchases the vehicle.

File a new plan including intent to surrender the old vehicle.  Depending on the trustee the plan may need to include the new vehicle payment, or file an amended J with new payment.  If you do not know the exact amount then use the highest guideline vehicle payment allowed and adjust when the payment amount is settled and adjust the final Plan payment accordingly when preparing the SOC.

Talk with the trustee in order to determine what you will need.

The original lender will still need to file a motion for relief from stay even if the amended/modified plan provides for surrender of the vehicle.   So, if possible, it is best to have specifics about the new car before the old car is surrendered.

Maney-buying-or-selling-vehicle-form-8-2019.pdf (30 downloads) (MANEY):

You can report the abandoned vehicle to the MVD and the owner will be notified. If it’s not claimed within 30 days then ownership will transfer to your client free and clear of any liens, and then it can be sold as is, or for parts, or whatever.  If there is no value, then you can just have it towed and let the tow company make the claim, if you prefer.

MVD link: https://www.azdot.gov/motor-vehicles/VehicleServices/abandoned-vehicles


What if the owner has a vehicle with a loan, the owner does not want the vehicle, but the lender refuses to pick up the vehicle.  The owner filed for bankruptcy, so is not concerned about a law suit.  The bankruptcy is closed and the owner would like to sell the vehicle free of the secured lien.   Can the owner somehow declare the vehicle abandoned and proceed with the process of abandonment as set forth in the statute?

One answer involves statutes: A.R.S. §§ 28-2131-37 & 28-4801-84, in particular A.R.S. § 28-4834.

The parties will need to complete together a new title and registration application including the lienholder section completed.  The lender and the borrower must present together in person.  The form does not need to be notarized but the parties must present original required identification.  The owner does not receive back the title.  Rather, at the counter, the new title is given to the lienholder. The party would need to be listed as a lienholder with AZDOT/MVD on the title.  Call 602-255-0072 for more info.

(Beware if they use a 3rd party motor vehicle services that they are sure it’s an authorized AZDOT contracted facility.  It’s probably smarter to go right to AZ DOT / MVD.)

Does a false financial statement make it impossible for a borrower to discharge debt under Section 523(a)(2)(B)(iii)?

Not according to In re Brown, 17-21719, E.D. CA, Bankr Court). “A bank’s blind reliance on financial ratios does not qualify as “reasonable reliance” on a false financial statement for purposes of excepting a debt from discharge under 11 U.S.C. § 523(a) (2) (B) (iii) when it has information inconsistent with the credit application presented through an automobile dealer.

In re Anderson, 2019 Bankr. LEXIS 2800 (Bankr. D. Mass. 2019) the court suggested that court approval of a lease-assumption agreement is the best means of ensuring
that a debtor can achieve the goal of motor vehicle retention without fear of repossession, and creditors can achieve the goal of a leasehold obligation that survives the bankruptcy discharge.  The court described the road to lease assumption as follows: (1) include the lease on the statement of intention and indicate that the lease will be assumed; (2) notify the lessor in writing of the intention to assume; (3) thereafter and within 30 days notify the lessor that the lease is assumed;31 (4) reach an agreement on the terms of the assumed lease; and (5) submit the written assumption agreement to the court for approval and “include a request for a determination that the assumed lease is a post-petition obligation of the debtor.

In re Clay, 339 B.R. 784, 785–86, 787, 788 (Bankr. D. Utah May 2, 2006) (Thurman) (Citing In re Case, 11 B.R. 843 (Bankr. D. Utah June 10, 1981) (Mabey), debtor can pay two mortgages and car loan directly to lienholders and pay only prepetition arrearages through the trustee; BAPCPA did not change the right of Chapter 13 debtors to choose to pay secured creditors directly so long as the contract rights of those creditors are not altered. “Before the BAPCPA, it was generally accepted that a debtor might choose . . . to pay a secured creditor directly so long as the creditor was paid pursuant to the contract terms. . . . The lesson of Case, that a debtor may choose to pay secured creditors directly so long as those creditors’ rights are not altered, were [sic] largely accepted throughout the country before the BAPCPA.” The requirement in § 1325(a)(5) that equal monthly payments be made to allowed secured claims provided for by § 1325(a)(5) does not change the pre-BAPCPA result because “a secured claim is only ‘provided for by the plan,’ and thus subject to the requirements of § 1325(a)(5), if the creditor is not paid pursuant to the terms of the contract.” The requirement in § 1326(a)(1)(A) that debtors give evidence to the trustee of direct payments before confirmation does not support the proposition that debtors would ordinarily make postconfirmation payments through the trustee to a secured claim holder. Court cites the prohibition against “stripdown” with respect to motor vehicles purchased within 910 days of a bankruptcy case in “§ 1325(a)(9)” in support of the conclusion that “the policy . . . is to restrict a bankruptcy’s effect on a debtor’s relationship with a creditor secured by the debtor’s vehicle.”).

In re Breeding, 366 B.R. 21, 27 (Bankr. E.D. Ark. May 14, 2007) (Mixon) (Although direct payment of secured claim holder is allowed by statute, direct payment is refused as an exercise of discretion in part because of funding problems created by BAPCPA. “By case law a presumption exists that favors distribution by the trustee. . . . A trustee collects no commission on funds that the debtor distributes directly to a creditor . . . and the Debtors in the instant case seek to avoid paying the Trustee’s commission. . . . Permitting debtors to pay creditors outside the plan over the objection of the trustee does potentially jeopardize the operation of the Office of the Chapter 13 Trustee as a self-funded program. After the advent of BAPCPA, the Court takes judicial notice that the rate of case filings has decreased dramatically, thereby reducing the amount of money passing through the office of the Chapter 13 Trustee . . . . New provisions of BAPCPA . . . could combine to produce more confirmable Chapter 13 plans that make no distribution to unsecured creditors, especially for above-median income debtors. . . . [R]equiring payment to be made to the Chapter 13 trustee by debtors produces an audit trail that minimizes debtor-creditor disputes over whether and when a payment has been made. For these reasons, the objection to confirmation on the basis that the Debtors improperly propose to pay Green Tree outside the plan is sustained.”).

In Cohen v. Lopez (In re Lopez), 372 B.R. 40 (B.A.P. 9th Cir. Aug. 3, 2007) (Markell, Brandt, Pappas), aff’d, 550 F.3d 1202 (9th Cir. Dec. 24, 2008)  the Ninth Circuit BAP “explained” Fulkrod (126 B.R. 584 (B.A.P. 9th Cir. Apr. 29, 1991) (Ollason, Russell, Meyers), aff’d, 973 F.2d 801 (9th Cir. Aug. 27, 1992) to mean that the arrearage on a home mortgage in a Chapter 13 case was impaired and must be paid through the standing trustee, but the ongoing mortgage payment was not impaired and could be paid directly by the debtor:

Fulkrod I essentially required Chapter 12 trustees to pay claims that the court referred to as “impaired” by the Chapter 12 plan through the plan, while allowing the debtor to pay directly those claims not impaired by the plan. We hold to that distinction . . . . [A] plan impairs an obligation if it allows or provides for payment designed to cure a default and reinstate a scheduled maturity date after acceleration. . . . Mr. Lopez’s plan thus correctly provides for payment of the mortgage arrears by the Chapter 13 trustee. But Mr. Lopez’s obligations, which mature after his bankruptcy filing, are not impaired by the plan. . . . Under Fulkrod I, they could be paid directly by the debtor outside of the plan. . . . Section 1322(a)(1) does not require that all debts must be paid through the plan; it merely requires that the debtor must submit enough money from his future earnings to “the supervision and control of the trustee” as is necessary to fund the plan. Section 1322(a)(1) says nothing else, though, about what exactly must be paid through the plan. . . . A plain reading of [§ 1326(c)] leads to the conclusion that Congress intended that some debts other than those specifically enumerated in Section 1326(a)(1) could also be paid by the debtor outside of the plan, so long as either the plan itself or the order confirming the plan allows it.

Not quite three years later, the Ninth Circuit BAP considered the appeal of a Chapter 13 debtor who had been refused permission by the bankruptcy court to make direct payment of a car loan. In Giesbrecht v. Fitzgerald (In re Giesbrecht), 429 B.R. 682 (B.A.P. 9th Cir. Apr. 28, 2010) (Hollowell, Montali, Markell). citing Lopez, the Ninth Circuit BAP stated that Chapter 13 debtors do not have an absolute right to make direct payments of even an “unimpaired” claim but that the bankruptcy court must articulate standards when it refuses a direct-payment plan:

[U]nder the Code, a chapter 13 debtor may directly pay a creditor. . . . The Bankruptcy Code provides no direction as to “when it is appropriate to insert such direct payment provisions in the plan or in the confirmation order.”. . . [B]ankruptcy courts have been afforded the discretion to make the determination of when direct payments may or may not be appropriate based upon the confirmation requirements of § 1325, policy reasons, and the factors set forth by case law, local rules or guidelines. . . . Bankruptcy courts may require that payments be made through the plan based on specific factors or reasons such as administrative efficiency, tracking of payments, fairness and treatment of creditors, and the determination that there is a reduction of plan failure when all payments are made through the plan.