April 1, 2020

6th Circuit Decides “Hanging Paragraph” Issue in Favor of Creditors

One of the most controversial topics arising from the BAPCPA changes ot the bankruptcy law has to do with the so-called "hanging paragraph" of Section 1325(a).  Stated simply, Section 1325(a) does not clearly address what happens in a Chapter 13 if a debtor surrenders a vehicle back to a secured creditor if the vehicle is worth less than the outstanding claim.

Example:  Tom has a 2005 Chevrolet worth $10,000.  GMAC holds a lien against that vehicle totaling $14,000.  Tom files Chapter 13 and provides in his plan that he elects to surrender the Chevrolet back to GMAC.  What happens to the $4,000 "deficiency?"

Some federal circuit courts of appeal have held that the surrender of the vehicle wipes out all liability.  Other appeals courts have ruled that upon surrender, any deficiency balance would become an unsecured claim payable in the Chapter 13.

The 6th Circuit Court of Appeals (its precedent governs cases filed in Tennessee) has issued a ruling on this matter in favor of creditors.  In the case of AmeriCredit Financial Services v. Long, the 6th Circuit Court of Appeals has ruled that deficiency claims arising from a debtor’s surrender of a vehcile in a Chapter 13 survives the surrender and must be paid pursuant to the Chapter 13 plan.

You can read a copy of the AmeriCredit v. Long decision by clicking on the link.  The decision is worth reading not only to understand the Court’s logic, but also to get a sense of the frustration that the appeals court has for the poorly worded provision of the law.  While the 6th Circuit holding provides that the vehicle surrender does not wipe out the deficiency, the appeals court does not hold back in expressing its displeasure in issuing its decision.

In language highly unusual to circuit court opinions, 6th Circuit Judge Merritt writes "due to a glitch or a gap in a recent revision to the Bankruptcy Code intended to benefit creditors, the law is now  silent on what happens to the remaining indebtedness in the surrender-of-the-car situation.  The bankruptcy court below held that the congressional mistake in drafting the revision means that the remaining indebtedness is completely wiped out.  We believe the gap should be filled and the Congressional mistake corrected. The law previously governing this situation should be restored until Congress can correct its mistake and fill in the gap."

Now, back to our example.  For the time begin at least, if Tom surrenders his car in his Chapter 13, GMAC can file an unsecured claim in Tom’s case for $4,000.  If Tom’s plan provides for a 100% payout to unsecured creditors, his plan will cost him around $80 more per month.   Let’s hope that Congress will see fit to fix this problem and end the situation where a lender gets a vehicle back to resell and hundreds or thousands of dollars in windfall profit earned on the backs of struggling debtors.