Surrender of Collateral Without Delivery?: Can a debtor “surrender” collateral – and cause a secured claim to be treated as unsecured – without physically delivering the collateral to the creditor (or making the collateral available to the creditor)?
Delivery of Collateral Required If Possible: Judge Schaaf addressed the issue in the case of In Re Mustafa, Case No. 15-52410 (Bankr. E.D. Ky., June 6, 2016 Order) (Doc. #45). In that case, the debtor no longer had possession of the car he was proposing to surrender (he had sold it and didn’t pay the creditor). Creditor objected to confirmation, arguing that surrender was not an option if the debtor couldn’t give the car back to the creditor.
The Court said that “surrender” requires physical delivery of the collateral if delivery is possible. If delivery is not possible through no fault of the debtor, then a debtor’s surrender of all rights in the collateral is sufficient under section 1325(a)(5).
Good Faith An Issue If Delivery Is Not Possible: The Court held that whether a debtor effectively “surrenders” collateral is very fact-specific and requires good faith on the part of the debtor and the creditor. Because the debtor in this case has some fault, the Court set an evidentiary hearing to determine good faith.
Alternative To Surrender: If a creditor objects and the debtor cannot “surrender” collateral for purposes of section 1325(a)(5), I think the only alternative (other than dismissal, conversion, or dealing with a nondischargeable debt) is to pay the allowed secured claim through the plan. But then the question arises – how do you value collateral if you no longer have possession of it?
The Point Is This: We frequently see plans proposing to surrender collateral because it’s been lost, stolen, transferred, destroyed, or even awarded to a former spouse in a divorce. We often take for granted what “surrender” means, but courts across the country have not been consistent in defining what it means to “surrender” collateral or what the legal effect of “surrender” is. Practitioners need to be aware of the issues that might arise when a plan proposes a “surrender” of collateral.
In future posts, we’ll talk about whether listing a creditor in the plan under the section for “Surrender of Property” is sufficient to treat the claim as unsecured, and whether the debtor can modify a plan after confirmation to surrender collateral and treat the deficiency claim as unsecured.
