Chapter 13 surrenders of collateral

Last week, the Sixth Circuit Court of Appeals said that “due to a glitch or gap in a recent revision of the Bankruptcy Code intended to benefit creditors, the law is now silent on what happens to the remaining indebtedness in the surrender-or-the-car situation, the bankruptcy court below holding that the congressional mistake in drafting the revision means 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 restored until Congress can correct its mistake and fill that gap.” (AmeriCredit Financial Services v. Long, etal.)

“The gap in the law is caused by a newly-formed inconsistency between § 1325(a) and 506 of the Bankruptcy Code,” the Sixth Circuit said.

In their approach to the case, it said that “the numerous courts that have addressed the issue have reached widely conflicting conclusions, the majority of them concluding that debtors can surrender collateral in full satisfaction of the debt without any further deficiency claim,” as the Bankruptcy Court for the Eastern Division of Tennessee had done with In re Ezell in 2006. A direct appeal of was denied, but roughly a year later the Seventh Circuit criticized the case in its consideration of In re Wright.

The Sixth Circuit observed, too, however, that in the twelve-month period ending Sept. 2007, some 310,802 Chapter 13 bankruptcies had been filed, many of them secured loans for trucks or cars, and that many states had been addressing this “gap” in bankruptcy provisions by adopting remedies based on state foreclosure, repossession, auction sale, and adjudication to determine deficiencies that arose from collaterals usually being less than the remaining debt. The Sixth Circuit found this approach unacceptable as well

In its overall determinations here, the Sixth Circuit noted that “the Supreme Court, addressing amendments to the Bankruptcy Code, has determined that ‘when Congress amends the bankruptcy laws, it doesn’t write on a clean slate, and, therefore, the Court has been reluctant to accept arguments that would interpret the Code, however vague the particular language under consideration might be, to effect a major change in pre-Code practice that is not the subject of at least some discussion in the legislative history.” ( Dewsnup v. Timm )

“In determining how to fill the gap left by Congress after the 2005 amendments,” the Sixth Circuit Court said, “we employ a well-established common law principle of interpretation known as ‘the equity of the statute.’ This method of interpretation of gaps, mistakes and ambiguities in statutes has guided common law judges at least since the interpretation of the statute De Deonis in the Fourteenth Century…. Our Court, as well, has referred favorably to interpretation according to the ‘equity of the statute.’”[ See Popovich v. Cuyahoga County Court of Common Pleas ]