Our local bankruptcy court recently issued an interesting ruling on liens that survive Chapter 13 bankruptcy discharge. Chapter 13’s are tricky with numerous parties and moving parts, so let’s take a look at what this ruling means.
Brief Overview of The Bankruptcy Court’s Ruling
In Shannon Covington v. Santander Consumer USA, INC. et. al. (In Re Covington) the Court found that Creditor Santander’s lien survived Debtor’s Chapter 13 bankruptcy discharge. The lien against the car survived because Santander was not provided for in the plan and did not receive any payments from the Chapter 13 plan.
It is important to understand that the Debtors personal liability on the car’s debt is discharged. This means that as long as Ms. Covington does not want to keep the car, she is under no obligation to pay back the debt to Santander. This also means that Santander cannot attempt collection action against her personally for the debt or any deficiency on the debt.
However, based on the Court’s ruling, Santander has the right to repossess the car to satisfy the debt owed. This is because the debt is secured by the car, and the Court found that Santander’s lien survived the bankruptcy discharge.
The Adversarial Proceeding – Debtor Seeks Title to Her Car
Debtor, Shannon Covington, filed an adversary proceeding seeking an order requiring Santander to remit title to her 2007 Ford Taurus. She was seeking free and clear title to her car. Leading up to this adversary proceeding no payment on the vehicle had been made during the 3-year course of her Chapter 13 bankruptcy, and not the 2-years since.
Santander filed a motion for summary judgment claiming its lien on the vehicle survived the bankruptcy discharge, and that Debtor is not entitled to the relief sought (title to the vehicle). Ultimately the U.S. Bankruptcy Court for the Southern District of Georgia granted Santander’s motion for summary judgment.
The Facts Leading Up to The Adversarial Proceeding
Debtor did not respond to Santander’s motion for summary judgment, so pursuant to Southern District of Georgia Local Rule 51.6 Santander’s Statement of Material Facts were deemed admitted.
Shannon and Jonathan Covington, Debtors, filed a joint Chapter 13 case on January 4, 2011. As of the date of filing, Debtors owed $11,661.17 on the vehicle.
The Chapter 13 plan payment was to repay Santander $5,950.00 plus 4% interest in respect to Santander’s secured claim. To get paid in a Chapter 13 plan, creditors must file a proof of claim by the claims bar date. Santander filed a proof of claim after the claims bar date.
If a creditor does not timely file a proof of claim, the debtor or trustee may file a proof of claim on the creditor’s behalf. 11 U.S.C. §501(c). Further, the debtor or trustee have an additional 30-days past the claims bar date to file such proof of claims. Neither Debtor nor the Trustee filed a claim on behalf of Santander.
A lien must be provided for in the plan for property encumbered by the lien to pass through the bankruptcy and become sole property of the debtor, free and clear of liens. Because no allowed proof of claim was filed for Santander, they did not receive any payments from the Chapter 13 plan. Therefore, the Court concluded that Santander was not “provided for in the plan” and therefore their lien on the Ford Taurus survives the bankruptcy discharge.
Why This Ruling Matters
This ruling affirms In re Thomas, which held that a secured creditor’s lien survived a Chapter 13 discharge when the creditor had not been provided for in the plan and the secured creditor had not filed a proof of claim. 883 F.2d 991 (11th Cir. 1989).
This matters because even when a creditor fails to file a proof of claim on time, and they don’t get paid in the plan, they still retain their right to a lien against the collateral. The debtor and the trustee are both able to file a proof of claim on behalf of debtors. The outcome of this Adversary Proceeding suggests that it is critical that the debtor or trustee be vigilant in ensuring the proper proofs of claims are filed, even where the creditor does not file one on its own behalf.
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