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Car debt survives ‘hanging paragraph’

Debtors’ lawyers left hanging by the “hanging paragraph” controversy for car buyers don’t have to hang around any more. And creditors don’t have to hang back.

Yesterday, the 4th U.S. Circuit Court of Appeals said that when a Chapter 13 debtor owes money for a car and surrenders the vehicle, but its sale nets less than the car buyer owed, a creditor can split its claim and pursue an unsecured deficiency claim against the car buyer.

The 4th Circuit panel acknowledged in Tidewater Finance v. Kenney that “a majority of bankruptcy courts in other circuits” – and several courts in Virginia – have concluded that the “hanging paragraph” in the 2005 amendments to the federal Bankruptcy Code protected a debtor from the creditor’s deficiency claim. That interpretation allowed debtors who purchased their vehicles within 910 days of the bankruptcy filing to surrender the vehicles in full satisfaction of the car debt.

In Kenney, the 4th Circuit reversed a Norfolk bankruptcy court’s approval of a Chapter 13 plan for Jennifer Kenney, who still owed over $5,000 on her 2003 Chevy Impala, and joined the 7th, 8th and 10th Circuits in holding that the creditor could still use state law remedies for the unsecured deficiency.

The court said the car debt, like Kenney’s other unsecured debts, didn’t necessarily have to be paid in full, “but it can’t be written off in toto while other unsecured creditors are paid some fraction of their entitlements.”

By Deborah Elkins

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