“I’ve Changed My Mind – I Want to Surrender My House”: What Effect Does Post-Confirmation Surrender Have on the Debtor’s Discharge?

If a confirmed plan provides that the debtors will cure arrearages through the plan and maintain ongoing payments on a mortgage or long-term car loan, and the debtors complete plan payments and get a discharge, those section 1322(b)(5) debts are not discharged per section 1328(a)(1). The debtors still have personal liability on those debts after discharge, just as if the debtors signed reaffirmation agreements in chapter 7 cases.
But what happens if after confirmation the debtors change their mind – they can’t afford the house or the car, and they let the creditor get relief from stay. Is the claim still a 1322(b)(5) claim that is excepted from discharge?
Even if a creditor gets relief from stay on a 1322(b)(5) claim after confirmation, the creditor’s claim remains a 1322(b)(5) claim according to In re Holman, 2013 WL 1100705 (Bankr. E.D. Ky. 2013). Taken to its logical conclusion, any resulting deficiency claim would not be discharged.
What about a post-confirmation plan modification to surrender the house or car – will that change the claim from one provided for under 1322(b)(5) into something else? Is such a plan modification permitted under the Sixth Circuit Adkins/Nolan doctrine? The debtors can try to modify the plan, but it may not be sufficient to protect the debtor from post-discharge collection calls and letters. See In re Spata, Case No. 09-52154 (Order Entered April 22, 2016, Doc. #122) (Bankr. E.D. Ky. 2016).
Is there a solution to protect the debtors? Maybe. Try including something like the following special provision in the original plan:
In the event that relief from stay is granted to any creditor addressed in Section II, or in the event that the Debtor surrenders the collateral to the creditor after confirmation, any resulting deficiency, after liquidation of the collateral, shall be classified and paid only as a general unsecured claim, but only up to the amount of said deficiency. Any amount unpaid on said deficiency claim shall be discharged upon completion of the plan. This special provision is intended to cover any and all secured claims, whether payment on the claims are to be made through the plan by the Trustee or to be made directly by the Debtor.
A plan with this provision was confirmed when no creditor objected. See In re Ratliff, Case No. 14-21064, Order entered Nov. 10, 2014, Doc. #43 (Bankr. E.D. Ky. 2014). The adequacy of the provision has not yet been tested, but it’s (probably) better than nothing. However, if a creditor objects to the provision, who knows what the result will be.
For a more detailed discussion, click here for a handout I prepared on Postconfirmation Mortgage Issues Affecting Discharge for a recent seminar. Part I of the handout discusses this issue (Part II discusses an issue mentioned in an earlier post, that a debtor who is delinquent in postpetition mortgage payments may not be able to get a discharge at all).
This is a more complex issue than what I’ve described here. Creditors’ attorneys, don’t assume that you and your clients have a free pass to collect on these 1322(b)(5) debts after discharge, because it’s not that clear. Debtors’ attorneys, be aware of the issues, and counsel your clients on the risks of changing their minds after confirmation.