Half a Car: Vehicle Lien Release in Chapter 13 Plan Does Not Apply to Co-Debtor’s Interests

In re Buttel, No. 22-40542 (Bankr. D.Kan. May 18, 2023)

On May 18, 2023, the U.S. Bankruptcy Court for the District of Kansas entered a memorandum opinion denying confirmation of a chapter 13 plan.  The issue was whether a creditor is obligated to release a lien on a vehicle when one of two co-debtors completes a Chapter 13 plan and is granted a discharge. There was also a dispute over the value of the vehicle.

In this case, debtor Vicki Lyn Buttel and co-debtor Kerry H. Kuehn jointly purchased a 2019 Mitsubishi Eclipse with financing provided by Lawrence Mitsubishi. The sales contract was subsequently assigned to Regional Acceptance Corporation (the creditor), which perfected a lien under Kansas law.

When the debtor filed for Chapter 13 bankruptcy relief, she proposed a three-year plan to cram down the secured claim by paying the present value of the vehicle and releasing the lien. The creditor, however, objected to the plan, arguing that the lien should not be released until the full balance was paid.

The court found that the value of the collateral must be at least the value of the debtor’s one-half interest in the vehicle and ruled that the lien release at discharge only applies to the lien granted by the debtor, not the co-debtor.

The opinion also discusses the requirements for cramdown under Bankruptcy Code § 1325(a)(5), which provides that the holder of a secured claim retains the lien until either the underlying debt is paid or a discharge under section 1328 occurs. The debtor and creditor disagreed over the timing of the lien release, with the debtor advocating for a release upon discharge and the creditor maintaining that the lien should remain until the co-debtor pays the outstanding debt.

The court found this to be a matter of statutory construction of § 1325 and related sections, resulting in the conclusion that the lien release only applies to the debtor’s one-half interest in the vehicle, not the co-debtor’s interest. Consequently, the court denied confirmation of the debtor’s plan, deeming that it did not sufficiently address lien release in line with the court’s interpretation. The debtor was instructed to submit an amended plan with non-standard provisions regarding release of the lien.

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