Repo-man with Deficiency in Chapter 13 You Can

Repo-man is slang for a collection’s company representative who repossesses property for a creditor. The creditor must be using the property as security for a financial credit instrument. A creditor has the property of a debtor repossessed by a repo-man when a debtor defaults on a secured note. After repossession, the property is normally sold for its current value to recover the amount owed the creditor. If the amount obtained is less than the amount owed the creditor, the difference is called a deficiency.

Film poster for Repo Man. Copyright 1984, © Un...

From the Film, Repo-Man

A deficiency is collectible under certain civil laws and is considered unsecured debt once the secured property has been sold to satisfy the debt. Creditors have as much right to try and collect deficiencies as debtors have the right to file for bankruptcy protection. Neither creditor nor debtor has any control over what the economic market does. Therefore, when a secured property goes underwater in value, both creditor and debtor have the right to pursue an equitable solution to a financial deal gone wrong.

Filing for bankruptcy protection is every debtor’s right in the United States. Filing bankruptcy can immediately stop the collections process through the use of the automatic stay of bankruptcy. Collections, depending on the type of bankruptcy filed and the type of debt, may or may not end with the bankruptcy process.

A chapter 13 bankruptcy is a reorganization type bankruptcy for individuals designed to pay back all or a portion of unsecured debts over a 3 or 5 year plan. Since a deficiency is an unsecured debt, a creditor holding a deficiency against a debtor can file a claim against the debtor in a chapter 13. The creditor can successfully recover all or a portion of the deficiency of the debt, but only under certain circumstances.

Before a creditor can collect a deficiency in a chapter 13 bankruptcy, a couple of things have to occur.

  1. The creditor has to make a claim of deficiency at the proper time during the chapter 13 bankruptcy to make it part of the plan. In the chapter 13 process, creditors are given a certain time frame by the trustee to make unsecured claims and become part of the planned process. When the time frame lapses, trustees will not usually extend the time. A bankruptcy filer defaulting during the chapter 13 bankruptcy process after a plan has been confirmed can hurt a secured creditor. To combat the situation, some creditors holding secured notes will make a claim with secured and unsecured components. They will typically list the unsecured component as $1 or unknown. This allows them to amend the unsecured component once the collateral sells.

  2. The creditor must either have a deficiency court judgment in hand or be willing to prove to a bankruptcy trustee the current value of asset being secured and the deficiency not yet collected. This usually occurs when a debtor has indicated he or she will surrender the secured property.

Not all bankruptcy districts handle deficiency claims the same. You may want to contact a bankruptcy attorney familiar with the district in which you are filing in order to obtain the information of how your trustee might handle any deficiency claim.

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