## Facts

- Jason D. Mellors and Darlene L. Mellors filed a voluntary Chapter 13 petition on September 1, 2006 in the U.S. Bankruptcy Court for the Western District of Pennsylvania.
- Before bankruptcy, the Mellors bought a used 1999 Mercury Villager, which was their only vehicle; Jason used it to commute to work.
- Coastal Credit, L.L.C. held a purchase-money security interest in the vehicle.
- The Mellors’ Chapter 13 plan was confirmed in December 2006. The plan treated Coastal’s claim as secured up to the value of the vehicle and unsecured for the remaining balance, with the secured portion paid monthly over the plan term.
- In February 2007, after plan confirmation, the Mellors learned the vehicle’s frame was cracked and the vehicle could not be driven unless repaired. Although the vehicle had previously been inspected, the defect was not detected.
- The Mellors could not afford the repair. They also could not afford both (1) continued plan payments on the inoperable vehicle and (2) the cost of obtaining replacement transportation.
- In March 2007, the Mellors filed an amended Chapter 13 plan proposing to surrender the vehicle to Coastal, treat the surrender as satisfaction of Coastal’s allowed secured claim, and allow Coastal to share pro rata with other unsecured creditors on its remaining unsecured balance.
- Coastal objected to confirmation, arguing that § 1329 does not allow a post-confirmation change from “retain and pay” to surrender with reclassification of any deficiency as unsecured.

## Issues

1. Whether 11 U.S.C. § 1329 permits Chapter 13 debtors, after confirmation but before completing plan payments, to modify a confirmed plan to surrender collateral securing an undersecured claim and treat any resulting deficiency as an unsecured claim.
2. Whether the proposed modification was confirmable under § 1329(b)(1) and § 1325(a), including the good-faith requirement and the secured-claim options in § 1325(a)(5), given the post-confirmation discovery that the vehicle was not safely operable without costly repairs.

## Decision

- The court overruled Coastal’s objection and confirmed the Mellors’ amended Chapter 13 plan.
- The court held that § 1329(a) authorizes a post-confirmation modification that changes the method of satisfaction of a secured claim from ongoing payments to surrender of the collateral, so long as confirmation requirements are met.
- The court allowed Coastal to assert an unsecured deficiency claim for any remaining balance after accounting for the value of the surrendered collateral and amounts already paid on the secured claim.
- The court ordered that Coastal’s allowed secured claim could not exceed the sum of (a) payments already made under the plan on account of Coastal’s secured claim and (b) the value of the surrendered vehicle, with the remainder treated as an allowed unsecured claim.

## Legal Principles

- A Chapter 13 plan may be modified after confirmation and before completion of payments under § 1329(a) to (among other things) increase or reduce payments on claims, extend or reduce the time for payments, or alter distributions to account for payments made outside the plan.
- A modification that substitutes surrender of collateral for future cash payments can fall within § 1329(a) because it changes (and typically reduces) the future payments required on the secured claim and can account for the surrender as a form of payment outside the plan.
- A modified plan must satisfy § 1329(b)(1), which incorporates key confirmation requirements in § 1325(a), including § 1325(a)(3) (good faith) and § 1325(a)(5) (permitted treatment of allowed secured claims, including surrender of the collateral).
- When collateral is surrendered, the secured creditor’s lien rights in the collateral are addressed through the surrender and liquidation process, but the underlying debt is not automatically eliminated; any remaining balance may be treated as an unsecured deficiency claim to be paid with other unsecured claims as the plan provides.
- Although confirmation has preclusive effect, § 1329 provides a statutory mechanism for later changes; courts may allow modification when post-confirmation events materially affect the debtor’s ability to perform the plan and the modification is proposed in good faith.
- The court declined to follow the restrictive approach associated with In re Nolan, concluding that the text and structure of § 1329 permit surrender-and-reclassification modifications under appropriate facts.

## Conclusion

In re Mellors held that Chapter 13 debtors may modify a confirmed plan under § 1329 to surrender a vehicle securing an undersecured claim and treat any remaining balance as an unsecured deficiency, where the debtors’ post-confirmation discovery of a serious defect made continued performance impractical and the modification satisfied the confirmation requirements, including good faith.


In re Mellors, 372 B.R. 763 (2007)