Can I Keep My Luxury Car, RV, and Boat, in Chapter 13 Bankruptcy in California?

Chapter 13 bankruptcy trustees in California and elsewhere frequently object to debtors’ Chapter 13 plans in which the debtor proposes to pay very little to his general unsecured creditors (like credit card companies), while nevertheless continuing to make payments on secured debts for so-called “luxury items.” Such plans, some Chapter 13 trustees have claimed, were made in “bad faith” because payments on the secured debts for such luxury items take away money that could have been used to pay more toward unsecured debts. I have had many San Jose bankruptcy cases in which I worried that the trustee might object to the debtor’s driving a luxury car, even where that car might arguably be necessary to the debtor’s business as a real estate broker, for example.
Now, however, California Chapter 13 bankruptcy debtors no longer have to worry that a trustee can prevent a Chapter 13 plan from being confirmed simply because the debtor wants to continue making payments on her luxury car, or her RV, boat, or second home for that matter. I was recently asked to brief the case Drummond v. Welsh (In re Welsh), 465 B.R. 843 (B.A.P. 9th Cir. 2012), before the San Jose Chapter 13 Bankruptcy Committee. The case involved a Montana couple who had filed Chapter 13 bankruptcy wherein they proposed to continue making payments on three vehicles, an RV, and two ATVs in addition to their home mortgage. The trustee had objected that making these payments on these secured debts left very little to pay toward the debtors’ sizable unsecured debt. Those creditors would receive only pennies on the dollar through the life of the Chapter 13 plan.
The court held that when Congress enacted BAPCPA in 2005, and specifically by enacting the Means Test in bankruptcy, Congress took away bankruptcy judges’ discretion to determine how much of a Chapter 13 debtors’ current monthly income is available to pay toward unsecured debts. Instead, Congress put in place a rigid, formulaic determination of a debtor’s “Current Monthly Income,” allowable withholdings from that CMI, and remaining “Disposable Monthly Income.” In other words, these amounts are determined by formula, not by judicial discretion. The Bankruptcy Code rigidly defines Current Monthly Income in a certain way. For example, it expressly excludes any social security income. Therefore, a Chapter 13 debtor is not required to put any social security income into a Chapter 13 plan. Similarly, all secured debt payments are, by definition, allowed withholdings when determining a debtor’s disposable monthly income available for the Chapter 13 plan. This means that the bankruptcy court no longer gets to decide whether it is fair to unsecured creditors that a Chapter 13 debtor will keep making payments toward a “luxury” car or other secured property, even if doing so limits the amount the unsecured creditors will receive from the Chapter 13 plan.
This means that now, if you file a Chapter 13 bankruptcy in San Jose or elsewhere in California, and you want to keep your luxury car, boat, or RV, the bankruptcy trustee won’t be able to object to your plan solely because you propose to keep these items. As long as you can afford to continue making the payments on these secured debts, and provided that your overall Chapter 13 plan is feasible and meets the liquidation test, for example, then just because you propose to keep making payments on such a luxury item your Chapter 13 plan can’t be attacked as being proposed in bad faith, even if your general unsecured creditors get much less than they would otherwise have received.
Our San Jose bankruptcy attorneys always offer a free initial consultation to Bay Area residents interested in filing Chapter 13 or Chapter 7 bankruptcy. Call us to schedule your free consultation at our San Jose offices.