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Lost Collateral in Chapter 13 Cases

Situations sometimes arise in Chapter 13 cases where the Debtor is unable to physically surrender collateral which secures a debt to a creditor. The reasons may be that the collateral was stolen, title documents were not properly executed, or ( in the case of the debtor's residence) the collateral was abandoned.

The general rule in the 11th Circuit ( which includes Alabama) is that the Debtor is not required to physically turn over collateral to a creditor in every case where the Chapter 13 Plan provides for it. The Debtor is required to step out of the way of the creditor's exercise of its legal rights, and to reasonably cooperate with the creditor to obtain possession of the collateral where feasible.

The debtor can be found to be legally responsible for the cost of the lost or abandoned collateral where the debtor has not acted in good faith. This would include situations where the debtor intentionally destroyed the collateral, or where the debtor intentionally conveyed possession of the collateral to a party who cannot be located. So long as the debtor has acted in good faith with respect to abandoned or lost collateral securing a loan, the Debtor should not have to worry about being responsible for paying the secured as anything other than a general unsecured creditor in the Chapter 13 Plan.

The legal issues that can arise in these situations of lost collateral can be complicated. Sometimes the debtor will be required to meet a burden of proof that the debtor acted in good faith even though the collateral securing a loan cannot be located. The debtor may have to work with his or her attorney to obtain discovery documents from any third party, such as an auto dealer, to track down the title history of the collateral. The most important thing for the debtor is to always act honestly and in good faith with respect to creditors both before and after the completion of the loan transaction.