If, like many debtors I meet with, your car is underwater, then you will want to consider your options regarding retention or surrender of the vehicle. In a chapter 7 bankruptcy, this is a pretty easy decision — you can keep the car and continue making payments, or you can surrender the car and discharge any obligation for a deficiency. In chapter 13, however, there is a third option that might make sense.
In a chapter 13 bankruptcy, the debtor has the ability to reduce the amount of secured loans on certain property in the confirmation of their chapter 13 plan. That “lien stripping” tool was significantly impacted in 2005 when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). With respect to personal automobile loans, Congress implemented what has been referred to as the “910 day rule” which prevents lien stripping where the contract for finance of the vehicle was signed less than 910 days prior to the filing of the bankruptcy. In that case, the entire loan amount must be treated as “secured” in the debtor’s chapter 13 plan, and must be repaid in full. If, however, the finance contract was either not a “purchase money” contract, was signed more than 910 days prior to filing for bankruptcy or is for a vehicle that is not considered a “personal automobile,” then the lien can be split into a “secured” portion which must be repaid in full in the plan, and an “unsecured” portion which gets repaid with other unsecured debts, such as credit cards under the plan.
The interesting thing about the 910 day rule is that it suffers greatly from much of the poor drafting that went into the rest of the BAPCPA. As written, it is subject to a lot of interpretation, and Bankruptcy Courts have been actively engaged in both criticizing the poor drafting skills of the BAPCPA authors, and in trying to figure out just what the 910 day rule really means.
An unnamed judge at the National Collections and Credit Risk Conference said that the auto finance industry is the only winner from BAPCPA, and the “few extra bucks” earned by some creditors under BAPCPA’s new laws “are way outweighed by the costs to the system.” Further, because of the poor drafting skills of the Act’s authors, there has been a lot of discussion of the “intended consequences” and the “un-intended consequences” of the revised 910 day rule. This is the area where most litigation regarding the rule has taken place.
Most courts that have taken up the issue of the 910 day rule have concluded that yes, in fact Congress intended to say that if a car loan was signed for less than 910 days prior to the filing of the bankruptcy, then no cram-down of the amount of the secured claim may be allowed. Cases have been heard and decisions published throughout the country upholding the absolute strict nature of the 910 day rule with respect to the amount of the claim.
Although the language in the 910 day rule has led courts to find regularly that the amount of the secured claim cannot be crammed-down, conversely, courts have been finding that other terms of repayment such as interest rate, term, etc.. can be modified in the chapter 13 plan. Courts in Missouri, Alabama, Tennessee, Florida, Georgia, Texas, Arkansas and North Carolina have reached the following conclusions:
- In Missouri, Florida, Alabama, Georgia and North Carolina, the Courts found that although the debtor had to provide for full repayment of the amount of the car loan, the debtor did not have to pay the contract interest rate, and that the interest rate and length of repayment was subject to cram-down.
- In Alabama, the Court found that in a case where additional money was borrowed under the purchase money car loan after the loan was made, it was not a “purchase money security interest” under Alabama state law, and therefore, the 910 day rule did not apply to this particular debtor’s car loan.
- In Tennessee, the Court found that where a debtor surrendered a car to the lender in bankruptcy, the lender had no claim whatsoever for any amount in the bankruptcy because the lender must accept the car as satisfaction in full of their claim.
There are additional opinions that, from the lack of clarity in what has become referred to as “the hanging paragraph (section 1325(a)(*) — so called because it is literally a hanging paragraph in the statute, not seemingly connected to any other provision in section 1325)” combined with the Till case, Courts have reached all sorts of strange conclusions about what can and cannot be done with a car loan which is not more than 910 days old.
It is important to note here that although the Bankruptcy Code is intended to be a uniform set of laws throughout the Country, they often refer to local law for issues such as, in the cases discussed above, what is a “purchase money security interest.” Additionally, the Country is broken up into multiple Districts and Circuits when it comes to the Federal Courts, and as such, from District to District and Circuit to Circuit, unclear laws such as BAPCPA are interpreted differently. Before filing bankruptcy, it is important that you retain a skilled, experienced attorney in same District as you intend to file because local knowledge is the key to success.
David L. Gibbs is an attorney with The Gibbs Law firm, APC. The firm’s practice focuses on issues related to Bankruptcy, Business Law and Manufactured Housing; including community subdivision, pre-purchase diligence and analysis as well as advising community owners on operational, financial and enforcement issues. The firm also represents manufactured home dealers in a wide range of issues. David L. Gibbs is admitted to the Federal Courts for the Central and Southern District of California, and also holds a California real estate broker’s license. The firm continues to offer a wide range of real estate and business related services as it has done for 34 years from its offices in San Clemente. Mr. Gibbs can be reached at (949) 492-3350.