Cars in Chapter 13 after BAPCPA
Prior to 2005, Chapter 13 debtors who owned vehicles that were "underwater" (the debt on the car was greater than its value) could cram down a car lender's claim under section 506(a)(1) by bifurcating, or splitting, the claim, with the secured claim equal to the replacement value of the car, while treating the balance of the claim as unsecured. The car creditor had to receive the present value of the car, with a discounted interest rate substantially lower than contract interest rate.
BAPCPA changed the rules of the game in regard to purchase money vehicle loans. BAPCPA amended section 1325 of the Bankruptcy Code as follows: For purposes of paragraph [1325(a)](5), section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day [period] preceding the date of the filing of the petition, and the collateral for the debt consists of a motor vehicle (as defined in section 30102 of title 49) acquired for the personal use of the debtor, or if collateral for the debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.
Practitioners, judges, and academics refer to this section as the "hanging paragraph" because Congress did not see fit to give it a number. This section requires Chapter 13 debtors to pay the full amount of the car loan if the car was purchased within 2 1/2 years (910 days) of filing. The "hanging paragraph" is likely the greatest proof that car lenders are BAPCPA's biggest beneficiaries.
However, there are several nuances that an experienced bankruptcy attorney can use to help the chapter 13 debtor with their financed car. For example, the debtor may still modify the term and interest rate of the loan. See In re Johnson 337 B.R. 269 (M.D.N.C. 2/2/06).
In addition, not all loans secured by cars are controlled by the "hanging paragraph" of section 1325. For example, if the loan is not purchase money because the debtor did not incur the debt to buy the car, section 1325 does not apply and the debtor can bifurcate the claim as provided in section 506 of the Bankruptcy Code. See In re Horn, 338 B.R. 110 (M.D. Ala. 2/23/06).
It is also interesting to note that the 910-day provision does not apply where the vehicle has not been purchased for the debtor's personal use. For example, a debtor could acquire a vehicle for his non-filing spouse and then exclude it from the provision of the "hanging paragraph" of Section 1325(a). See In re Jackson 338 BR 923 (M.D. Ga. 2006).
Other courts note the confusion created by the "hanging paragraph." The amendment to Section 1325 (a) creates neither a secured, nor an unsecured claim. The court in In re Carver, 338 B.R. 521 (S.D. Ga. 3/6/06), created an entirely new class of creditor. The court tried to reconcile the problem by devising a rule consistent with congressional intent. The court held that "a 910 claim must receive the greater of (1) the full amount of the claim without interest; or (2) the amount the creditor would receive if the claim were bifurcated and crammed down. However, no other courts have adopted the test developed in Carver.
