Drive Financial Services, L.P versus Jordan Affirms Use of Till Interest Rate

In Drive Financial Services, L.P. v. Jordan  the United States Court of Appeals for the Fifth Circuit was called upon to address whether changes made to the Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) which gave greater rights to secured motor vehicle creditors superseded the decision of the United States Supreme Court in the case of Till v. SCS Credit Corp.

Till addressed the issue of the correct interest rate to be paid to a secured creditor in a Chapter 13 plan.

Before the enactment of BAPCPA, section 506 of the Bankruptcy Code permitted a debtor to bifurcate (strip down) a secured creditor’s claim into a secured and an unsecure portion if the value of the collateral was less than the amount owed under the loan.

BAPCPA limited this right when it comes to motor vehicles.

Section 1325(a)(9) of the Bankruptcy Code, now best known as the “hanging paragraph” provides that section 506 cannot be used to strip down a car loan that is incurred within 910 days of the filing of a bankruptcy petition.

Since the enactment of BAPCPA several motor vehicle creditors have tried to argue that the hanging paragraph not only changed the right to strip down the secured debt, but also acted to legislatively overrule Till.  Drive was one such case.

In Drive the Jordan’s purchased a truck on July 20, 2003 financed by Drive Financial Services at an interest rate of 17.95%.  On December 22, 2005, 865 days from the date of purchase, the Jordan’s filed for protection under Chapter 13 of the Bankruptcy Code.

The Jordan’s Chapter 13 Plan provided for payment of the loan, but at an interest rate of 7.5% rather than the contractual rate of 17.95%.  The Bankruptcy Court found that Till was controled the interest rate and confirmed the Jordan’s plan with the modified interest rate on the Drive Financial debt of 7.5%.

Drive Financial appealed this decision arguing that the hanging paragraph added by BAPCPA  not only prohibited the stripping down of the secured debt during the 910 day period, but also legislatively overrule Till, thus requiring the contractual interest rate to be used in paying off the claim.

The Fifth Circuit in Drive rejected the creditor’s argument.  The Court found that the hanging paragraph only applied to the issue of when and how much of a creditor’s claim was secured, not the interest rate that was required to be paid by the debtor, and that BAPCPA did not prohibit bankruptcy courts from altering the contractual terms for secured claims, and therefore did not supersede  Till. 

Based upon this finding, the Court affirmed the 7.5% interest rate set forth in the Jordan’s Chapter 13 plan.