Here we are just past the third anniversary of the effective date of BAPCPA and my wish list for revisions to BAPCPA includes the ability to waive the requirement for credit counseling when there is foreclosure pending, changes to simplify the application of exemption schemes in bankruptcy, and broadening the income exclusions for the means test. Number four on my hit parade is to change a provision which has the effect of determining how (or whether) your car loan can be modified in Chapter 13. Bankruptcy lawyers have come to call this provision the “910 language,” or the “hanging paragraph” or the “flush language,” references to the fact that it hangs from another provision, kind of like a wart on a cartoon witch’s nose, without being properly codified at all. (Note that bankruptcy lawyers are code geeks–we like our laws neatly organized, and we love referring to esoterica such as “section 1129(b)(2)(A)(i)(I)” and we don’t like it when someone clutters up our Code with such mess.)
The 910 provision is, broadly summarized, a limitation on how Chapter 13 can treat certain debts for personal property purchased within 910 days of the date of a bankruptcy. The provision essentially requires either payment in full of such debts, or surrender of the collateral, if the collateral was purchased for personal or household use. The provisions limits a debtor’s options to restructure debt, usually car loans, which can in turn limit a debtor’s ability to restructure other debt. In a worst-case scenario, a debtor may have to decide between trying to keep a house or keep a car.
The purpose of the 910 provision is obvious-we want to discourage a debtor who is contemplating bankruptcy from going out on the eve of bankruptcy, buying a new car (or anything else, for that matter), and then taking advantage of the provisions of Chapter 13 to change the terms of that purchase. As a practical matter, that prohibition has always existed, even before the advent of BABCPA. Before any of us ever heard of a hanging paragraph, courts wouldn’t approve such plans because of the requirement that all Chapter 13 plans be proposed in good faith. But even assuming that such a specific prohibition is necessary, surely we don’t really think that debtors are plotting evil schemes to rip off their vehicle lenders for two and a half whole years? The 910 day time period is simply too long.
A prohibition that looks back six months, or even a year, would be sufficient to deter the undesirable behavior, but let an honest debtor restructure debt so as to have the best possible chance to keep his home, remain employed, and pay creditors more than they would receive otherwise. After all, we’re not talking about getting a car for free. We’re talking about restructuring the debt on the car to pay the replacement cost of the vehicle (which is more than the lender can get if the car is surrendered), plus interest. The lender gets a fair shake, the debtor gets a better chance at a fresh start, and we all benefit by having fewer repossessed vehicles and foreclosed houses flooding the market.
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