07 Mar Strip down of car loan OK
A decision this week out of the Eastern District of North Carolina should be music to the ears of Chapter 13 debtors with recent car loans. Judge Small ruled in the Telephius Price case, 06-00957-5 that the infamous “hanging paragraph” inserted in the Bankruptcy Code does not prohibit the cram down of the car loan if the purchase loan financed charges other than the price of the car.
The background of the issue is found in efforts of car lenders to lobby Congress to prevent Chapter 13 debtors from stripping down the lien to the value of the car at filing: the claim was treated as a secured claim, and paid with interest, to the extent that there was value in the car and the balance of the debt was treated as unsecured.
Early in most new car purchases, the car is worth less, sometimes substantially less, than the loan balance. The car lenders wanted the debtor locked into repaying the full loan balance in Chapter 13 if they wanted to keep the car.
Meanwhile, every other secured claim was subjected to an analysis of the value of the collateral, but the car lenders wanted special protection for their interests. They succeeded in convincing Congress to prohibit the strip down, or cram down, of their lien by insertion of an unnumbered paragraph stuck into 1325 of the amended Bankruptcy Code. It purports to prohibit strip down of purchase money security interests for vehicles acquired within 910 days of the bankruptcy filing.
The provision has been nick named the “hanging paragraph” and the affected vehicles called “910 cars”.
Judge Small examined the contract for the purchase of the used car in the Price case and found that the loan covered not only the purchase of the car, but the balance owed on a trade in and “gap” insurance. He applied the state’s Uniform Commercial COde to decide whether the presence of those other items in the loan changed the lien from a purchase money lien alltogether, or whether the lien could be a purchase money lien as to the purchase price and a non purchase money lien as to the other items financed. He held that the inclusion of other items destroyed the purchase money quality of the lien and thus the Prices could repay just the present value of the car, which after all, is what the lender would get if it repoed the car.
This is just one court out of several hundred, but this decision ought to be persuasive to other bankruptcy judges in states where state law permits the judge to choose between the lien being transformed or being dual status.
Cathy Moran, Esq.
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