Kentucky Bankruptcy Law

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What Chapter 13 can do for your car loan

I really do not understand this considering what the economy has been like, but most of the people I talk to are paying at least 10% interest on their car loan. So, when I am explaining the differences between a Chapter 7 and a Chapter 13 bankruptcy, I happily toss in that they could reduce that interest rate to around 5.25% (the prime rate plus 2 points). This happens by operation of 11 USC Section 1325(a)(5)(B)(ii) and a U.S. Supreme Court Case known as Till v. SCS Credit Corp., 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004) or more affectionately, just “Till“. 

In the Till case, the Supreme Court decided upon using the prime interest rate plus around 2% to satisfy the requirement that: “the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such [secured] claim”. 1325(a)(5)(B)(ii). Basically, the secured creditor must get an equivalent of the value of the asset plus the time value of the money involved plus a pinch for the risk of non-payment. This decision was made prior to the BAPCPA amendments to the bankruptcy code in 2005. However, other cases have ratified its applicability to post-BAPCPA cases. Thus the Till rate was born. Prime rate has been 3.25% for over a year now, so the Till rate is 5.25% give or take a point.

There is one potential catch, though. In BAPCPA, there is an odd “hanging paragraph” in Section 1325 that basically says that if you bought your car less than 910 days (2.5 years roughly) prior to the day you file your bankruptcy, then you cannot “cram” down the debt on the car. A cramdown refers to using Section 506 to split the debt secured against an asset, like a car, into two parts: the secured part up to the value of the asset and the unsecured part. To keep the asset, the secured part has to be paid in full while the unsecured part can get discharged.

So, crafty creditor lawyers, o what a cunning breed they are, seized on this hanging paragraph to argue that since one cannot split the loan into secured and unsecured parts, then the interest rate must be the contracted rate. Of course, they have also argued early on in cases where the contract rate was LOWER than the Till rate that the higher rate should apply. On those earlier type cases, the creditors WON, but now that the Till rate is usually much lower than the contract rate, they are stuck with their prior wins and it has turned to loss EVEN when the car was purchased less than 910 days prior to the bankruptcy.

September 5, 2012 Posted by | Bankruptcy, Chapter 13, Plan, Security interests | , , , , , , , , , , , , , | 1 Comment