May 21, 2007
Is a Hanging Paragraph Like a Dangling Chad?
Kristin Schroeder Simpson
BAPCPA – it changed the bankruptcy world. That is not new news.
New news, however, is judicial interpretation of a new phrase in bankruptcy parlance – the 910-day Rule, a rule applied to a debtor's purchase-money car loan. You find the 910-Day Rule in the “hanging paragraph” in 11 U.S.C. § 1325(a).
The 910-day Rule alters the prior chapter 13 confirmation requirement that if a car-laon/secured creditor does not consent to its treatment in the chapter 13 plan, the creditor retains its lien and the debtor must pay via the plan the value of the collateral, not the full principal due. The 910-day Rule strips the bifurcation option for “new” cars. The hanging paragraph follows the last enumerated confirmation requirement -- §1325(a)(9) -- and provides:
For purposes of paragraph (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 [sic] preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle (as defined in section 30110 of title 49) acquired for the personal use of the debtor . . . .
At first blush, the parsing of the 910-day Rule is not too difficult – it’s a simple date calculation and definitional exercise. In short, if you purchased any mechanically-powered vehicle for your use on public thoroughfares in the 2 and ½ years before you filed bankruptcy (read: car, motorcycle, any vehicle in which you would try to claim an exemption), you cannot discharge the unsecured portion of the secured creditor’s claim.
Pre-BAPCPA, a debtor with a new car could bifurcate the car creditor’s claim via section 506(a) of the Bankruptcy Code and confirm a chapter 13 plan that paid out the unsecured portion pro rata with other general unsecured claims. As explained in In re Solis, 356 B.R. 398 (Bankr. S.D. Tex. 2006):
“Prior to October 16, 2005 [BAPCPA effective date], a debtor in a chapter 13 could bifurcate any claim secured by the debtor’s automobile by treating the claim as secured up to the value of the vehicle and treating the remainder of the claim as unsecured. The Court was obliged to confirm the plan if it paid the lender the present value of the secured portion of the claim and if it paid the unsecured portion in the same manner as other unsecured claims were paid.” Id. at 405 (citing Till v. SCS Credit Corp., 541 U.S. 465 (2004)).
BAPCPA obliterates this former “bankruptcy advantage” for a chapter 13 debtor’s “new” car. Now, even though immediate depreciation happens to all of us when we drive the car off the lot, bankruptcy doesn’t help you get out from underwater unless you wait 911 days after purchase to file.
The current judicial debate, however, is not over this “timing” issue; rather, courts struggle with the meaning of “acquired for the personal use of the debtor.” It matters because in many chapter 13 cases, the debtor may own more than one car, or be a signer or co-signer on more than one car loan: one for the spouse, the child, the truck to tow the boat, etc.
In the past year, several courts have supplied necessary judicial gloss to the “personal use” part of the hanging paragraph. “Personal use” is not a defined bankruptcy term. There are currently three camps defining “personal use.” First, some courts look at a totality of the circumstances test, and included therein the inquiry as to whether the acquisition of the car enabled the debtor to make a significant contribution to the family unit. See, e.g., In re Medina, -- B.R. -- , available at 2007 WL 744644 (Bankr. S.D. Tex. March 12, 2007) (Tahoe used for debtor’s transportation to work not subject to the 910-day Rule); In re Martinez, -- B.R. -- , 2007 WL 744643 (Bankr. S.D. Tex. March 12, 2007) (citing In re Johnson, 350 B.R. 712 (W.D. La. 2006); In re Hill, 352 B.R. 69 (Bankr. W.D. La. 2006)) (Taurus used for debtor’s transportation to work not subject to 910-day Rule).
A “totality plus” test looks to whether the debtor’s personal use is “significant and material, regardless of whether there is also some business use.” In re Solis, 356 B.R. 398, 409-411 (Bankr. S.D. Tex. 2006) (Dodge Ram used by non-debtor spouse for work purposes, but also used by debtor-wife for personal use subject to 910-day Rule). The Solis court rejected the contention that if the vehicle significantly contributes to income production, it cannot be for personal use, a holding made by the court in In re Hill.
Other courts determine that absent legislative guidance, the Internal Revenue Guidelines apply – thus a vehicle used for transport between home and work is not business property. See, e.g., In re Wilson, 2006 WL 3512921 (Bankr. D. Kan. 2006) (citing In re White, 352 B.R. 633 (E.D. La. 2006)) (adopting significant and material test of In re Solis and holding that Dodge pickup and Ford Expedition used for family transportation and foster care business subject to 910-day Rule).
Most recently, Judge Parker, the Chief Bankruptcy Judge for the Eastern District of Texas, in In re Adaway, -- B.R. -- , available at 2007 WL 1174882 (Bankr. E.D. Tex., April 10, 2007), held that the phrase “personal use” is a subset of the phrase “personal, family, or household use,” thus not a term of art that has a mutually exclusive meaning. Id. at * 3. Judge Parker notes that the statute must contemplate mixed use; however, predominant, exclusive personal use at the time of acquisition is not required to trigger the 910-day Rule, neither is the “mere demonstration of de minimus use of the vehicle by the debtor after its purchase be solely sufficient to nullify a debtor’s stated subjective intent that a vehicle was not acquired for his personal use.” Id. In short, Judge Parker holds that the 910-day Rule is triggered if the debtor intends personal use of the car to be significant and material at the time of acquisition. Evidence of actual use, however, is the “best available evidence to corroborate a debtor’s testimony regarding his subjective intent at the time of acquisition” – but, “cannot be absolutely determinative.” Id. In Adaway, the court determined that a Mitsubishi purchased by the debtor but used minimally by the debtor but daily by his non-debtor spouse not subject to the 910-day Rule.
In sum, if you plan to cramdown a secured car lender, or object to a debtor’s chapter 13 plan’s treatment of your secured creditor’s claim – research and review the evidence. Look at the purchase money documents – while checking the box for “personal and family use” versus business use is not determinative, it may add to the totality of the circumstances you must prove. Determine if there are any attendant warranties where the warranty is conditioned on personal use. Prior to the confirmation hearing, determine what the debtor intended at the time of acquisition, as well as what happened after purchase. Did the debtor actually drive the vehicle? Did the debtor use it as her primary transportation to and from work? Finally, look at the case law in your jurisdiction – your bankruptcy judge may have addressed this issue, or it may be addressed by other judges in your district.