Cram-a-lot The Quest Continues

Cram-a-lot The Quest Continues

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It comes as no surprise that there has been a sense, mostly among members of Congress, that debtors who choose chapter 13 are more dedicated to repaying their creditors than those who choose chapter 7. Before enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), debtors were largely free to accept or reject the elevated commitment of chapter 13, but incentives were built into the law to promote the congressionally preferred choice: the automatic stay coupled with the ability to cure mortgage arrearages over time,2 the "super discharge" that allowed debtors to discharge debts that would remain viable after a chapter 7 discharge3 and the cramdown, which allowed the debtor to retain property while only paying the present value of the collateral.4

However, all of that changed with the enactment of BAPCPA. The carrot approach was abandoned and replaced with a stick. Mandatory tests determine who may file chapter 7 and who must file chapter 13. The automatic stay is not so automatic and does not stay as long. A dose of legislative kryptonite rendered the "super discharge" more of a "Clark Kent discharge." In the process, the cramdown was virtually eliminated—or, at least, that is what was advertised. However, a careful reading of the statute suggests that the cramdown is not yet dead. Lawyers who diligently seek may yet find that they can still "cram-a-lot."

If that last term sounds a bit strange to you, you have probably been devoting too much attention to bankruptcy law and we need to bring you up to speed on the latest news on Broadway. Monty Python's Spamalot is all the rage these days, recently winning the Tony for Best Musical of 2005. It is a musical lovingly ripped off from the 1974 motion picture Monty Python and the Holy Grail.5 While we are not suggesting that BAPCPA takes us back to the Middle Ages of bankruptcy law, we do note that the anti-cramdown provision lends itself nicely to references from Monty Python's Spamalot and adds a bit of much-needed comedy to this discussion.

The Anti-cramdown Provision

When considering the impact of BAPCPA, it is prudent to begin with a careful reading of the applicable statutory language. In this case, the provision is found at the end of §1325(a), and provides:

For purposes of paragraph (5), §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 [period] preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle (as defined in §30102 of Title 49) acquired for the personal use of the debtor, or if collateral for that debt consists of any other thing of value, if the debt was incurred during the one-year period preceding that filing.

If you fancy yourself a knight on a noble and daring quest to bring relief to repressed debtors, you will undoubtedly think of arguments even more creative than those contained in this article.

Right off the bat, it is apparent that this provision needs correcting because it has no alphanumeric designation and merely dangles at the end of §1325(a). There is no way to cite to this provision other than its proximity to other citable provisions. It is also missing an operable word. The first sentence refers to "the 910-day [period] preceding the date of the filing of the petition...." This definition makes no sense without the word "period," so we have added it for purposes of discussion. A debtor may argue that the drafting deficiency renders the provision void. Even so, the obvious errors hint at a greater issue: The provision itself may lack teeth.

The Exceptions that Swallow the Rule

After BAPCPA, the basic rule is that §506, which bifurcates claims into secured and unsecured claims based on the valuation of the collateral, no longer applies, thereby eliminating the cramdown. However, this new rule includes a laundry list of conditions that are so extensive they may swallow the rule.

With respect to car loans, cramdown is prohibited if (1) there is a creditor6 (2) that has a purchase-money security interest,7 (3) securing a debt8 that is the subject of a claim;9 (4) the debt was incurred within 910 days (roughly two-and-a-half years) before the petition was filed; (5) the collateral is a motor vehicle; and (6) the motor vehicle was acquired for the personal use10 of the debtor.11 With respect to other types of personal property collateral, the cramdown is not available if (1) the creditor has a purchase-money security interest (2) securing a debt that is the subject of the claim, (3) the collateral for that debt consists of any other thing of value12 and (4) the debt was incurred within one year of the bankruptcy filing. Undoubtedly, creative attorneys will easily maneuver around the conditions to the debtor's benefit, especially with regard to vehicles.

Take It or Leave It

The most obvious maneuver is to rely on tried-and-true tactics from the past. Historically, there have been several ways to treat a car claim: (1) surrender the car in full satisfaction of the claim,13 (2) retain the car and cram down the lien,14 (3) cure the default and complete the contract payments through the plan15 or (4) convince the creditor to accept some other treatment.16 The latter is the most flexible option because it allows the debtor to ignore statutory prohibitions and appeal to a creditor's business sense.

A debtor may propose a chapter 13 plan that allows the creditor to accept an old-fashioned cramdown of the secured claim and a bifurcated unsecured claim or, in the alternative, the collateral will be surrendered in full satisfaction of the claim.17 Given the choice between a hunk of cold hard steel that must be repossessed, stored and then sold, or periodic disbursements of warm, green cash, the creditor may find a cramdown preferable. Ultimately, this will be a business decision for the creditor, and the debtor need only make the proposal to force a decision.

Be Careful What You Ask For

Debtors might also side-step the anti-cramdown provision by relying on the proof of claim filed by the creditor. Creditors must file a proof of claim in order to share in the distribution under the plan. Many creditors bifurcate their own claims by designating a portion of their claim secured and the balance unsecured. If §506 is not applicable, this will not be necessary. However, creditors may be slow to change their practices and, arguably, if they continue this practice, the debtor may be allowed to rely on their bifurcation and treat the claims accordingly under the plan.

Time Is on Your Side

Time may also be the debtor's best ally against the anti-cramdown provision. If a debtor purchases a car 910 days before the case is filed, the anti-cramdown provisions apply. In contrast, if the car was purchased a single day earlier or if the case is filed a single day later, the prohibition simply will not apply. In close cases—perhaps any case where the loan is near the two-and-a-half-year mark—debtor's counsel will time the filing of the petition so as to avoid the prohibition.18

Three Conditions for the Price of One

Room for creativity continues still further with the many conditions enumerated in the statute. With respect to motor vehicles, the anti-cramdown provision only applies if the car was "acquired for the personal use of the debtor." This simple phrase includes three exceptions to the rule. First is the "acquired for" requirement, which seems to relate back to the intent at the time of the purchase. If the debtor originally bought a car for his 17-year-old son to drive, arguably it was not acquired for his personal use. The original intent may be fixed even if the debtor subsequently decided to drive the car himself. If a debtor makes this assertion, the court may have little evidence upon which to find otherwise. The subsequent use by the debtor undoubtedly will be a factor that reduces the credibility of the debtor's position. Yet the creditor is not likely to have evidence of the original intent. We can speculate that creditors will soon begin creating evidence by adding a question about intent to the standard loan application.

The next issue is the definition of "personal use." While it is a common term in other areas of the law, it is new in this context, and no definition was provided in BAPCPA. Debtors may claim that a vehicle is not for "personal use" if it is ever used for income-producing purposes. Creditors are not likely to accept this proposition and will look to nonbankruptcy authority for guidance, such as the Internal Revenue Code (IRC). Indeed, creditors may argue that a vehicle must qualify for a business-expense deduction for tax purposes in order to escape the grasp of §1325(b). While this is logical, it may be a difficult sale. The anti-cramdown provision makes specific reference to the IRC for purposes of defining a motor vehicle. However, it makes no references to other definitions. If Congress makes a reference in one place but not in another, we must assume that it was intentional.

Finally, there is the requirement that the vehicle be acquired for the personal use "of the debtor." On its face, this excludes use by nondebtor members of the household. In multi-car households, spouses may file separate cases and propose plans that cram down the car driven by the other spouse. Indeed, in the husband's case, the car is not for his personal use if the car is driven by his wife.19

All of these provisions will initially require judicial interpretation and will be initiated by the debtor asserting a position that is challenged by the creditor. However, all of these conditions will be highly factual and will require burdensome litigation. Every party will be watching these cases carefully to determine when the cost of litigation is justified. However, parties will also have to be mindful that every dispute is potential precedent and chose their battles wisely.

Unfair Discrimination

Finally, the anti-cramdown provision may give rise to a claim of unfair discrimination. This is perhaps the most unlikely argument, but it has significant potential. Section 1322 provides that a chapter 13 plan "may...designate a class or classes of unsecured claims." The cross-reference to §1122 instructs that substantially similar claims may be placed in the same class. But §1322(b)(1) prohibits classification that unfairly discriminates against any designated class. Historically, the reported case law has focused on preferable treatment given to co-signed claims, claims that are nondischargeable in chapter 7 and claims owed to creditors that have a continuing relationship with the debtor. However, the anti-cramdown provision provides fertile ground for new law because the last paragraph of §1325(a) makes somewhat arbitrary distinctions between otherwise similarly situated claims.

This is best illustrated with a hypothetical. Consider Sir Dennis, an unemployed knight, who files for bankruptcy protection under chapter 13. His schedules indicate that he has two identical vehicles secured by identical purchase-money security interests in the amount of $8,000. The replacement value of each car is $5,000. The only difference between the cars is that Bank One lent the money to purchase Car A 909 days prior to the filing, while Bank Two lent the money to purchase Car B 911 days beforehand. Sir Dennis is single, and both cars are exclusively for his personal use.

Pursuant to §1325(a), Banks One and Two will receive very different treatment under a chapter 13 plan. Car A was acquired for the personal use of the debtor within 910 days of the bankruptcy filing, so §506 does not apply. As such, Bank One is deemed to have a fully secured claim, even though the collateral is worth less than the claim. Bank One is entitled to be paid fully as a secured creditor prior to any payment to the general unsecured creditors.20

In contrast, Bank Two's claim is subject to §506 because it was purchased more than 910 days prior to the filing. The plan may bifurcate Bank Two's claim into a secured claim of $5,000 and an unsecured claim of $3,000. The unsecured portion will be paid pro rata with the other general unsecured claims, but only after Bank One has been paid the full $8,000 (to the extent that such claims are entitled to any payment under the plan).

Clearly Bank One will receive more favorable treatment than Bank Two, and the issue of unfair discrimination comes into play. The obvious counter argument is that the disparate treatment is statutorily imposed and is, therefore, fair. The analysis does not end there, however. New §1325(a)(5)(B)(i) authorizes the court to confirm a plan if, among other requirements:

[T]he plan provides that—
(I) the holder of such claim retain the lien securing such claim until the earlier of—
(aa) the payment of the underlying debt determined under nonbankruptcy law; or
(bb) discharge under §1328....

Stated more simply, undersecured creditors may retain their liens even after the secured portion of the claim has been satisfied. When applied to our hypothetical, Bank Two will retain its lien on Car B, even after the $5,000 secured claim has been paid. However, as the secured portion of the claim is satisfied, the lien on Car B becomes available to secure the previously unsecured portion of the claim. Under nonbankruptcy law, this gives Bank Two collection rights similar to those of Bank One under the plan and dissimilar to the other unsecured claims. Thus, §1325(a)(5)(B)(i) may conflict with the anti-cramdown provisions in the last paragraph of §1325(a) and may support the unfair-discrimination argument.21


In the end, though the advertised goal of the last paragraph of §1325(a) was to ensure that debtors are only able to "cram a little," unfortunate drafting will not halt the quest for the cramdown. If you fancy yourself a knight on a noble and daring quest to bring relief to repressed debtors, you will undoubtedly think of arguments even more creative than those contained in this article. But if you pursue this quest, you must keep your sense of humor firmly within your grasp, because the road undoubtedly will be rocky and hearts may fail. To assist in this endeavor we recommend that you take a page from Monty Python's Spamalot and embrace your own paraphrased theme song that goes something like this:

We're Knights of the 13 table
We file when e'er we're able
Twenty Sixteen's, tests mean
And income disposable
We go to meetings and court a lot
We fund plans and vans and still cram a lot!22


1 The author wishes to acknowledge the generous assistance of Julie Levitt-Guren in writing this article. Return to article

2 11 U.S.C. §§362 and 1322(b)(5). Return to article

3 11 U.S.C. §1328 pre-BAPCPA. Return to article

4 11 U.S.C. §1325(b)(5). Return to article

5 Monty Python and the Holy Grail was a spoof of the legend of King Arthur and the round table of Camelot. Return to article

6 The term "creditor" is defined as an "entity that has a claim against the debtor...the estate...or a community claim...." 11 U.S.C. §101(10). Return to article

7 The Bankruptcy Code does not include a statutory definition of the term "purchase-money security interest." Return to article

8 The term "debt" is defined as a "liability on a claim." 11 U.S.C. §101(12). Return to article

9 The term "claim" is defined as a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured...." 11 U.S.C. §101(5). Return to article

10 The Code does not include a statutory definition of "personal use." Return to article

11 The term "debtor" is defined as a "person...concerning which a case under [Title 11] has been commenced." 11 U.S.C. §101(13). Return to article

12 The Code does not include a statutory definition of the term "other thing of value." In fact, this is a completely new term of art that has not previously been seen in the consumer bankruptcy world. It is not particularly artful, however, so there is not likely to be must dispute over its meaning. Return to article

13 11 U.S.C. §1325(a)(5)(C). Return to article

14 11 U.S.C. §1325(a)(5)(B) before BAPCPA. Return to article

15 11 U.S.C. §1322(b)(3). Return to article

16 11 U.S.C. §1325(a)(5)(A). Return to article

17 11 U.S.C. §1325(a)(5)(C). Return to article

18 In fact, with the expanded filing requirements under §521 and the enhanced obligation to conduct pre-filing due diligence under §707(b)(4), counsel may naturally delay filing without any strategic intent. Return to article

19 It will be interesting to see if courts impute use by a spouse or dependent to the debtor. Return to article

20 Because §506 does not apply, there is a question as to whether Bank One would not be entitled to interest on its claim. Return to article

21 Ironically, this provision may be may the undoing of the cramdown. For several years, courts have struggled with the question of whether a secured creditor's lien must be released after satisfaction of the secured claim under a confirmed plan or after completion of the entire plan. The issue has now been resolved by statute. But this resolution raises a plethora of arguments that may not have been considered previously. Return to article

22 Monty Python's Spamalot takes its name from a line in the song used in both movie and musical called "Knights of the Round Table." The original lyrics are: "We're knights of the round table, we dance when e'er we're able, we do routines and chorus scenes, and footwork impeccable, we eat ham and jam and spam a lot...." Return to article

Journal Date: 
Tuesday, November 1, 2005