Cram Down In A New Light: What Does It Mean Under The New Law?

This article is limited to a cram down of an automobile, such as a car or truck in a Chapter 13 bankruptcy case. The Bankruptcy Code in its current version has at least two statutes for Chapter 13 cram downs. The first statute is 11 U.S.C. Section 506. This section allows the debtor to repay the replacement value of his or her car or truck automobile in the debtor’s Chapter 13 Plan, instead of paying the entire debt owed. In 9 out of 10 cram down cases, this cram down to value results in a considerable savings to the debtor. In some cases, the debt owed on the car or truck can be as high as twice the value. The second statute is 11 U.S.C. Section 1325. Section 1325 carves out an exception to the Section 506 Cram Down. In a “hanging paragraph,” Section 1325 states, 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 preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle. For those of you who are really into learning how a cram down works, go read the full statute at this link: 1325

When Congress wrote the words, “if the creditor has a purchase money security interest securing the debt…” what did Congress mean? State Law defines purchase money security interest. Congress may not have intended to allow State law to determine this issue, however, no where in the Bankruptcy Code is “purchase money security interest” defined, nor should it be. It’s a State law question. The question becomes then under State Law this- if the car creditor loaned money to the debtor to buy a car within two and one-half years of filing bankruptcy (910 days for those who are counting). Second, the debtor owed the same car creditor money on a car loan and the creditor “rolled” the old debt (negative equity) into the new car loan. Does the car creditor have a “purchase money security interest” in the new car, so the debtor cannot cram down the new car to its replacement value? No. The debtor cram downs the newer car or truck in his or her Plan because the creditor loaned money not only for the new car but also loaned money to pay off the old car debt. The loan by the creditor was not limited to the purchase of the new car. The new loan also paid off the old car debt. In conclusion, when a new car creditor advances loan proceeds to finance the purchase of a car and pays off the debtor’s old debt which is usually secured by the debtor’s trade in, the car creditor’s lien on the new collateral is not a purchase money security interest. In any case such as this, the value will always be less than the debt. The debtor should cram down the debt to the value of the car and pay the car creditor in the Chapter 13 Plan.