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Repossessions: 8.6.2.4.3 Valuing property other than automobiles

The valuation standard adopted in section 506(a)(2) is not limited to automobiles. It is also used to value used personal property for redemption in chapter 7 and payment of secured claims under chapter 13 plans.291 Clearly, the retail cost of the item as new should be considered irrelevant.

Repossessions: 8.6.2.4.4 Computation of value

When there are prior liens on property ahead of the lien which is to be valued, the amount of those liens must first be subtracted to determine if there is value over and above the prior liens. If the prior liens equal or exceed the value of the property, then the allowed secured claims of all creditors with lower priority liens are equal to zero. If the debtor is not the sole owner of the property, the value of the debtor’s fractional interest after deduction of liens must then be determined.

Repossessions: 8.6.3 Right to Cure Defaults on Long-Term Debts

There are some long-term obligations that the debtor cannot pay within the time period of the proposed plan, which can never exceed five years.301 One such debt is a secured manufactured home loan. The debtor may cure a default on such a long-term obligation within a “reasonable period” of time without having to pay the entire debt balance due within the time period of the plan.302

Repossessions: 8.7.1 In General

As discussed above, under 11 U.S.C. § 506(a), a creditor’s allowed secured claim can be no greater than the amount of that creditor’s collateral. When an allowed secured claim is provided for in a chapter 13 plan and the holder of the claim is paid the full present value of the allowed secured claim under section 1325(a)(5), the lien is satisfied and any remaining claim is only an unsecured claim. The creditor’s unsecured claim is fully dischargeable in chapter 13 as is any other unsecured claim.

Repossessions: 8.7.2 Restrictions in Chapter 7

In Dewsnup v. Timm,321 the United States Supreme Court held that section 506(d) could not be used independently to void a partially secured lien in a chapter 7 case. Despite the clear statutory language of section 506(d) providing that a lien is void to the extent it does not secure an allowed secured claim, which was noted by the dissent, the Court based its decision on the fact that Congress had given no indication in the legislative history that it intended the section to act as an independent avoiding power in chapter 7 cases.

Repossessions: 8.7.3.1 In General

In 2005 Congress attempted to limit the debtor’s stripdown rights by adding language at the end of section 1325(a) stating that, for purposes of section 1325(a)(5), section 506 shall not apply to certain claims. This provision was not given a section number designation by the 2005 amendments, and is frequently referred to as the “hanging paragraph” of section 1325(a).

Repossessions: 8.7.3.2.1 Introduction

One question that arises is whether an obligation that covers not only the price of a car but also the trade-in vehicle’s negative equity qualifies as a purchase-money obligation. This question is particularly important in the bankruptcy context, as the “hanging paragraph” of 11 U.S.C. § 1325(a) prohibits “cram down”329 in certain circumstances in which the creditor has a purchase-money security interest in a motor vehicle.

Repossessions: 8.7.3.2.3 Courts holding negative equity is part of purchase-money obligation

Though courts considering the issue are split evenly on a national basis, most circuit courts of appeal have found ways to hold that advances to pay off negative equity in a trade-in vehicle is part of the price of the new vehicle. It should be noted that these decisions are based on state law and may not be binding in other states in the same circuit.334 For example, the Second Circuit certified the question to the New York Court of Appeals.

Repossessions: 8.7.3.2.4 Courts holding negative equity is not part of purchase-money obligation

One circuit court of appeal and many lower courts have applied the UCC definitions to hold that the negative equity in the trade-in vehicle is neither part of the “price” of the new vehicle nor “value given to enable the debtor to acquire rights” in it.349 Many lower courts have similarly held that the payment of negative equity does not create a purchase-money obligation. These courts note that negative equity is not one of the enumerated items in the official comment and is not similar to any of those items.

Repossessions: 8.7.3.2.5 Consequences if a portion of the debt is not purchase-money: the transformation rule versus the dual status rule

If the court concludes that some portion of the debt (for example, negative equity, gap insurance) is not a purchase-money obligation, the next question is what effect does that have on the applicability of the hanging paragraph.358 Some courts have held that the Bankruptcy Code itself requires the entire obligation to be purchase-money security interest in order for the debtor to be denied the right to cram down.359 This conclusion is consistent with the rule that an exception to an otherwi

Repossessions: 8.8.1.1 In General

Reaffirmation is an agreement made between the debtor and a creditor under which the debtor agrees to be bound by an obligation to the creditor despite the bankruptcy discharge. It is a common practice of secured creditors to seek reaffirmation in exchange for an agreement not to repossess the collateral.

Repossessions: 8.8.1.2 Requirements for Reaffirmation Agreement and Form 2400A

A number of requirements must be met before a reaffirmation is binding.370 First, there must be an agreement between the debtor and creditor that is enforceable under applicable non-bankruptcy law.371 The reaffirmation agreement must contain a clear and conspicuous statement advising the debtor that the agreement may be rescinded by giving notice to the creditor at any time prior to discharge or within sixty days after the agreement has been filed with the court, whichever is later.

Repossessions: 8.8.1.3 Approval When Consumer Represented by an Attorney

The court may disapprove certain reaffirmation agreements in cases in which the debtor is represented by an attorney, although a hearing is not required in every such case.381 Except if the creditor is a credit union,382 if the debtor’s declaration shows a budget insufficient to make payments under the agreement, a presumption arises that the reaffirmation agreement is an undue hardship, and the court is required to review the matter.

Repossessions: 8.8.2.1 Secured or Unsecured Debt?

A number of major retail store chains that issue their own credit cards claim to take a purchase-money security interest (PMSI) in the goods purchased with the cards. Presumably, this covers all goods, including socks and underwear, but not surprisingly, creditors assert a security interest primarily with respect to furniture and major appliances like washing machines and refrigerators.

Repossessions: 8.8.2.2 Negotiating a Reaffirmation Agreement

The creditor may push hard for a reaffirmation agreement by claiming that it is the only means for the debtor to keep the property. Reaffirmation should actually be considered a last choice because it reaffirms the debtor’s personal liability for failing to make payments. Upon reaffirmation, the debtor remains subject to a suit for money damages even after obtaining a discharge.

Repossessions: 8.8.2.3 Responding to Lender Abuses

Reaffirmation practices by some of the nation’s largest creditors have been abusive and aggressive, requiring strong debtor response. A common tactic has been for unsecured creditors, particularly credit card issuers, to argue that their claims were not dischargeable on the grounds that the debtor committed “implied fraud” by using a credit card at a time when they had no ability to repay. Many large credit card companies routinely filed these challenges in almost every case, without doing any investigation to determine if the use was in fact fraudulent.

Repossessions: 8.8.2.4 Ignoring the Claimed Purchase-Money Security Interest in Household Goods

One of the best options for a debtor facing a claimed purchase-money security interest in household goods is to ignore the claim of a security interest entirely. If the debtor completes a bankruptcy case without paying or reaffirming, the debtor’s personal liability on the claim will be discharged. Although the creditor will retain whatever rights it has to the collateral under state law, those rights are subject to whatever defenses the debtor has, as discussed above.

Repossessions: 8.9.1 Requirements of Section 521(a)(2)

Section 521(a)(2) requires the debtor in a chapter 7 case to file a statement of intention with respect to debts secured by property of the estate and with respect to personal property leases.424 The debtor need not state all of their plans regarding the property on this statement (for example, lien avoidance, chapter 13 cure, and so forth).

Repossessions: 8.9.2.1 Introduction

Prior to the 2005 amendments there was no sanction provided for failing to carry through on stated intentions, which reflected the view that the statement of intention was designed primarily as a notice provision for secured creditors.

Repossessions: 8.9.2.2 Stay Relief Under Section 362(h)

Section 521(a)(2)(C) adds an exception for relief from the stay as permitted by section 362(h). That subsection terminates the automatic stay with respect to personal property of the estate securing a claim, and renders that property no longer property of the estate, if the debtor fails to timely file a statement of intention, or to state an intention to surrender the property, redeem the property, enter into a reaffirmation agreement with respect to the underlying claim, or assume an unexpired lease on the property.

Repossessions: 8.9.2.3 Stay Relief Under Section 521(a)(6)

Section 521(a)(6) provides that the debtor shall not retain possession of personal property as to which a creditor has an allowed secured claim for the purchase price secured by that personal property, unless the debtor, not later than forty-five days after the meeting of creditors, enters into a reaffirmation agreement or redeems the property. If the debtor fails to “so act,” the stay under section 362(a) is terminated and the property is no longer property of the estate.