A secured loan is considered “under water” when the value of the collateral securing the loan is less than the balance owed on the loan. Because of how rapidly automobiles depreciate as soon as they are driven off the lot, and because of the depression of home values following the market crash in 2008, a great number of secured loans qualify as being under water.
In Chapter 13
, certain secured loans can be “crammed down” so that the secured loan balance is reduced down to the replacement value of the collateral. The remaining balance is treated as an unsecured debt. Say, for example, that you have a vehicle worth $8,000, but the loan balance is $12,000. If the vehicle loan is eligible for cram-down, then the secured loan balance is reduced from $12,000 to $8,000, and the remaining $4,000 on the loan is treated as an unsecured debt.
Let’s also knock back one more definition before we continue: purchase money security interest (or PMSI). A debt is a PMSI debt if the loan was used for the purpose of purchasing the collateral that is pledged as security for the loan. A debt is non-PMSI if the borrower already owns an item that is pledged as security for the loan.
So which debts can be crammed-down? Let’s look at the relevant statutes…
11 U.S.C. § 506(a)
(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.
(2) If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing. With respect to property acquired for personal, family, or household purposes, replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.
11 U.S.C. § 1322(b)
Subject to subsections (a) and (c) of this section, the plan may—
(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;
11 U.S.C. § 1325(a) “Hanging Paragraph”
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 period preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle (as defined in section 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 1-year period preceding that filing.
49 U.S.C. § 30102(a)(6)
“motor vehicle” means a vehicle driven or drawn by mechanical power and manufactured primarily for use on public streets, roads, and highways, but does not include a vehicle operated only on a rail line.
What do all of these statutes boil down to?
- A mortgage secured only by your home can never be crammed-down.
- If a loan is non-PMSI, then it can be crammed-down at any time (though it would be wise to wait at least 3 months to avoid a challenge to your discharge under 11 U.S.C. § 523(a)(2)(C)(i).
A PMSI loan can be crammed down if the collateral is
- If a loan is refinanced (even if the loan was originally a PMSI loan), the act of refinancing causes it to become a non-PMSI loan.
- an automobile (car, truck, van, or motorcycle) and if the debt was incurred more than 2½ years before your bankruptcy case was filed.
- anything else (such as a boat, ATV, snowmobile, furniture, appliances, jewelry, or real estate that is not your principal residence) if the debt was incurred more than a year before your bankruptcy case was filed.
The new official bankruptcy forms go into effect on December 1, 2015. Having perused the new forms, I would characterize the majority of the changes as accomplishing two major things…
First, the new forms have been formatted in such a way as to break-up some of the denser material on the forms. The Voluntary Petition, for example, has been expanded from 3 pages to 7 pages. The old version crammed a lot of material into a two column format with smaller font sizes. The new version breaks up all of the various information requested into cleaner and more concise modules – the result being that there is more white space and the content spreads over more pages. However, it also folds in the old exhibit concerning credit counseling courses, and reduced what used to span over 4 pages into a single page.
Second, the new forms bring certain questions front-and-center. For instance, on Schedules A & B, the nature of ownership used to be a tiny column where “H”, “W”, “J”, or “C” were meant to be squeezed. Debtors completing forms on their own would frequently miss that potion of the forms because of the way they were designed, and most debtors who had attorneys (who have software that prepare the schedules) didn’t notice the content in this column or understood what it meant. The new version of the forms asks for more detail and makes presentation of those details much clearer than the older forms did. Again, the consequence is that the new formatting sprawls over greater page space.
Overall, the average bankruptcy petition, schedules, and statement of financial affairs used to be about 60 pages – give or take – depending on the number of creditors an individual had. I would estimate that the new average will be about 90 pages.
Although the new forms have no SUBSTANTIVE effect on law, the forms do explicitly ask a few questions that were not asked before, drawing a Trustee’s attention to facts that – although they always had to be disclosed – often times were overlooked because of the way the forms were structured.
For instance, the new forms ask several pointed questions to determine if a debtor or the debtor’s spouse lived in a community property state within recent years. The forms also ask if a debtor has made payments – not only directly to an insider but also – to third parties for the benefit of an insider.
Below are the new office hours that will go into effect January 1, 2016. Here are some of the key features…
- There are two sets of hours – January 1 to April 30 and May 1 to December 31. The month of October is different only in that the office will be closed on Fridays and Saturdays.
- During the first part of the year, evening office hours have been expanded to include Thursday. Although the office opens 2 hours later, appointments are available 2 hours earlier.
- Hours are limited during the second part of the year, but in exchange for the loss of evening hours, Saturday appointments will be available.
This is the final month to file bankruptcy before the big change in bankruptcy forms. I will have more information on the new forms posted shortly. But in the meantime, you might be asking yourself – why should I try to file this month? What difference does it make which forms I use?
In terms of substantive law and effect, probably no difference. But any existing draft petitions will have to be re-edited to conform to the new bankruptcy forms, and we anticipate that our software won’t be able to make a perfect transition. Attorneys will need time to re-adjust their practices to ensure that new questions posed by the forms are asked and answered. All of this means that there will likely be a short period after the new forms take effect where bankruptcy schedules are not completed as accurately as they would have been using the forms that we’re all accustomed to (some attorneys are still struggling with the changes to Schedules I & J that went into effect last year). While some trustees and judges might give a pass to certain omissions for a brief time, others may not, and that could result in adjourned hearings, delayed confirmation orders, etc.
It doesn’t mean that you can’t or shouldn’t file after December 1. Just expect that there will be a period of bumpy transition while we adjust to the new forms. If you are able to file before December 1 and would prefer not to be a part of that transition, then you have 3 weeks left.