Cramming: Overview of Bankruptcy – Chapter 13 and Why to File, Part 3

Series: #8 0f 13

Last time, we discussed curing a mortgage, one of the reasons a debtor would want to file a Chapter 13 bankruptcy rather a Chapter 7. Next, we look at “cramming.”

What does “Cramming” Mean in Reference to Bankruptcy?

“Cram” is a word of art in bankruptcy practice. It literally means reducing a secured debt to the fair market value of the subject collateral. It is most often used with regard to automobiles, but it may also be used for household goods or even mobile homes.

When cramming in a plan, the debtor offers the fair market value of the collateral with interest; the balance of the debt is treated as an unsecured claim.

Cramming a car.
In the past when cramming a car in a plan, it was advisable to include language that required that the title be released upon payment of the value offer. However, pursuant to the revised 11 USC §1325*(a)(d)(B), a secured creditor may object and the plan can not be confirmed unless the secured claim holder retains their lien until the debt is paid in full or the case is discharged.

However, because paragraph (5) gives three options (acceptance, satisfaction of enumerated terms, or surrender), arguably, if the plan specifies that title will be released upon payment of the secured portion of the claim, and the creditor fails to object, upon confirmation the creditor is deemed to have accepted the plan and is bound by the terms of the plan.

11 U.S.C. § §506*(a)(2) codifies Associates Financial Corp. v. Rash, 117 S.Ct. 1879 (1997) and mandates that the “allowed secured claim shall be determined based on the replacement value” and not the liquidation value. If there is still a dispute regarding the replacement value, courts have generally favored concrete evidence of the value, but have recently indicated a willingness to look at “book” values, preferring the NADA guide.

In addition to the collateral itself, oftentimes, the original financing agreement includes credit-like insurance and/or a warranty of some sorts. It has been our experience that debtors generally surrender those policies and/or warranties in reaching a value offer. See In re Sharon, 200 B.R. 281 (Bankr. D. Or. 1995), holding that the value of an extended service contract is not included in the allowed secured claim. Of course, the debtor is free to reaffirm those contracts and add those costs to the fair market value offer.

The ability to cram a recently purchased vehicle (or other personal property) has been limited by the BAPCPA amendments (referred to as the 910-Rule). The unnumbered paragraph at the end of §1325(a) excludes any vehicle acquired for personal use or any other personal property purchased within 910 days of filing from the application of §506. In short, this means that the claim may not be bifurcated and treated as only partially secured.

In re Till, 541 U.S. 465, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004) is still assumed to be the appropriate standard for establishing the interest rate to be offered on secured claims. Till, using the formula approach, established that the interest rate should be the national prime rate plus a risk factor (between 1 and 3%) depending on the circumstances of the particular debtor. A recent decision out of the Southern District of Illinois by Judge Coachys of the Indianapolis Division, In re Rushing (05-37004), applied Till to both cram downs and 910 vehicles.

Finally, keep in mind that cramming any car into a plan limits that debtor’s ability to convert to Chapter 7 later on and keep that vehicle as the payments will not be current based upon the underlying contract. Signing a reaffirmation agreement following a conversion to Chapter 7 may automatically subject your client to the default provisions.

It may also not be advantageous financially to file a Chapter 13 solely for the purpose of cramming a vehicle after the debtor has paid the Till rate of interest and the attorney fees.

Cramming other personal property.
Subject to only a one-year limitation (similar to the 910 rule addressed above) debtors may offer the fair market value on virtually any piece of personal property, including furniture, appliances and boats. If no objections are received, the trustee will pay the value offer with interest, and will treat the remaining balance of the claim as unsecured. Interest should be offered as §1325(a)(5) requires that the creditor must receive “present value” of the collateral. However, it would seem that if interest were not offered and the creditor failed to object, the value could be paid at a flat rate (no interest).

Use caution when “cramming” the debtor’s personal property in a plan however, as the Best Efforts test will have some bearing. That is, if the debtors are attempting to retain collateral that is not “reasonable and necessary” as contemplated by §1325(b), the trustee may raise an objection to the utilization of estate funds to retain an unnecessary item. This objection may be resolved by either a surrender of the collateral in question, or by a modification of the plan that will increase the amount offered to general creditors by the amount of funds necessary to retain the property. Some items that may merit a trustee’s “BEF” objection include additional or luxury cars, a big screen TV, a boat, or a baby grand piano.

Next: Liquidating Tax Debt

* Source: Cornell University Law School Legal Information Institute


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*Disclosure required by 11 U.S.C. § 528(a)(3): We, the law office of Tom Scott & Associates, P.C., are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.