The infamous hanging paragraph in §1325(a) prohibits bifurcation of a creditor’s claim secured by a vehicle into a secured claim and an unsecured claim. Specifically:
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…
Unless you can find an off-ramp, the debtor is stuck paying the contract balance on the loan.
Remember, however, that even a 910 car loan is subject to a Till interest adjustment.
The 910 Exceptions
- The loan isn’t purchase money This exception to the application of 506 was designed to protect car dealers, not necessarily everyone who makes a loan secured by a car. Look for loans that represent refinances of a car loan or the pledge of car to secured a personal loan. Often these refinances are done by credit unions.
- The vehicle is a business vehicle Either the nature of the vehicle or the debtor’s business should tip you to a loan that may be outside the hanging paragraph. If it’s a delivery van, a pickup with racks, or an SUV sufficient to haul a trailer for the debtor’s business, you may have a transaction that doesn’t involve a “motor vehicle for the personal use of the debtor.”
- The vehicle is driven by someone other than the debtor Consider whether the vehicle is driven by a non debtor. The statute speaks in terms of the debtor’s personal use, so perhaps the vehicle for the teenager or college student, or even non-debtor spouse is outside the protection of the hanging paragraph.
Keep thinking and asking questions even if the first answer is 910.
Image courtesy of Striking Images by Bo.