This is the second part of a two-part series on cram down in chapter 13. In the first part I discussed how cram down can be used to reduce the amount owed on an item of personal property to the amount the property is worth today, instead of the full amount owed under the original loan agreement. In this second part I will briefly discuss limitations on the cram down option.
The “Hanging Paragraph”
In the 2005 revisions to the Bankruptcy Code, Congress inserted a provision that limits the use of cram down when dealing with Purchase Money Security Interests (“PMSI”) (where the lender provides the financing for the property and then takes back a security interest in the collateral – like most auto loans, for example). Because this new provision in the Code was added without being labeled with its own specific identifying citation in the Code, it is referred to as the Hanging Paragraph.
Specifically, the Hanging Paragraph limits the debtor’s ability to strip down to current value the balance owed on personal property when that property was purchased within a certain set number of days prior to filing. For example, the time set for an auto loan is 910 days (approximately 2½ years). The debtor is not permitted to strip down the lien to present-day value on a vehicle purchased for personal use until he or she has owned the car for at least 910 days. For other types of personal property, like furniture and appliances, the time set in the Hanging Paragraph is one year.
As shown above, timing is everything when it comes to cram down. Timing issues must be considered carefully before filing the bankruptcy. Depending on the circumstances it can even be necessary to delay the filing to allow additional time to elapse in order to bring cram down within the time restrictions of the Hanging Paragraph.
Photo courtesy of christyscherrer.
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Nice article on the chapter 13 cram down process. That hanging paragraph has proven to be an obstacle for many people trying to file bankruptcy.
.-= Jon´s last blog ..Lender has stated it will not pursue a deficiency judgment but can the lender send the amount that was short to a collection agency? =-.