Limits on lien stripping in Chapter 13
The 2005 amendments to the bankruptcy code included a provision that purports to limit the ability of debtors to strip liens on cars purchased within 910 days of the filing down to the present value of the car. Prior law allowed debtors to pay as a secured claim an amount equal to the present value of the collateral and to treat any amount by which a claim was under water (undersecured) as an unsecured claim.
While drafters thought the result would be that debtors would have to pay the contract balance on such vehicles, model plans adopted by courts are permitting the debtor to propose payment of lesser amount, subject to veto by the secured creditor. Time will tell how courts interpret an awkwardly drafted provision and whether car lenders would rather have the car surrendered rather than compromise on the amount of the debt.
As an alternative to paying more than the car is now worth, debtors have the option to surrender the car in full satisfaction of the debt. Lenders are springing up whose business plan is to fund the purchase of replacement cars.
Discussion
ABI bankruptcy blog: "Dude-Where's
my car"
Cathy Moran -BankruptcyLaw Network: Cracks in the Windshield
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7/3/11