Information on Bankruptcy car loans

BANKRUPTCY

The biggest hit credit unions and other consumer creditors take in bankruptcy is in Chapter 13 on car loans.

Under the cramdown rules in Section 1325(a)(5), a Chapter 13 debtor has a right to bifurcate an auto lender's secured claim into two claims:

1. An allowed secured claim equal to the vehicle's dollar value; and

2. An allowed unsecured claim equal to the amount of dollars owed exceeding the collateral's dollar value.

In other words, a lender is protected as a secured creditor only to the extent of the value of its collateral.

Because the lender typically is undersecured, the lender often finds a large amount of its debt being treated as unsecured. That portion then is subjected to a small repayment percentage.

The significance hinges on the word "value." If the Chapter 13 plan is required to follow retail (replacement) valuation, the lender obviously will receive substantially more than if a wholesale (foreclosure) valuation is used.

Because the difference between retail and wholesale is typically at least $1,000 per vehicle, and because there are more than 400,000 Chapter 13 cases per year, the difference between wholesale and retail can amount to millions of dollars annually.

The valuation issue was widely litigated, and the U.S. Supreme Court in 1997 finally determined, in Rash, that retail (replacement) value was the appropriate standard. This decision didn't sit well with many of the bankruptcy judges, who were following wholesale (or some point between wholesale and retail) valuation. And they've relied upon some confusing language in a footnote to justify their failure to follow the replacement-- value standard.

I think those judges are misreading Rash, and your chances of winning on appeal are good.

If that's the case, why haven't creditors contested these lower valuations?

1. Some creditors have declined to do so because they believed that passage of the Bankruptcy Reform Act would take care of the problem. It's true the act that died in Congress last year contained a provision requiring retail under certain conditions, but that legislation has been languishing since 1998.

It's now six years since the Rash decision, and we still don't have a new law. Even if legislation is passed this year, the old law will continue for six months after the enactment date. That assumes, of course, that the legislation ultimately passed includes a retail standard.

2. Some creditors apparently presumed the bankruptcy courts were free to follow the lower-valuation standards. I disagree, and my legal analysis is on my Web site (www.mapother.com) for credit unions desiring ammunition to give to their lawyers.

I especially don't agree with the bankruptcy judges in the First, Fourth, Sixth, Eighth, and Ninth Circuits, for reasons explained in Mulvania, 214 BR 1, because those circuits had ruled in favor of retail before the court rendered its decision in Rash. (The Web site also will tell you in what circuit your credit union is located.)

3. Some credit unions fret that a first-class appeal will be costly. While I strongly recommend a first-class appeal, there's a wonderful way to reduce costs: Share the costs with other credit unions in your geographic area.

There's simply no reason why a dozen credit unions can't contribute $500 each to establish a $6,000 war chest to fund an appeal. All it takes is a little leadership initiative.

My father was involved in share-expense appeals 50 years ago. One such case cost each creditor $300, and the savings from that case in Kentucky alone easily have reached the millions of dollars.

WILLIAM R MAPOTHER specializes in strategies to maximize bankruptcy recoveries.

Contact Bill Mapother at 502-587-5451 or at www.mapother.com.