The 910 Cramdown: Personal or Business Use?

When the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) revised the U.S. Bankruptcy Code in 2005, Section 1325 was amended to add a new paragraph that is affectionately referred to as the “hanging paragraph.”

It states: “For purposes of paragraph (5), 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.”

Before BAPCPA, a debtor could file bankruptcy and cramdown a vehicle to its value, regardless of the purchase date. For example, if the balance on a loan was $20,000 but the value was only $10,000, the debtor could avoid paying the full balance due. As a result, many debtors abused the process by purchasing a vehicle immediately before filing for bankruptcy.

‍Defining “Personal Use”

‍When Congress added the “hanging paragraph,” it intended to create more protections for automobile lenders and avoid debtor abuse. For the most part, the new code section has been clear and effective. However, it was inevitable that challenges would arise over interpretation of code language. In particular, there has been litigation about the definition of “personal use” in the hanging paragraph.

The problem is that the Bankruptcy Code doesn’t actually define that term. As a result, situations still arise where a debtor purchased a vehicle within the preceding 910 days of filing bankruptcy and then attempted to cramdown the vehicle to value, alleging that it wasn’t for “personal use.

”Courts have generally stated that they will apply a “totality of the circumstances” test when determining if the vehicle was purchased for personal or business use. However, bankruptcy courts have developed three variations of this test.‍

Case Law

The first approach, exemplified by the Johnson case, reviews whether the vehicle is used primarily for business purposes. It examines the totality of the circumstances by considering whether acquiring the vehicle enabled the debtor to make a significant contribution to the debtor’s or the family unit’s gross income.  Ultimately, the court held in the Johnson case that it is business use if the debtor uses it to generate income for maintenance and support.

This is a very liberal test. As long as the debtor uses the car to travel to and from work, the court will find that it’s a business use.

The second method used in the Solis case looks at the other piece by examining whether there is significant and material personal, rather than business, use – even if there’s also a business use. Thus, this approach is also liberal and not difficult for a debtor to prove.

The last approach, which was used in the Joseph case and appears to be favored by the majority, splits the difference and is the most conservative. These courts look to see if the vehicle is predominately used to perform functions of a business or trade. The debtor’s intention at the time of purchase weighs heavily in the finding of use, but is not dispositive.

‍Commercial Rideshare Drivers

‍What does all this mean for debtors who use their vehicles as commercial drivers for Uber or Lyft? What happens if an Uber/Lyft driver files bankruptcy and wants to cramdown a vehicle purchased within 910 days of filing? Despite the ever-increasing popularity of rideshare services such as these, there doesn’t appear to be current case law relating to a debtor in this situation. It’s reasonable to believe that it’s just a matter of time before a case emerges that addresses this.

For now, a court’s choice about the approach to use for the totality of the circumstances test will be the difference-maker as to whether a rideshare driver will be able to cramdown a 910 vehicle. If the debtor can show that the vehicle is used exclusively for his employment as a ridesharing driver, then the cramdown will be allowed under all three approaches.‍

Protections for Lenders

‍There may be some situations where the vehicle is used for both personal and business needs. There is little doubt that courts that use the more liberal approaches of Johnson and Solis will allow the cramdown because the vehicle is being used to generate income.

However, the outcome in cases where the court uses the third approach of Joseph is not so clear. In order to cramdown to value, a debtor will likely need to make a strong showing that the vehicle is used primarily for business purposes. The individual case facts will be extremely important.

In addition, the intention when the vehicle was purchased could be an important factor that the court takes into consideration. A debtor who already owned the vehicle and has subsequently become an Uber/Lyft driver will have a much harder time proving that the predominant use of the vehicle is for business purposes.

As it stands now, bankruptcy courts don’t seem willing to upset the norm. It is also likely that creditors haven’t found the right case to use to push back on established case law so they can seek a universal opinion.