One of these days, the courts will develop a uniform, coherent definition of “personal use” for deciding when a chapter 13 debtor can cram down the secured claim on a recently purchased car to the current value of the vehicle. For the time being, courts are using variants of the “totality of the circumstances” to reach differing results in similar situations.
To stem the tide against debtors who would cram down secured auto loans to the value of the car, Congress added the so-called hanging paragraph to Section 1325(a) in 2005 to proscribe the bifurcation of a purchase money secured claim on a vehicle acquired within 910 days of bankruptcy “for the personal use of the debtor.” Congress did not define “personal use.”
In a chapter 13 case before Bankruptcy Judge Shelley D. Rucker of Chattanooga, Tenn., the debtor had purchased a car about one year before filing. The security agreement she signed recited how the “primary use” was “personal.”
The debtor was a health care worker whose job required her to pick up her employer’s clients and take them to events and medical appointments. She was obligated to have a car and was reimbursed by her employer for the number of miles driven.
The auto lender filed a secured claim for about $28,000 and objected to confirmation of the plan, which provided for reducing the secured claim to $15,000 and paying interest at 4%.
Judge Rucker overruled the objection and confirmed the plan in her March 2 opinion.
Judge Rucker said there is universal acceptance that the debtor’s intended use at the time of purchase is the “operative intent.” She said it is also “widely accepted” that the debtor’s “actual use” after purchase “can be persuasive evidence of the debtor’s intent at the time of purchase.”
There are three iterations of the “totality of the circumstances” test used by most courts in deciding whether a car was for the debtor’s personal use, Judge Rucker said. On one end of the spectrum, courts inquire as to whether the car enabled the debtor to make a “substantial contribution” to gross income.
A second approach “flips the analysis around” and inquires whether personal use was “significant and material,” regardless of whether there was also some business use.
The third test, adopted by Judge Rucker, explores whether the car enables the debtor “to perform the functions of a business or a trade” after the debtor “arrives at work.” She said the third test evaluates “whether the vehicle is predominantly used to perform functions of a business or trade rather than personal ones.”
Applying the test to the facts at hand, Judge Rucker said the recitation of personal use in the printed form purchase agreement was “ambiguous and inconclusive.”
Concluding that the hanging paragraph did not apply, Judge Rucker was persuaded by evidence showing that the debtor was required to have a car for her job and that she was reimbursed.
The facts, Judge Rucker said, show that “the vehicle was predominantly used to perform the functions of the debtor’s job,” thus allowing the debtor to bifurcate the claim and reduce the secured claim to the value of the car.