One of the myriad changes made to bankruptcy practice by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) is the treatment of a claim for a debt collateralized by a motor vehicle or other personal property of the debtor.  More specifically, new language inserted by BAPCPA at the end of 11 U.S.C. §1325(a), nicknamed the "hanging paragraph" because of its physical location and appearance on the page, addresses the treatment of a secured claim arising from a debt.

A majority of bankruptcy courts found that the new statutory language appears to eliminate the bifurcation of a secured claim, pursuant to 11 U.S.C. §506, if a debtor has surrendered the collateral, by finding that such a surrender thereby fully satisfies the claim.[1] According to this line of reasoning the wording of the statute plainly states that "[f]or purposes of paragraph (5), §506 shall not apply" if the debt was incurred within 910 days before petition and if it is collateralized by a motor vehicle, or within one year before petition if it is secured by other personal property.  The Turkowitch court explains:
This court concludes that the language of the hanging paragraph is not ambiguous.  If §506 does not apply, there can be no bifurcation of the claim, whether or not the collateral is worth less than the claim and whether or not the collateral is surrendered. Thus, removing the bifurcation provisions of §506 means that the 910-claim is satisfied in full by surrender of the collateral under §1325(a)(5)(C).[2]

The court detected a fairness and balance in this approach, observing:

Ironically, the same provision that prevents the debtor from lien stripping and reducing a creditor's allowed secured claim prevents the creditor from claiming a deficiency against the debtor. While this new language may not operate to hoist the 910-creditor by his own petard, surely the creditor may be said to hang by his own paragraph.[3]

Several bankruptcy courts disagreed, holding that the nonbankruptcy law afforded a creditor recourse to pursue his deficiency claim if one arose after he disposed of the collateral.[4]
More recently, several circuits have considered the issue, unanimously disagreeing with the preceding majority of bankruptcy courts.  The Fourth, Sixth (albeit in a divided opinion), Seventh, Eighth, Tenth and Eleventh circuits all held similarly: "[A] creditor may pursue an unsecured deficiency claim when the debtor surrenders a 910 vehicle. The deficiency claim is to be governed by the parties' contract and applicable state law, and will depend on whether the contract and state provide for recourse."[5] They reasoned that while the "hanging paragraph" may eliminate application of 11 U.S.C. §506, it is well recognized that state law provides rights and obligations absent to any rule provided by the Bankruptcy Code.[6] Furthermore, according to the court, this accords with the intent of Congress, which did not intend, in adding the "hanging paragraph," to harm a lender when a debtor surrenders his vehicle/collateral purchased within 910 days before petition.[7]

Thus, based on the more recent, authoritative appellate reviews, as the Barrett court opined, "in light of the foregoing, it seems safe to say that the previous minority view is now the majority view."[8]

Bankruptcy courts addressing the issue have reached a consensus regarding the extent to which a nonfiling spouse’s income should be included in the calculation of current monthly income. The nonfiling spouse’s income is included in current monthly income only to the extent that it is received on a regular basis for the benefit of the household expenses of the debtor or the debtor’s dependents. The nonfiling spouse’s income not dedicated to household expenses may be deducted from current monthly income through a marital adjustment. The burden of proof lies on the debtor to prove that the excluded nonfiling spouse’s income is not for the benefit of the household.

• In re Sharp, No. 07-72222, 2008 Bankr. LEXIS 2861 (Bankr. C.D. Ill. Aug. 21, 2008), finds that while a debtor must report a nonfiling spouse’s income, “the portion of such spouse’s income which is not used on a regular basis for the household expenses of a debtor or debtor’s dependents may be subtracted” from current monthly income.
• In re Coup, No. 07-34195, 2008 Bankr. LEXIS 1792 (Bankr. N.D. Ohio June 6, 2008), finds it appropriate for a nonfiling spouse to contribute income to at least some of the household expenses.
• In re Grubbs, No. 07-32822, 2007 Bankr. LEXIS 4282 (Bankr. E.D. Va. Dec. 14, 2007), holds that a nonfiling spouse’s income is “considered only to extent that the income is regularly contributed to the household expenses of the debtor.”
• In re Barnes, 378 B.R. 774 (Bankr. D. S.C. 2007), finds that a debtor must include a nonfiling spouse’s bonus income in current monthly income “if it is paid on a regular basis for debtor’s household expenses” and that the debtor bears the burden to prove, by a preponderance of the evidence, that the bonus income is not paid on a regular basis for household expenses.
• In re Baldino, 369 B.R. 858 (Bankr. M.D. Pa. 2007), finds that Congress chose to exclude any portion of the nonfiling spouse’s income “devoted to personal pursuits or expenses from current monthly income.”

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Bankruptcy courts addressing the issue have reached a consensus regarding the extent to which a nonfiling spouse’s income should be included in the calculation of current monthly income. The nonfiling spouse’s income is included in current monthly income only to the extent that it is received on a regular basis for the benefit of the household expenses of the debtor or the debtor’s dependents. The nonfiling spouse’s income not dedicated to household expenses may be deducted from current monthly income through a marital adjustment. The burden of proof lies on the debtor to prove that the excluded nonfiling spouse’s income is not for the benefit of the household.

• In re Sharp, No. 07-72222, 2008 Bankr. LEXIS 2861 (Bankr. C.D. Ill. Aug. 21, 2008), finds that while a debtor must report a nonfiling spouse’s income, “the portion of such spouse’s income which is not used on a regular basis for the household expenses of a debtor or debtor’s dependents may be subtracted” from current monthly income.
• In re Coup, No. 07-34195, 2008 Bankr. LEXIS 1792 (Bankr. N.D. Ohio June 6, 2008), finds it appropriate for a nonfiling spouse to contribute income to at least some of the household expenses.
• In re Grubbs, No. 07-32822, 2007 Bankr. LEXIS 4282 (Bankr. E.D. Va. Dec. 14, 2007), holds that a nonfiling spouse’s income is “considered only to extent that the income is regularly contributed to the household expenses of the debtor.”
• In re Barnes, 378 B.R. 774 (Bankr. D. S.C. 2007), finds that a debtor must include a nonfiling spouse’s bonus income in current monthly income “if it is paid on a regular basis for debtor’s household expenses” and that the debtor bears the burden to prove, by a preponderance of the evidence, that the bonus income is not paid on a regular basis for household expenses.
• In re Baldino, 369 B.R. 858 (Bankr. M.D. Pa. 2007), finds that Congress chose to exclude any portion of the nonfiling spouse’s income “devoted to personal pursuits or expenses from current monthly income.”

View Online.