Today's Trends in Credit Regulation

The Hanging Paragraph is Out of Hibernation
By Shelley B. Fowler

It's been years since the Bankruptcy Code was amended to add the anti-cramdown provision at the end of 11 U.S.C. ยง 1325(a). That "hanging paragraph," as it is fondly called because it follows nine numbered paragraphs but has no number in front of it, shored up protection for creditors that perfected their security interests in personal use vehicles within 910 days before the car buyer's bankruptcy filing.

Although this amendment spawned many court decisions within a year or two of its 2005 enactment, the volume of decisions seemed to die down to less than a trickle in the last several years. For that reason, a recent decision discussing this Bankruptcy Code section caught my eye.

When Terrae Carmon filed a Chapter 13 bankruptcy petition, she was the sole owner of a 2007 Cadillac DTS that she bought almost two and a half years earlier. When she bought the Cadillac in anticipation of adopting a child, she traded in a 2009 Dodge Ram pickup truck that was primarily used by her husband.

Carmon filed a Chapter 13 plan in which she proposed to treat the $21,255 claim of Allegacy Federal Credit Union, secured by a lien on the Cadillac, as secured in the amount of $11,075 and unsecured in the amount of $10,180. Allegacy objected to confirmation of Carmon's plan, arguing that because Carmon bought the Cadillac for her personal use within 910 days prior to her bankruptcy filing, its claim was protected from bifurcation (a fancy term for splitting the claim into secured and unsecured parts) by the hanging paragraph of Section 1325(a) of the Bankruptcy Code. In essence, Allegacy argued that its entire $21,255 claim should be treated as secured.

The U.S. Bankruptcy Court for the Eastern District of North Carolina sustained the objection. Although Carmon agreed that she bought the car within 910 days prior to her bankruptcy filing, she argued that the "hanging paragraph" did not apply because she did not buy the car for her personal use. As evidence, she noted that the insurance on the Cadillac is in her husband's name as well as her name, each of them has a key to the Cadillac, and she obtained the Cadillac by trading in her husband's truck.

In reaching its decision, the court relied on the fact that the Cadillac was titled in Carmon's name and she was the sole obligor on the Allegacy debt because she had better credit than her husband and could therefore qualify for better financing. The court also relied on the fact that Carmon "has the opportunity to use the Cadillac at her discretion[,] does not need permission from her husband to operate the Cadillac[, and] has unfettered access to the Cadillac."

The court concluded that the fact that Carmon's husband used the Cadillac along with Carmon did not change the fact that she bought the car for her personal use because the statute does not require that the car be used for the "exclusive" personal use of the debtor. The court noted that extending the protection of the "hanging paragraph" to a creditor only if the debtor has exclusive use of the car could lead to "abuse that would make the provision worthless."

So, the next time you are faced with a debtor who claims that he or she can treat your claim as less than fully secured because he or she does not have exclusive use of the car on which you hold a lien, this case might be a good one to pull out of your back pocket.

In re Carmon, 2014 Bankr. LEXIS 3768 (Bankr. E.D.N.C. September 5, 2014).

Shelley B. Fowler is a Managing Editor of CARLAW, HouseLaw, PrivacyLaw, and Spot Delivery. Shelley can be reached at 410-865-5406 or by e-mail at

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