The 910-Day Rule: Explaining The Cramdown on Car Loans

In Chapter 13 bankruptcy, the “cramdown” is one of the most powerful tools available to a debtor. The cramdown allows an individual to reduce the secured balance of a loan to the actual fair market value of the collateral, often saving thousands of dollars in principal and interest. However, under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, there is the requirement of the 910-Day Rule.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Key Takeaways: Navigating the 910-Day Rule For Vehicle Cramdowns

• The 910-Day Threshold: If your auto loan is older than 910 days (roughly 2.5 years) at the time of filing, you can “cram down” the balance to the vehicle’s current fair market value. If it is newer, you generally must pay the full contract price.
• The “Personal Use” Exception: The rule only applies to vehicles bought for personal, family, or household use. If the vehicle was purchased primarily for business, you may be able to cram down the loan even if it was financed within the last 910 days.
• The Power of the PMSI: The 910-day protection only exists if the loan was used to purchase the car. “Title loans” or cash-out refinances are not protected, making them eligible for a cramdown regardless of when the loan was taken.
• Interest Savings Still Apply: Even if you can’t reduce the principal balance due to the 910-day rule, Chapter 13 still allows you to lower the interest rate to the court-approved Till rate, which can save you thousands over the life of the plan.
• Chapter 13 vs. Chapter 7: While Chapter 13 offers flexibility and court-ordered modifications, Chapter 7 usually requires a “reaffirmation agreement” where lenders rarely budge on original contract terms.
• Lenders Prefer Payments over Repossession: In reality, most lenders would rather accept a modified payment plan through bankruptcy than deal with the financial loss of a repossessed vehicle.

What is the 910-Day Rule?

Commonly referred to as the “hanging paragraph” because it was added to the end of Section 1325(a) of the Bankruptcy Code without a sub-section number, this rule creates an exception to the standard cramdown procedure.

When is a Car “Cramdown-Proof”?

The 910-day rule (the “hanging paragraph”) only protects a lender if all three of the following conditions are met:

1. The Timing: The loan was taken out within the 910 days (about 2.5 years) before you filed for bankruptcy.
2. The Purpose: The loan was a Purchase Money Security Interest (PMSI), meaning the money was used specifically to buy the vehicle.
3. The Use: The vehicle was acquired for your personal use (not for a business or as an investment).

If your loan meets all three criteria, you are prohibited from splitting the debt. You must pay the full contract balance through your Chapter 13 plan.

If these three conditions are met, the debtor must pay the full contract amount of the loan through the Chapter 13 plan, regardless of whether the car is worth significantly less than the payoff balance.

The PMSI Requirement: Is Your Loan Actually Protected?

The 910-day rule only applies if the creditor holds a Purchase Money Security Interest (PMSI). In simple terms, a PMSI exists when the loan proceeds were used specifically to purchase the vehicle that serves as collateral. If you went to a dealership and signed a contract to buy a car, that is a PMSI.

However, if you already owned your car and later took out a “title loan” to cover medical bills or home repairs, that lender does not have a PMSI. Because the loan wasn’t used to acquire the vehicle, the 910-day rule does not apply, meaning you may be able to cram down a title loan even if it was taken out just months before filing.

The “Personal Use” Distinction

The 910-day rule is strictly applied to vehicles intended for personal, family, or household use. If your vehicle is used primarily for business, you may be able to avoid the 910-day restriction, even if the car loan was obtained within the 910-day period.

Professor’s Note: Comparing Chapter 7 Bankruptcy to 13

In my experience, lenders are often more flexible regarding loan modifications than most debtors realize. In reality, a lender rarely wants you to surrender the vehicle; doing so usually results in a significant financial loss for them.

It is typically in the lender’s best interest for the debtor to keep the vehicle and continue making payments, even if that means the interest rate or loan balance is reduced through a Chapter 13 plan.

A Critical Distinction: Chapter 13 vs. Chapter 7

It is important to note that the cramdown is not an option in Chapter 7 bankruptcy. In a Chapter 7 case, if you intend to keep your vehicle, you will generally be required to sign a reaffirmation agreement.

Unlike the flexibility often found in Chapter 13, lenders are rarely willing to modify original loan terms in a Chapter 7. Instead, they typically insist on the original contract terms. If you are filing for Chapter 7, I recommend reviewing my series on reaffirmation agreements, which covers:

• Last-Minute Tactics: Why creditors often wait until the final moments to present a reaffirmation agreement.
• Attorney Approval: Why your lawyer may refuse to sign the agreement for your protection.
• Credit Reporting Issues: How creditors may stop reporting your timely payments to Experian, Equifax, and TransUnion if a reaffirmation is not filed.

Why the 910 Day Rule Exists

Before 2005, it was common for debtors to purchase a brand-new vehicle, file for bankruptcy shortly thereafter, and immediately cram down the loan to the car’s “blue book” value, since car values drop significantly the moment it leaves the dealership lot.

The 910-day rule was a legislative win for the auto-financing industry, ensuring that lenders are protected from rapid depreciation in the early years of a loan.

The Benefits of Chapter 13 if You Don’t Meet the 910 Rule

For debtors who purchased the car within 910 days, there are still options available:

Interest Rate Adjustment: While you may have to pay the full principal, you can often still reduce the interest rate to the Till rate (Prime + a risk premium), which is frequently lower than subprime auto loan rates.

Negative Equity: There remains a split in jurisdictions regarding “negative equity” with the debt rolled over from a previous trade-in. In some jurisdictions, the portion of the loan representing negative equity is not considered part of the “purchase money security interest” and can still be crammed down.

Summary Table: Cramdown vs. 910-Day Rule

Feature	Standard Cramdown	910-Day Rule (The Exception)
Loan Principal	Reduced to Fair Market Value	Must pay Full Balance
Timing Requirement	Loan older than 910 days	Loan taken within last 910 days
Interest Rate	Reduced to Till Rate	Reduced to Till Rate
The Result	Lower monthly payments	Higher payments (but lower interest)

The Professor’s Conclusion

Understanding the 910-day rule is essential for any debtor looking to keep their vehicle in a Chapter 13. While this rule prevents you from reducing the principal balance on newer loans, it does not strip away all your protections.

By taking advantage of the Till rate to lower your interest and extending your repayment period through the court-ordered plan, you can still significantly lower your monthly costs, potentially saving you thousands of dollars throughout the life of the bankruptcy plan.

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