Fifth Circuit Limits Chapter 13 Cramdown Rights

The Fifth Circuit Court of Appeal[1] recently ruled in favor of lenders regarding how consumer loans are treated in Chapter 13 bankruptcies. Specifically, the ruling changes how borrowers can avail themselves of the Chapter 13 cramdown provisions, which allow debtors to adjust debts on personal property by paying the value of an item at an adjusted interest rate, rather than the loan balance at the contract rate.

In Evolve Federal Credit Union v. Barragan-Flores (5e Cir., No. 18-50420), the court considered a Chapter 13 plan filed by the debtor, who had two auto loans with the credit union. Each loan contained a standard “cross-collateral” clause, making each vehicle a collateral for the other loan. The Chapter 13 debtor’s plan proposed to transfer one vehicle and hold the other with an adjusted balance and interest rate, in accordance with 11 USC § 1325 (a) (5).

In accordance with standard practice, the bankruptcy court approved the plan, despite the objection of the credit union. The credit union appealed and the district court overturned. The debtor then appealed to the Fifth Circuit, which confirmed the district court.

Under the Fifth Circuit, cross-collateralized loans constitute a single obligation, which prohibits a debtor from treating different collateral items differently under § 1325 (a) (5). This provision allows debtors to regularize secured claims in one of the following ways:

  1. The secured creditor accepts the Chapter 13 plan.
  2. The debtor assigns the asset securing the loan to the creditor.
  3. The debtor invokes the restrictive provision and adjusts the debt to the present value of the movable property in question.

Citing both the United States Supreme Court and the Fifth Circuit precedent, the court ruled that a debtor cannot combine steps two and three, waiving certain guarantees and retaining other elements at a reduced value, when the property guarantees a single bond. The previous Fifth Circuit case to deal with this issue had come to this conclusion in the context of a single loan with multiple collateral elements. Barragan-Flores now extends this rule to cross-collateralized loans.

Significantly, lenders can still allow debtors to assign certain collateral and retain other items if they determine it is in their business interests. They can simply refuse to oppose a plan that is otherwise reprehensible and allow the plan to be upheld. However, in situations where debtors attempt to perform a “partial cramdown” by dividing up cross-collateralized loans, lenders can now object and force debtors to waive all collateral or reduce the value and rate. interest of all articles.

[1] The Fifth Circuit hears appeals from the federal district courts in Texas, Louisiana and Mississippi. Its holdings set a binding precedent for federal district courts and bankruptcy courts in those states.

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