In a victory for secured lenders, the Supreme Court on Monday refined the so-called "cram down" provision in Chapter 13 of the bankruptcy code.
Under this provision, the difference between the value of the collateral and the balance of the loan is considered unsecured debt, which can be discharged.
In the case, Elray and Jean Rash tried to use the provision to keep a truck used to haul freight. They urged a judge to reduce the loan to $28,500, the amount the creditor could have raised by auctioning off the vehicle.
The lender, Associates Commercial Corp., objected. The Dallas-based affiliate of Ford Motor Credit Co. argued that the couple should pay the replacement cost, $41,000, to keep the truck.
Justice Ruth Bader Ginsburg, writing for an 8-to-1 majority, sided with Associates Commercial. "The value of the property retained because the debtor has exercised the 'cram down' option is the cost the debtor would incur to obtain a like asset for the same proposed use," she wrote.
Justice John Paul Stevens dissented, arguing that the law requires judges to use the auction value. "The purpose of this provision is to put the creditor in the same shoes as if he were able to exercise his lien and foreclose," he wrote.
Industry officials applauded the decision. "The court has extended more realistic and meaningful protections to secured lenders," said Michael F. Crotty, deputy general counsel for litigation at the American Bankers Association. "By reducing losses to the lender, this decision prevents additional costs from being passed on to future borrowers."