Keywords: 910 loans . car loans . hanging paragraph . Chapter 13 . cramdown . autos .
Chapter 13 > Secured Debts Secured Debt: 910 Car Loans > amount includes financing of negative equity?26 Cases , IssueID 19 |
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Topic Description:The 2005 bankruptcy amendments added a "hanging paragraph" (that is, doesn't have a separate subsection like all paragraphs should) to section 1325(a) that says that you cannot cramdown an purchase-money auto loan that was obtained less than 910 days Lines of Cases:
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Americredit receives purchase money status for that portion of its collateral not allocable to negative equity. Runs counter to 8 other circuit courts. US Supreme Court denied Cert.on this case.
Americredit receives purchase money status for that portion of its collateral not allocable to negative equity.
NOTE: Supreme court denied cert. 10-1443,2011, even though this opinion runs counter to 8 other circuit courts
Debtor bought a new vehicle fewer than 910 days before filing for Chapter 13 relief. As part of this purchase, he traded in his old vehicle which had a lien $9,588 on it. The Car seller credited $3,000 from the old car towards the new car purchase, leaving $3,558 of "negative equity" from the old car still to pay off. Debtor financed this lien amount, plus the new car's price, for a total loan of $18,723.
When debtor filed for relief, the court found that the negative equity portion of the loan was:
1) included in the creditor's purchase money security interest, and;
2) protected from modification by Section 1325(a)'s hanging paragraph.
"[A] purchase money security interest includes 'obligations for expenses incurred in connection with acquiring rights in the collateral' - and that seems a pretty good description of negative equity."
The court did not permit cram-down of the amount of the loan used to pay off an old loan on a trade-in vehicle.
The New York Court of Appeals' answer to our certified question is determinative of the case before us. We now know that, under New York law, negative equity is considered a purchase-money obligation and therefore included in a PMSI. Accordingly, because the other conditions for avoiding cramdown under the hanging paragraph were not contested by the parties,[3] creditor-appellees' entire claims, including those portions attributable to the payoff of negative equity on their trade-in vehicles, must be treated as secured claims. As a result, creditor-appellees are immune from cramdown and bifurcation of their full security interest in debtor-appellants' cars, including that portion deriving from the negative trade-in value of their prior cars.[4]
Departs from majority of cases. Based upon a careful review of existing case law, this Court continues to hold that negative equity is not protected by the "hanging paragraph" of section 1325(a) of the Bankruptcy Code. It is neither "all or part of the price" of a new car nor is it "value given to enable the debtor to acquire rights in or the use of" a new car. As such, it does not fit within the definition of a PMSI under applicable Article 9 guidelines.
Negative equity protected by hanging paragraph
The concept of "purchase money security" includes negative equity.
A debtor may not cram down the "negative equity" portion of the debt.
negative equity, gap insurance, and extended warranties are all part of the purchase money obligation protected by the hanging paragraph.
when debtors trade in vehicles that are worth less than the amount owed on them, any negative equity included with the financing of the new car's purchase is included in the purchase-money obligation, secured by the purchase money security interest, and protected from modification by Section 1325(a)'s hanging paragraph
On appeal in 1st Circuit: Question pending: Is negative equity on a trade-in vehicle part of a purchase money security interest when rolled into a loan for a new vehicle, made within 910 days before filing in chapter 13?This court says it knocks the loan out of 910 protection.
A debtor may not cram down the "negative equity" portion of the debt.
A debtor may not cram down the "negative equity" portion of the debt.
A debtor may not cram down the" negative equity" portion of the debt.
A debtor may not cram down the "negative equity" portion of the debt.
Adopting a "dual status" rule in which a PMSI is created in the amount of the new vehicle, and the portion of the loan used to pay off the trade-in vehicle, and the portion of the loan used to pay off the trade-in vehicles is just an ordinary secured interest.
hanging paragraph does not preclude holders of secured debt from pursuing deficiency judgment after surrender of secured property.
Adopting a "dual status" rule in which a PMSI is created in the amount of the new vehicle, and the portion of the loan used to pay off the trade-in vehicle, and the portion of the loan used to pay off the trade-in vehicles is just an ordinary secured interest.
because the secured claim at issue is comprised of both purchase-money and nonpurchase-money components, it is subject to modification in the debtors' Chapter 13 plan
Court ruled that a "transformation rule" applied which means that if a portion of the secured claim is for negative equity, then the entire debt is transformed into a non-PMSI claim which can be crammed down.
Reversed on Appeal to 6th Cir. 599 F.3d 498
Question pending: Is negative equity on a trade-in vehicle part of a purchase money security interest when rolled into a loan for a new vehicle, made within 910 days before filing in chapter 13?
Lower court:"the court continues to hold that negative equity is not part of a purchase money security interest, after thorough consideration, and with particular appreciation of the Comments accompanying the Revised Uniform Commercial Code, the court adopts use of the dual status rule for the purposes of the hanging paragraph"
Court ruled that a "transformation rule" applied which means that if a portion of the secured claim is for negative equity, then the entire debt is transformed into a non-PMSI claim which can be crammed down.
Americredit receives purchase money status for that portion of its collateral not allocable to negative equity. Runs counter to 8 other circuit courts. US Supreme Court denied Cert.on this case.
Debtor bought a new vehicle fewer than 910 days before filing for Chapter 13 relief. As part of this purchase, he traded in his old vehicle which had a lien $9,588 on it. The Car seller credited $3,000 from the old car towards the new car purchase, leaving $3,558 of "negative equity" from the old car still to pay off. Debtor financed this lien amount, plus the new car's price, for a total loan of $18,723.
When debtor filed for relief, the court found that the negative equity portion of the loan was:
1) included in the creditor's purchase money security interest, and;
2) protected from modification by Section 1325(a)'s hanging paragraph.
"[A] purchase money security interest includes 'obligations for expenses incurred in connection with acquiring rights in the collateral' - and that seems a pretty good description of negative equity."
The court did not permit cram-down of the amount of the loan used to pay off an old loan on a trade-in vehicle.
The New York Court of Appeals' answer to our certified question is determinative of the case before us. We now know that, under New York law, negative equity is considered a purchase-money obligation and therefore included in a PMSI. Accordingly, because the other conditions for avoiding cramdown under the hanging paragraph were not contested by the parties,[3] creditor-appellees' entire claims, including those portions attributable to the payoff of negative equity on their trade-in vehicles, must be treated as secured claims. As a result, creditor-appellees are immune from cramdown and bifurcation of their full security interest in debtor-appellants' cars, including that portion deriving from the negative trade-in value of their prior cars.[4]
Departs from majority of cases. Based upon a careful review of existing case law, this Court continues to hold that negative equity is not protected by the "hanging paragraph" of section 1325(a) of the Bankruptcy Code. It is neither "all or part of the price" of a new car nor is it "value given to enable the debtor to acquire rights in or the use of" a new car. As such, it does not fit within the definition of a PMSI under applicable Article 9 guidelines.
Negative equity protected by hanging paragraph
The concept of "purchase money security" includes negative equity.
A debtor may not cram down the "negative equity" portion of the debt.
negative equity, gap insurance, and extended warranties are all part of the purchase money obligation protected by the hanging paragraph.
when debtors trade in vehicles that are worth less than the amount owed on them, any negative equity included with the financing of the new car's purchase is included in the purchase-money obligation, secured by the purchase money security interest, and protected from modification by Section 1325(a)'s hanging paragraph
On appeal in 1st Circuit: Question pending: Is negative equity on a trade-in vehicle part of a purchase money security interest when rolled into a loan for a new vehicle, made within 910 days before filing in chapter 13?This court says it knocks the loan out of 910 protection.
A debtor may not cram down the "negative equity" portion of the debt.
A debtor may not cram down the "negative equity" portion of the debt.
A debtor may not cram down the" negative equity" portion of the debt.
A debtor may not cram down the "negative equity" portion of the debt.
Americredit receives purchase money status for that portion of its collateral not allocable to negative equity.
NOTE: Supreme court denied cert. 10-1443,2011, even though this opinion runs counter to 8 other circuit courts
Adopting a "dual status" rule in which a PMSI is created in the amount of the new vehicle, and the portion of the loan used to pay off the trade-in vehicle, and the portion of the loan used to pay off the trade-in vehicles is just an ordinary secured interest.
hanging paragraph does not preclude holders of secured debt from pursuing deficiency judgment after surrender of secured property.
Adopting a "dual status" rule in which a PMSI is created in the amount of the new vehicle, and the portion of the loan used to pay off the trade-in vehicle, and the portion of the loan used to pay off the trade-in vehicles is just an ordinary secured interest.
because the secured claim at issue is comprised of both purchase-money and nonpurchase-money components, it is subject to modification in the debtors' Chapter 13 plan
Court ruled that a "transformation rule" applied which means that if a portion of the secured claim is for negative equity, then the entire debt is transformed into a non-PMSI claim which can be crammed down.
Reversed on Appeal to 6th Cir. 599 F.3d 498
Question pending: Is negative equity on a trade-in vehicle part of a purchase money security interest when rolled into a loan for a new vehicle, made within 910 days before filing in chapter 13?
Lower court:"the court continues to hold that negative equity is not part of a purchase money security interest, after thorough consideration, and with particular appreciation of the Comments accompanying the Revised Uniform Commercial Code, the court adopts use of the dual status rule for the purposes of the hanging paragraph"
Court ruled that a "transformation rule" applied which means that if a portion of the secured claim is for negative equity, then the entire debt is transformed into a non-PMSI claim which can be crammed down.
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