Newer Cars, Loans, & Chapter13: Cracks in the Windshield
By Cathy Moran, California bankruptcy lawyer on Apr 28, 2007 in General Bankruptcy Information
Industrious lawyers have pinpointed several attacks on the anti cram down provisions of the newly amended Bankruptcy Code. In 05, car lenders successfully lobbied for a prohibition on stripping down car loans to the value of the underlying collateral where the car was purchased within 910 days of the bankruptcy filing. Bankruptcy lawyers call these “910 cars”.
On the face of the provision (which didn’t even get its own paragraph, but was left hanging unnumbered at the foot of Section 1325(a)) debtors with recent car purchases were left with the choice of paying more than the car was now worth in order to keep it via Chapter 13, or surrendering it.
But wait! To be within the scope of the hanging paragraph, the vehicle had to be subject to a purchase money security interest. It seems that many vehicle loans also paid off the outstanding balance from a trade in, or financed insurance, or warranties. These inclusions may defeat the purchase money character of the security interest, and thus permit the strip down of the loan.
Was the car acquired for the personal use of the debtor, as the hanging paragraph requires? If it was acquired for the debtor’s child or non filing spouse, perhaps it is outside the prohibition on strip down.
Finally was it acquired for business use? If so, it is not subject to the hanging paragraph.
This is a new field of litigation and it will be a while before we know how courts approach these chinks in the armor of this provision. Take a close look at the actual contract before concluding you have to pay the contract balance to keep the car.
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Chip Parker, Attorney | Apr 28, 2007 | Reply
Check your closing statement, and look for something called GAP insurance. That’s for the negative equity rolled into the new loan. If it is part of the statement, then it was financed. More and more bankruptcy lawyers are seeking to value automobiles with this scenario.