GAP Insurance, Debt Cancellation Agreements, & Reducing Car Loan Balances

GAP Insurance, tagged as Guaranteed Automobile Protection by marketing wags, pays a loan deficiency when a car is totalled and the collision insurance does not pay the loan in full.  These are more commonly known as debt cancellation agreements (DCAs), but can be called “insurance” if state law permits.  The name is a distinction without a difference, says the Federal Reserve Board.   It’s not insurance as we usually think of it, since only the lender receives meaningful protection.  In fact, the protection to the consumer is so minimal that the Comptroller of the Currency prohibits these and other financed single premium insurance coverages for residential loans.  (67 Fed.Reg. 58962 (Sept 19. 2002); too old for a link.)

A rule from the 10/05 bankruptcy reforms is that one can only reduce a car’s loan balance to the car’s value in a Chapter 13 case (and pay it over the length of the plan) if the loan was not a purchase money loan taken out within 2 1/2 years before the bankruptcy was filed.  However, if GAP insurance was part of the financing, then the loan was not only for the car’s purchase and the balance can be reduced to the car’s value.  In re Price, Bankr ED NC 2007 (currently on appeal and there are cases ruling otherwise).

Reducing a car’s loan balance is a powerful tool of a Chapter 13 bankruptcy case.

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