Upside Down Car Loans Protected in 8th Circuit

The Eighth Circuit ruled this week that certain types of car loans are protected from “cramdown”  in the Chapter 13 bankruptcy process, reversing decisions in Eastern Missouri.

Agreeing with its sister circuits which have addressed this issue, the Midwestern federal circuit court of appeals concluded that loans made during the 910-day period prior to a bankruptcy filing to purchase motor vehicles for the personal use of the debtor are protected from cramdown, even if the loan includes “negative equity” rolled over from a previous car loan.  The majority adopted the reasoning of several other courts which incorporated this negative equity into the definition of “purchase money” under the Uniform Commercial Code.

What does this ultimately mean?  In general, a Chapter 13 plan often involves the division of a pot of money (created with the debtor’s monthly payments) among creditors.  Under this decision, a larger portion of that pot of money will be diverted to the automobile lenders away from unsecured creditors — who will already receive only a small part of their debt, in most cases.

In some cases, this may force consumers to pay more in their Chapter 13 plans.  Debtors who need to pay a set minimum amount to unsecured creditors, to retain non-exempt property or because of a “means test” repayment calculation, might be paying more over all.  In some cases, this will make the plan impractical for the consumer and cause it to fail.

In many cases, the consumer may well elect to surrender the car to the lender and get by with some other transportation, in lieu of paying so much for a depreciating asset.

The case is Ford Motor Credit v. Mierkowski, 08-3866 (8th Cir. 9/8/09).