Trade-in loan balance, gap insurance, service contracts, fees not part of car loan purchase money security interest

07 Dec Trade-in loan balance, gap insurance, service contracts, fees not part of car loan purchase money security interest

Negative equity, GAP insurance, service contracts, and administrative fees rolled into your car loan are not entitled to the special protection for purchase money security interests in cars, a Kansas bankruptcy judge ruled this week in In Re Miller, Case No. 08-40935, (Bankr. D.Kan. December 2, 2008).

The Hon. Janice Miller Karlin ruled the gap insurance and service contract were optional items the
debtor chose to purchase and the Ford Motor Credit Corporation agreed to finance, but were not part of the value given to “enable” the debtor to acquire the car.

Judge Karlin affirmed her two prior rulings that negative equity, the money loaned to repay the note on the borrower�s trade-in vehicle, is not a purchase money obligation, but merely payment of an antecedent debt.� The so-called hanging paragraph of 11 U.S.C. � 1325(*) grants special protection to car lenders in chapter 13 bankruptcy.

The Court left open the door for a different ruling on service contracts in a future case if the creditor could prove that the service contract enhances the value of the vehicle and continues with the vehicle such as window tinting and undercoating.� The creditor has the burden of proving what charges are included in its purchase money security claim, the Court ruled, noting there was limited evidence presented by stipulation in the Miller case.

To determine how much of the car loan claim must be repaid in a chapter 13 bankruptcy, the Court ruled the purchase money portion of the loan must be paid in full with trustee discount rate. If the car is worth more than the purchase money portion of the loan, the rest of the lender’s claim is crammed down and is paid up to the value of the car with trustee discount rate.

Judge Karlin said payments on the car loan prior to the bankruptcy are pro-rated between the purchase money and non-purchase money portions of the loan balance to determine the claim in chapter 13 bankruptcy.

Since the enactment of the 2005 bankruptcy reform amendments, courts have been grappling with the new protection for car lenders to determine what exactly is a purchase money security interest in a vehicle purchased for personal use within 910 days of a bankruptcy petition.� Dozens of rulings, many of them opposite of each other, have been issued since and the cases are working themselves through the appellate courts.� My colleagues in the Bankruptcy Law Network have written many posts about 910 car loans: what is a 910 claim?, strip down of car loan, upside down car loans in Kansas and MIssouri and two rulings in Florida.

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Jill Michaux has helped Kansas consumers with debt problems for three decades. She and her partner, Mark Neis, are Topeka's only bankruptcy specialists, board certified in consumer bankruptcy law by the American Board of Certification. She help start the National Association of Consumer Bankruptcy Attorneys.
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