28 Oct Upside Car Loans in Missouri, Part III
Eastern Missouri bankruptcy judges now have concluded how Missouri law applies to certain car loans with trade-ins for Chapter 13 cases. Although on appeal, these decisions will help make Chapter 13 more affordable for consumers — and potentially pay more to unsecured creditors.
Last December I wrote about the “upside down” 910-day car issue. The problem in a nutshell is whether Missouri law treats the “negative equity” — when a trade-in car has more debt than value — of a car loan as “purchase money” or not. If it does not, then the debtor might be able to repay less than the full balance owed on the loan which might make the Chapter 13 payment plan more viable — and might repay other creditors more.
In Eastern Missouri, the court has concluded that such a loan will normally be a “dual status” loan, with the a pro-rata portion of the outstanding loan balance that was necessary to actually buy the car is still protected. But the amount attributed to paying off the old car loan — the “negative equity” — could be paid less than the full amount, depending on the car’s underlying value.
Interestingly, Judge Surratt-States in an April decision and Judge Schermer in the most recent case both concluded that Missouri law requires a “close nexus” between the trade-in and the acquisition of the new vehicle in order for the new loan to be fully treated as “purchase money.” Judge Schermer distinguished this from the Weiser case (which I critiqued in December) where the Western District of Missouri court concluded that there was a “close nexus” because the debtor testified the loan could not be obtained without the trade-in.
Although these decisions do not go as far as some believe Missouri law might go, they will save Chapter 13 debtors a lot of money at the exepense of car lenders. Since those same lenders fought so hard for special protection in the 2005 bankruptcy amendments, no one should be surprised that both cases are on appeal.
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