Upside Down Car Loans In Missouri

07 Sep Upside Down Car Loans In Missouri

Cathy Moran has discussed allowing Chapter 13 debtors to strip down a “new” car loan to the fair value of the vehicle despite a special BAPCPA provision called the “hanging paragraph.” And the alternative approaches used in other districts.

Last month a bankruptcy judge in Kansas, concluded that Missouri would follow the “transformation” rule and allow the strip down as well.

In the David & Bobbi Hunt case, Judge Robert Berger noted that the debtors had purchased their car within 910-days of their bankruptcy filing and they had done so in Missouri. Therefore, the car loan could be subject to the “hanging paragraph” protection from strip down if it qualified as a purchase money debt. (And Missouri law would apply either because the transaction occurred there or the agreement stipulated it, apparently.)

Judge Berger, relying on bankruptcy cases from both Missouri districts, concluded that its courts would hold the lender did not have a purchase money security interest. This was because the debtors had traded-in a car with “negative equity” (that is, a car worth less than the debt owed on it). Under the “transformation” doctrine applied in a different context prior to BAPCPA, Missouri bankruptcy courts held that the debt must be incurred for the actual purchase of the consumer good and if other debt is refinanced as part of the transaction then the entire loan is “infected” and is not “purchase money.”

Will Missouri judges apply the Uniform Commercial Code as Judge Berger has anticipated they would? His reasoning is sound with a solid basis in Missouri decisions. If I were the judge, I would have some confidence the conclusion is correct. But those decisions revolved around financing of relatively low value items like household goods and furniture, not brand new Corvettes (actually, it was a 2005 Ford van). It will take time and expense to find out if Judge Berger was right that Missouri judges will apply the same reasoning or if they will break with him in applying the law.

To add my own commentary to my colleague’s, BAPCPA was enacted with only passing recognition that many terms of art like “purchase money” had complex meanings and uses in the real world. When used poorly in new laws, they cause uncertainty and run up legal costs for everyone.

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website:

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