Tuesday, March 16, 2010

Car Buyers Beware of Negative Equity if Contemplating Bankruptcy

Car buyers beware!  The Seventh Circuit Court of Appeals ruled recently that car buyers who file Chapter 13 bankruptcy cannot cram-down the negative equity financed when trading-in an older vehicle for a different car if the transaction occurred within 910 days of the bankruptcy filing date.  That negative equity becomes part of the purchase money security interest and is subject to protection.

Howard v. AmeriCredit Financial Services, No.09-3181 (in re Aubrey Howard), (7th Cir. 3/1/10). In Howard, the Seventh Circuit addressed the issue of whether a Chapter 13 bankruptcy debtor can exercise the “cramdown” provisions of the Bankruptcy Code relative to the “negative equity” on a vehicle trade-in. Negative equity is the difference between the amount owed on a trade-in vehicle and the actual value of said vehicle. Vehicle owners frequently do not have sufficient cash reserves to satisfy the negative equity. So, dealers frequently add the negative equity to the cost of a new vehicle and provide financing for both.

Debtor did just that; signing an agreement to pay the negative equity and the cost of the new vehicle and provided the new vehicle as security for that obligation. Debtor later filed bankruptcy. In the Chapter 13, Debtor did not dispute that the cost of the new vehicle could not be crammed-down to the value of the new vehicle because said vehicle was purchased with 910 days of the bankruptcy filing date. However, debtor asserted that the negative equity portion of the new loan could be crammed-down because it was not a part of the purchase money security interest.

The Seventh Circuit disagreed with debtor and affirmed the bankruptcy court ruling. The Court held that negative equity can be part of a purchase money security interest and if thus secured is not subject to the cramdown power of the bankruptcy judge in a Chapter 13 bankruptcy.

Warmest Regards,

Bob Schaller

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By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm
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Bob is a member of the National Bankruptcy College Attorney Network, American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys.

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