Recent Bankruptcy Decision from the Western District of Wisconsin Discusses Negative Equity, Car Loans, and the Chapter 13 Cram Down

July 19, 2017

A quick introduction for those of you who are not bankruptcy nerds.  For certain types of collateral, Chapter 13 allows a Debtor to reduce a secured creditor’s claim down to the value of the collateral.  This is called “cram down.”  But, there are certain limits on the Debtor’s “cram down” powers.  For example, the Debtor can’t cram down the value of a claim secured only by a security interest in the Debtor’s principal residence.  See 11 U.S.C. section 1322(b)(2).  Similarly, the Debtor cannot cram down a purchase money security interest in a personal use motor vehicle acquired within 910 days of the bankruptcy filing date.  See the “hanging paragraph” in 11 U.S.C. 1325(a).

So, imagine a typical situation in which a Debtor trades in a vehicle with negative equity (meaning that the value of the trade-in vehicle was less than the debt owed on the trade-in vehicle) and obtains a loan to purchase another vehicle.  In this situation, the new loan includes both the negative equity from the trade-in vehicle and the purchase price of the new vehicle.  Now, imagine the Debtor files for bankruptcy within 910 days of obtaining that loan.  Can the Debtor cram down the negative equity?  That was the situation faced by the Bankruptcy Court for the Western District of Wisconsin in In re: Manor (Western District of Wisconsin Bankruptcy Court Case No. 17-10248).

In a decision dated June 27, 2017, the Bankruptcy Court held that the Debtor could not cram down the negative equity.  In other words, the negative equity was held to be part of the purchase money loan and therefore the Debtor could not cram down that negative equity on a personal-use motor vehicle purchased within 910 days of the bankruptcy filing date. 

The Manor decision does not break new ground.  Indeed, the Court noted that similar decisions were reached by the Seventh Circuit and the Sixth Circuit in 2010 and by the other Circuit Courts as well.

But, the moral of the story is to pay close attention to the details of your car loan whenever a Debtor files a Chapter 13 bankruptcy case.  Was your loan made within 910 days?  Was it a purchase money loan?  Is it a personal use vehicle?  If so, the Debtor can’t cram down your loan, not even the negative equity. 

Remember there are strict deadlines in Chapter 13 cases.  So, secured creditors with questions about the Debtor’s plan should make sure they contact their counsel immediately.

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