Negative Equity
The court recently ruled on the treatment of “negative equity” under the so-called “Hanging Paragraph” at the end of 11 U.S.C. §1325. In re Hebert, 07-50372 (December 12, 2007), this issue arises in the context of a 910 vehicle when the underlying debt includes not only the purchase price of the 910 vehicle, but also includes the financing of the deficiency balance on the debtor’s trade-in. In addition to the other requirements under the hanging paragraph, a creditor must have “a purchase money security interest securing the debt that is the subject of the claim.” In Hebert, the court ruled that the portion of the creditor’s claim that reflects the financing of negative equity was not secured by a purchase money security interest, and thus was not protected from modification by the Hanging Paragraph. The court also ruled that (1) creditor did not have a purchase money security interest for the portion of the claim related to “gap” insurance, (2) the “dual-status” rule applied so that claim would be bifurcated between the purchase-money and non-purchase-money portions of the claim, (3) the purchase-money portion of the claim is subject to protection under the Hanging Paragraph, and (4) pre-petition payments should be allocated first to the non-purchase-money portion of the claim.
