Recent Entries

Can A Debtor Cram Down Negative Equity Financed Through A Newly Purchased Vehicle?

Published on July 13, 2009 in Motor Vehicle. 0 Comments

Negative equity is created when a debtor owes more on a trade-in than the actual value of the trade-in.  This negative equity is then rolled into the purchase of the new vehicle.  Under the 910-day rule, debtors cannot cram down a purchase money security interest in a motor vehicle acquired for the personal use of the debtor incurred within 910 days of filing for bankruptcy, or a debt incurred during the 1-year period preceding that filing.  An initial reading of the 910-day rule favors creditors, as debtors cannot cram down a newly purchased vehicle to the replacement value.  However, the rule as interpreted by many bankruptcy courts has created a murky area of law. 

Debtor attorneys have successfully argued that a new vehicle loan containing negative equity can be crammed down, as the negative equity is not considered purchase money securing the loan.  Although debtor attorneys at first were successful in arguing that negative equity is not purchase money, several Circuit Courts of Appeal have now held the opposite.   The 11th, 2nd, and most recently the 4th Circuit Courts of Appeal have ruled in favor of creditors. The issue is currently before the 6th Circuit Court of Appeals.

The three lines of analysis courts have followed in determining whether negative equity is purchase money are: 1) dual-status rule, 2) transformation rule, and 3) negative equity is purchase money.  Under the dual-status rule, a debtor can cram down the amount of negative equity financed in the purchase of the new vehicle.  Under the transformation rule, the financing of negative equity “transforms” the entire loan into non-purchase money, therefore the debtor can cram-down the loan amount to the actual fair market value of the vehicle.  Lastly, courts have held the negative equity rolled into the new loan is purchase money and cannot be crammed down.

Courts ruling that negative equity is purchase money follow their state law definition of purchase money under Article 9 of the Uniform Commercial Code.  Most recently in the Southern District of Ohio, Judge Hopkins ruled that, “as long as some portion of the transaction is secured by a purchase money security”, the loan cannot be crammed down.  This ruling has taken the interpretation of what is considered purchase money one step further. In favor of creditors, the ruling relied upon the plan language of the statute rather than state or federal law.

Although interpretation of the 910-day rule by bankruptcy courts has created murky waters, which creditors must navigate, the rulings of the Circuit Courts indicate the waters again may become passable.  It seems that soon the majority rule will likely hold negative equity as purchase money, which cannot be crammed down. 

If you have any questions on this information, please contact David H. Yunghans, Esq., an associate focused on bankruptcy located in the Cincinnati office of Weltman, Weinberg & Reis Co., L.P.A. David can be reached at (513) 723-2211 or via e-mail at .

Senate Rejects Cramdown Provision

Published on May 1, 2009 in Bankruptcy Act 2009. 0 Comments

The Senate earlier this week introduced two versions of the Helping Families Save Their Homes Act of 2009.  On April 30, 2009 the Senate voted down an amendment to one of the Senate Bills, which sought to add the cram-down provision to the bill.  The vote was 45 yeas to 51 neas.   All Senate Republicans voted against the bill along with 12 senate Democrats.
The cram-down provision still survives as their remains yet another Senate Bill containing the cram-down provision.  It seems that sponsors of the bill were testing the water to see how much support they would receive for the bill.

Senate May Vote On Housing Bill Without Cram-Down Provision

Published on April 30, 2009 in Chapter 13 and Real Estate. 0 Comments

As The Helping Families Save Their Homes Act awaits a Senate vote, it has become apparent that the cram-down provision of the bill will likely not muster enough support to pass.  The cram-down provision, which gives bankruptcy judges the power to modify principal balance and interest rates of mortgages, has faced intense opposition from the banking industry. 

Last week, Sens. Dick Durbin (D-Ill.), Christopher Dodd (D-Conn.), and Charles Schumer (D-N.Y.) introduced two new bills.  The bills are similar to H.R. 1106 -The Helping Families Save Their Homes Act- passed by the House, however one bill does not contain the judicial mortgage modification language known as the “cram-down” provision.  The provision instead is likely to be voted on as an amendment to the act.  It is predicted that all Senate Republicans and a few Democrats will oppose the cram-down provision.  Sen. Mary Landrieu (D-LA.) is one of the Democrats who oppose the cram-down provision.  Sen. Landrieu opposes the legislation out of concern for the possible affect on local community banks.  A vote on the bill is expected within the next week.

Possible Compromise This Week on Bankruptcy Cramdown Legislation

Published on April 21, 2009 in Chapter 13 and Real Estate. 0 Comments

While the House passed a bill permitting mortgage cramdowns, the Senate has yet to do so.  However, it hopes to have a compromise in place this week.  Senate Majority Whip Dick Durbin (D-Ill) met with banks, credit unions, and consumer groups to negotiate terms for the Senate bill.

Details are sketchy, but it appears that the terms would further limit the pool of borrowers who may be permitted to reduce the principal balance on mortgages in bankruptcy.  If a lender offers a refinance that reduces the interest rate through the current Obama plan, a borrower may not be permitted to reduce the principal balance in a Chapter 13 plan.  This is obviously an incentive for lenders to offer refinancing to certain borrowers in an attempt to avoid a reduction of the principal balance by a bankruptcy judge.

“At-risk low income borrowers” and those who spend less than 31% of their income on home mortgage payments would be ineligible as well for principal write-downs.  The program would apply only to loans originated before 2009, and would end in 2014, thus limiting bankruptcy cram downs to approximately five years from enactment of any bill.

WWR will continue to keep you informed as this Senate bill takes form.

Bankruptcy Filings Surge in the U.S.

Published on April 14, 2009 in Chapter 11, Chapter 13 and Chapter 7. 0 Comments

With the current state of the economy and massive job layoffs, the number of Bankruptcy filings in the U.S. has surged. The Associated Press reported that over the last 12 months, there have been over 1.2 million bankruptcy proceedings filed. In March of 2009, there was an increase of 46% on the number of filings from March 2008. The largest percentage of increases in filings is from the Western portion of the United States: Arizona, California, Idaho and Nevada leading the way.

Many experts are predicting that this is just the start of the surge. Some early projections are for 1.5 million bankruptcies to be filed in 2009. This is despite the fact that the Bankruptcy Cramdown Legislation may have reached a roadblock in the Senate. Many experts also believe the increase will continue into 2010.

It will be a challenging time for both financial intuitions and debtors. Weltman, Weinberg & Reis will continue to keep you updated on Bankruptcy trends in order to allow creditors to be in a position to protect their interests in the current environment.