Under Bankruptcy law, a debtor cannot cram down a secured claim when the creditor has a purchase money security interest in a motor vehicle acquired for the debtor’s personal use within 910 days of a debtor’s bankruptcy filing.  In some vehicle purchase transactions, debtors trade-in a vehicle in order to purchase a new vehicle.  If there is a difference between the value of the vehicle that the buyer trades in and the amount of the buyer’s preexisting debt, the difference is financed into the purchase of the new vehicle.  This is referred to as negative equity.  Debtor attorneys have argued that negative equity is not considered purchase money, and therefore a debtor can cram down the value of the negative equity financed into the new car purchase. 

This issue recently came before the 10th Circuit Court of Appeals.  The issue before the court was whether under the hanging paragraph of 11 U.S.C. 1325(a) a creditor has a purchase money security interest in the negative equity of the trade-in vehicle.  In line with the decisions of the 11th, 2nd, and 4th Circuit Courts of Appeal, the 10th Circuit Court of Appeals ruled that a creditor does have a purchase money security interest in negative equity.  Suddenly what was once the minority rule is quickly becoming the majority.  Now 14 states follow that negative equity is purchase money.  Creditors should consult legal counsel for advice on the these rulings.