In In re Acaya, — B.R. —-, 2007 WL 1492475 (Bkrtcy.N.D.Cal.,2007),
the Northern District of California Bankruptcy Court determined that negative
equity does not qualify as “purchase money” to protect what
would otherwise be a 910 day creditor.
This is a situation that often happens. A debtor trades in his car, but
he owes more than it is worth. The dealer allows him to take his “negative
equity” with him to the next car he purchases. It is kind of like
a reverse down payment. Instead of putting money down for the car, you
take more debt with you that you add on to the car.
Under the old (pre 2005) law, debtors could cram down, i.e., pay only what
the car is worth, in a Chapter 13 plan. Under the new law (2005 to present),
if a car was purchased within the last 910 days, you have to pay the full
amount owed on the car, not just what it was worth. However, you have
to pay the full value of a “purchase money” loan. The court
in Acaya determined that this roll-over of negative equity was not “purchase
money” and therefore, it could be stripped off if the value of the
car was less than what was owed.