Negative Equity Does Not Count for 910 Claims

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.