Car Purchased By Refinancing Negative Equity Is Not Subject to Hanging Paragraph

February 1, 2007

The case of In re Peaslee, decide on December 22, 2006 in the US Bankruptcy Court for the Western District of New York, involved a Chapter 13 plan providing for the bifurcation of a creditor’s claim secured by debtor’s vehicle. The case trustee filed a valuation motion seeking a determination that the creditor had secured a claim for the vehicle’s retail value and an unsecured claim for balance of amount due under retail installment contract.

John C. Ninfo, II, Chief Judge, held that if all of the debt included in the claim secured by a vehicle is not secured by a purchase money security interest, then the exception provided under the anti-bifurcation statute (the “hanging paragraph” of 11 U.S.C. sec. 1325(a)(9)) does not apply. Judge Ninfo also held that when a debtor refinances a vehicle for a new one there is no purchase money security interest under New York law. Therefore, the hanging paragraph does not apply and the vehicle creditor will have a secured claim in the amount of the vehicle’s retail value and an unsecured claim for the remaining amount owed.

In re Peaslee, — B.R. —-, 2006 WL 3759476 (Bankr. WDNY 2006).

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