MOTOR VEHICLE NEGATIVE EQUITY AND BANKRUPTCY
Oftentimes when a person purchases a vehicle from a dealer they trade a vehicle for the purchase of the “new” one that has a debt owed against it. If the debt owed on the traded vehicle is greater than what the dealer provides the purchaser in trade value, then this scenario is often referred to as “negative equity.” This negative equity is often financed into the purchase of the new vehicle, so the debtor immediately owes the creditor more than the value of the new vehicle.
Under current Chapter 13 bankruptcy law a debtor is generally precluded from paying such car creditor less than what is owed on the vehicle, despite the fact that the vehicle may be worth less than what the creditor is owed.
When a debtor pays a car creditor less than what they are owed, this is known as “cram down.” For a greater explanation of this concept see the Newsletter entitled “Cram Down in Chapter 13.”
Although it is not a settled issue in all bankruptcy courts throughout the United States, the majority of bankruptcy courts have concluded that a debtor can cram down the negative equity in an automobile purchase, including most Texas courts.
See In Re Sanders, 377 B.R. 836 (Bankr. W.D. Tex. 2007) and In Re Brodowski, 391 B.R. 393 (Bankr. S.D. Tex 2008).
This ability to cram down negative equity created from vehicle trades can be very beneficial to a potential debtor in Chapter 13 cases.
If you would like to discuss this subject more, then please contact me at (903) 683-2018 or at (936) 225-1800.
As always, any opinions expressed on this website are just that, opinions. So if you have a question regarding bankruptcy or debt relief, then please give me a call to discuss your individual situation. Bankruptcy, as many other areas of the law are very case or fact specific. I pride myself on giving you the answers to your questions that are based on your individual circumstances.