In our previous post, we began discussing a case currently being appealed to the Supreme Court which seeks to resolve a split between the circuit courts on the issue of whether a Chapter 13 debtor can cram down the portion of a loan attributable to the financing of negative equity in a vehicle she traded in.

The lender in the case, AmeriCredit Financial Services, has asked to Supreme Court to resolve a split among the federal appeals courts on the issue. Eight other federal appeals courts have apparently ruled that lenders have a purchase-money security interest in the negative equity of an auto traded in for the purchase of a new vehicle.

The 9th Circuit Court, in its decision in support of allowing the cram down, said that the negative-equity charges from the debtor's traded in vehicle don't qualify as "new value" under the Bankruptcy Code.

In its petition for to the Supreme Court, AmeriCredit said the decision gives the message that car buyers do not have to pay charges to satisfy indebtedness on traded in vehicles as secured debts, and that the decision will make it harder for customers with negative equity on a trade-in vehicle to get auto loans. AmeriCredit also wants the high court to resolve a split among the circuit courts. But according to the Chapter 13 debtor, the decision doesn't create a split, since her case rests on an interpretation of California law

The case is interesting, not only because of the issue of how debts are treated for purposes of bankruptcy, but also because of the potential market ramifications.

Source: Thomson Reuters, News & Insight, "Car owner says 9th Circuit got cramdown ruling just right," Chip Giambrone, August 8, 2011.