The "hanging paragraph" in Bankruptcy Code § 1325(a) requires many debtors hoping to retain a vehicle under a chapter 13 plan to repay the full value of their auto lender's secured claim, even if that claim is undersecured. This protection is limited to creditors with a purchase-money security interest in the debtor's vehicle. Accordingly, bankruptcy courts reviewing a chapter 13 plan must consider the validity of an objecting creditor's purchase-money security interest. This issue has proven controversial in cases where the lender financed both the debtor's newly purchased vehicle and excess debt ("negative equity") a trade-in vehicle. The highly general language of the Uniform Commercial Code affords few clues to the purchase-money status of financed negative equity. To break the impasse, this Article draws on heretofore-neglected evidence from the UCC's text and drafting history that lends substance to the "consumer compromise" embodied in Revised Article 9. These materials indicate that the UCC maintains strict requirements for according purchase-money status to a consumer loan, and would not accord purchase-money status to financed negative equity. If this conclusion is at odds with the expectations of the drafters of the hanging paragraph, it suggests that they erred in hinging the applicability of a rule of federal bankruptcy law on a loan's purchase-money status under state law.
The Over-Encumbered Trade-in in Chapter 13,
Emory Bankr. Devs. J.
Available at: https://scholarlycommons.law.emory.edu/ebdj/vol29/iss1/4