Purchase money security interest
Ever since the bankruptcy code was amended in Oct 2005, one of the leading issues in bankruptcy law concerns the modifications to purchase money security interest in motor vehicles purchased by consumers within 2 ½ (910 days) prior to the filing of a voluntary petition. Prior to the 2005 amendments a debtor filing a Chap 13 bankruptcy could alter his or her payments to a secured creditor of a vehicle by cramming down the amount due and payable from the amount of the debt down to the value of the secured property , in this case the value of the vehicle. The 2005 amendment said that if a vehicle was purchased within 2 ½ years of the filing of the bankruptcy, and the creditor obtains a purchase money security interest, the ability to cram down the debt from the value of the debt to value of the collateral was disallowed.
This change in the law only applied to consumer debtors. Purchases of vehicles by business creditors were still permitted to be crammed down.
However, an issue of recent interest is whether the fact that the purchase price of the vehicle included the payoff of a traded-in vehicle also qualified for being considered a purchase money security interest which would prevent the chapter 13 debtor from cramming down the debt to either the value of the vehicle, or, the amount actually paid for the purchase of the new vehicle within 2 ½ years. That matter is now being considered by the United States Circuit Court of Appeals for the Second Circuit (the circuit covering the states of New York, Vermont, Connecticut, and Puerto Rico). Originally the bankruptcy court had ruled that the claim was not protected from modification because the entire obligation, which included the payoff of the previously traded-in vehicle, was not a “purchase money obligation.” The district court in New York reversed, and now the matter is before the Court of Appeals.