GAP Insurance Not In Car Lender's PMSI

GAP insurance, service contracts, administrative fees and the traded-in car payoff are not part of a car lender’s purchase-money secured claim in chapter 13 bankruptcy and can be crammed-down if the car is worth less than the loan balance, Judge Janice Miller Karlin ruled this week in In Re Miller, Case No. 08-40935, (Bankr. D.Kan. December 2, 2008).

Judge Karlin suggested the ruling may be different for service contracts in a future case if the creditor convinces her the contract enhances the value of the vehicle.  Creditors have the burden of proof to establish their purchase money security interest (PMSI) claim, she said.

Non-PMSI charges are still part of the creditor’s secured claim and must be paid in chapter 13 bankruptcy up to the value of the car. A debtor must pay the entire PMSI to retain a car even if the amount is greater than the car’s value if the loan was incurred within 910 days of bankruptcy.Judge Karlin ruled the creditor should pro-rate the the loan payments made between the purchase money and non-purchase money portions of the claim.

Judge Karlin affirmed her two prior rulings that the money used to payoff the loan on the traded-in car (negative equity) is not part of the purchase money loan used to acquire the new car, but is the payment of an pre-existing debt.  This issue is pending on appeal in another case before the U.S. Courts of Appeal for the 10th Circuit in Denver.

About Jill Michaux

Jill Michaux is a Kansas bankruptcy attorney. She can be found on Google+. She and her partner, Mark Neis, are Topeka's only board certified consumer bankruptcy law specialists.