## Facts

- Aubrey Howard traded in a 2005 Pontiac worth about $14,450 but owed $22,498.68, leaving approximately $8,048.68 in negative equity.
- On September 7, 2007, Howard purchased a 2007 Chevrolet Trailblazer for about $29,798 and paid $4,500 down.
- The dealer arranged financing through AmeriCredit that covered the vehicle price, taxes/fees, and the negative equity from the trade-in loan.
- AmeriCredit later filed a secured proof of claim for $34,698.07.
- Howard filed a Chapter 13 petition on December 3, 2008.
- Howard’s proposed plan treated AmeriCredit as secured only up to the Trailblazer’s asserted current value (about $13,250) and sought to cram down the remainder (including negative equity) as unsecured.
- AmeriCredit objected, asserting the entire debt was protected from cramdown by the § 1325(a) “hanging paragraph” because it was a 910-day purchase-money security interest (PMSI) vehicle claim.
- The bankruptcy court sustained AmeriCredit’s objection, and Howard took a direct appeal to the Seventh Circuit.

## Issues

1. Whether, under Illinois UCC § 9-103 and the Bankruptcy Code’s § 1325(a) hanging paragraph, financed negative equity from a trade-in is part of a vehicle lender’s PMSI.
2. If so, whether the hanging paragraph renders § 506 inapplicable and bars cramdown of the negative-equity portion of the creditor’s claim in Chapter 13.

## Decision

- The Seventh Circuit affirmed the bankruptcy court.
- The court held that negative equity financed as part of the same vehicle purchase transaction is a purchase-money obligation under Illinois UCC § 9-103.
- Because the debt was a PMSI in a qualifying 910-day personal-use vehicle, the hanging paragraph prevented application of § 506.
- Howard’s plan could not bifurcate AmeriCredit’s claim into secured and unsecured portions; the claim had to be treated as fully secured.

## Legal Principles

- In Chapter 13, cramdown under § 506(a) generally allows a secured claim to be treated as secured only up to collateral value, with any excess treated as unsecured.
- The § 1325(a) hanging paragraph provides that § 506 “shall not apply” to certain 910-day vehicle claims secured by a PMSI, barring bifurcation and cramdown for qualifying loans.
- Under Illinois UCC § 9-103, a PMSI exists to the extent collateral secures a purchase-money obligation, including obligations incurred as part of the collateral’s “price” or for “value given to enable” the debtor to acquire rights in the collateral, if the value is so used.
- Paying off a trade-in’s lien to complete the vehicle purchase can constitute “value given to enable” acquisition of the new vehicle; rolled-in negative equity may therefore be included within the PMSI for the new vehicle.

## Conclusion

The Seventh Circuit held that, under Illinois’s UCC definition of purchase-money obligation, rolled-in negative equity from a trade-in is part of the lender’s PMSI in the newly purchased vehicle; because the loan qualified as a 910-day vehicle claim, the § 1325(a) hanging paragraph barred cramdown and required the claim to be treated as fully secured.


AmeriCredit Fin. Servs., Inc. v. Howard (In re Howard), 597 F.3d 852 (7th Cir. 2010)