## Facts

- Betsy Honcoop (debtor) entered a finance contract to borrow funds to purchase a motor vehicle for personal use.
- Nicholas Financial, Inc. (creditor) held the contract as the secured lender (as assignee of the retail installment contract).
- The total amount financed was $11,339 plus interest.
- The contract’s itemization included a $500 charge for guaranteed auto protection (GAP) insurance in connection with the purchase transaction.
- The contract required monthly payments but did not specify what portion of each payment was attributable to the GAP charge as opposed to the vehicle itself.
- Honcoop filed a Chapter 13 bankruptcy petition within 910 days of executing the contract.
- In the bankruptcy case, Honcoop valued the vehicle at $4,570 and sought to value Nicholas’s secured claim based on the vehicle’s value rather than the full contract balance.
- Nicholas objected, arguing that the “hanging paragraph” following 11 U.S.C. § 1325(a) prevented use of 11 U.S.C. § 506 to reduce the secured claim and required treatment of its claim as fully secured.

## Issues

1. Whether the portion of the debt attributable to the financed GAP insurance was part of the creditor’s purchase-money obligation secured by a purchase-money security interest (PMSI) under applicable state U.C.C. law.
2. If the GAP insurance portion was not purchase-money, whether the presence of a non-purchase-money component caused the creditor to lose PMSI status entirely (transformational approach) or allowed the claim to be split into purchase-money and non-purchase-money portions (dual-status approach).
3. Whether the § 1325(a) hanging paragraph barred § 506 valuation for all of Nicholas’s claim, or only for the portion that qualified as PMSI.

## Decision

- The court held that the financed GAP insurance charge was not part of the “price of the collateral” and did not constitute “value given to enable” the debtor to acquire rights in the vehicle for PMSI purposes.
- The court applied the dual-status rule, treating Nicholas’s security interest as purchase-money only to the extent the obligation related to the vehicle’s purchase-money component, and non-purchase-money to the extent it related to GAP.
- The court denied the debtor’s motion to value to the extent it sought to reduce the purchase-money portion protected by the § 1325(a) hanging paragraph.
- The court granted the debtor’s motion to value to the extent it sought to bifurcate and treat the non-purchase-money GAP portion under § 506(a).

## Legal Principles

- The § 1325(a) hanging paragraph prevents bifurcation under § 506 only for a qualifying 910-day personal-use motor vehicle claim that is secured by a purchase-money security interest.
- Purchase-money status is determined by state law; under U.C.C. § 9-103, a security interest is purchase-money “to the extent” the obligation is incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in the collateral.
- Optional add-on products financed in the same transaction, such as GAP insurance, may fall outside the purchase-money obligation when they are not required to acquire the vehicle and are not treated as part of the vehicle’s price for PMSI analysis.
- When a single auto-finance obligation includes both purchase-money and non-purchase-money components, a court may apply the dual-status rule in a consumer transaction, preserving PMSI treatment for the purchase-money portion while allowing § 506 treatment of the non-purchase-money portion.
- Under the dual-status approach, the creditor’s claim must be allocated between PMSI and non-PMSI components to determine which portion receives hanging-paragraph protection.

## Conclusion

In In re Honcoop, the bankruptcy court ruled that a 910-day vehicle lender’s claim was protected from § 506 cramdown only to the extent it secured a true purchase-money obligation; because the financed GAP insurance was not purchase-money, the court applied a dual-status analysis and allowed the GAP portion to be bifurcated and treated under § 506 while leaving the purchase-money vehicle portion protected by the hanging paragraph.


In re Honcoop, 377 B.R. 719 (2007)