## Facts

- Debtors purchased a 2005 Ford Explorer for personal use, financing the purchase through Ford Motor Credit Company LLC (FMC) under a retail installment contract.
- As part of the transaction, debtors traded in a Chevy Tahoe valued at $8,000, but owed $10,324.13 on the Tahoe, creating $2,324.13 in negative equity.
- The dealer arranged to pay off the Tahoe lien and included the negative equity payoff in the amount financed by FMC, with the Explorer as collateral for the entire balance.
- Debtors filed a Chapter 13 petition 846 days after the purchase.
- The Chapter 13 plan proposed bifurcating FMC’s claim into (i) a secured claim equal to the Explorer’s value and (ii) an unsecured deficiency.
- FMC objected to confirmation, arguing the “hanging paragraph” after 11 U.S.C. § 1325(a)(9) barred bifurcation because the loan was a 910-day vehicle debt secured by a purchase money security interest (PMSI).

## Issues

1. Whether the portion of a vehicle loan used to finance rolled-in negative equity from a trade-in constitutes a purchase-money obligation under Article 9’s PMSI definition.
2. Whether a creditor is entitled to full anti-bifurcation protection under the § 1325(a) hanging paragraph when the claim includes both purchase-money and non-purchase-money components.

## Decision

- The court overruled FMC’s objection to the extent it demanded treatment of the entire claim as fully secured and immune from bifurcation.
- The court held that financed negative equity was not part of the purchase price of the new vehicle and did not create a PMSI in the Explorer for that portion of the debt.
- Because the claim included non-PMSI debt, the hanging paragraph did not bar application of § 506 to at least the non-purchase-money portion, permitting bifurcation consistent with the plan’s approach.

## Legal Principles

- PMSI status for motor-vehicle financing under § 1325(a)’s hanging paragraph is determined by Article 9’s definition of “purchase money obligation,” including whether the debt was incurred as part of the collateral’s price or as value given to enable acquisition of the collateral.
- Paying off preexisting debt on a trade-in (negative equity) is not “part of the price” of the new vehicle and is not value that “enables” the debtor to acquire rights in the new vehicle; it is an antecedent obligation satisfied in the same closing.
- The hanging paragraph’s anti-bifurcation protection applies only when the creditor’s claim is secured by a PMSI for the debt at issue; including non-PMSI debt prevents extending blanket 910-day protection to the entire claim.
- Section 506 bifurcation remains available in Chapter 13 for non-purchase-money components of an otherwise secured vehicle claim.

## Conclusion

The court held that rolled-in negative equity from a trade-in does not qualify as purchase-money debt, so the creditor could not treat its entire 910-day vehicle claim as immune from bifurcation under § 1325(a)’s hanging paragraph, and § 506 could be used to bifurcate at least the non-PMSI portion.


In re Sanders, 377 B.R. 836 (Bankr. W.D. Tex. 2007)