Used Car News

The Ninth District Court ruled that negative equity is unsecured debt in a bankruptcy filing, breaking with the other federal courts on this matter.

Marlene Penrod purchased a 2005 Ford Taurus at California Ford dealership in 2005. She paid $1,000 down and traded in her 1999 Ford Explorer.
The dealership paid $6,000 for the Explorer, but Penrod owed $13,000 on it. The negative equity was added to her contract for paying off the debt.
AmeriCredit and Penrod entered into a retail installment contract where she agreed to pay $31,700, of which $25,600 was for the car, with 20 percent interest.
Penrod filed for Chapter 13 bankruptcy protection about a year and a half later.
The Chapter 13 plan Penrod proposed included splitting out the negative equity from the rest of the contract into an unsecured claim.
AmeriCredit objected. A Bankruptcy Appellate Panel sided with Penrod.
The case then went to the Ninth District. The National Automobile Dealers Association, California Bankers Association and several captive finance companies and banks filed briefs in support of AmeriCredit.
But the panel of three judges agreed with the bankruptcy panel.
The issue came down to a definition of price.
AmereiCredit’s lawyers argued that the negative equity was part of the cost for Penrod in buying the car.
The judges stated that while AmeriCredit assuming the existing debt may be necessary for the sale, it has no bearing on the price of the vehicle.
Eight other circuit courts have ruled the two are so closely connected that they should be counted together.
“We decline to adopt the reasoning of our sister circuits,” the court’s decision states. “We acknowledge that our decision creates a circuit split, and we do not do this lightly.”
Attorney Larry Young said this decision means nothing for dealers and finance companies outside the West Coast.
“It just means, like a lot of other things, that the Ninth Circuit is different,” he said.
There are still two circuits were this matter remains without a decision – the first and the third.
Meanwhile, dealers and finance companies in the nation’s largest car market will need to consider how much risk they want to take on when a consumer has negative equity in a trade.
AmeriCredit’s lawyers told the court that more than a third of vehicle purchases include negative equity.