The newly enacted prohibition on stripping down car loans in Chapter 13 bankruptcy to the value of the car may not cover as many transactions as drafters thought. When the bankruptcy bill was working its way through Congress prior to 2005, the car lenders persuaded Congress to protect them from having their claim in a bankruptcy measured by the value of the car that is the collateral.

You see, new cars lose a lot of value when they are driven off the lot, and lose value more rapidly for the first several years of the loan than the payments on the loan reduce the loan balance. If bankruptcy is filed during those years, there may be several thousand dollars difference between what is owed on the car and what that car is worth.

So the amendment prohibited stripping down car loans on cars purchased within 910 days of the bankruptcy filing where the lien on the car is a “purchase money security interest.” That term has a meaning outside of bankruptcy, describing a lien that secured a loan to buy the collateral. But what if the loan bought a bunch of other stuff too?

Bankruptcy lawyers have started analyzing all the things that the “car loan” bought: there is GAP insurance (protecting only the lender from the gap between the car’s value and the debt); there’s the unpaid loan balance on a trade in; there are various kinds of warranties, etc. All of these other things muddy the waters as to whether the lien in question is a “purchase money security interest” under state law.

As cases work there way through the courts, we will see how bankruptcy judges and appellate court judges apply longstanding non bankruptcy legal terms to this provision of the gloriously ill-drafted Bankruptcy “Reform” Act.