The Chapter 13 Debtor proposed a Chapter 13 Plan which would cram down a car lender even though the claim was subject to the hanging paragraph of 11 U.S.C. § 1325(a) (the “hanging paragraph”). The Debtor had purchased a vehicle for her personal use within 910 days before she filed her Chapter 13 case, financed both the purchase price and some miscellaneous other expenses and granted the car lender a security interest in the car. The Debtor contended that because the car lender had also financed the Debtor’s purchase of GAP insurance (insurance to cover the “gap” between the balance owed on the car loan and the value of the vehicle if it is totaled in an accident or stolen), the purchase money security interest that the lender held for the balance of the purchase price was destroyed, or “transformed,” into a non-purchase money security interest. Thus, the Debtor asserted that she was not prohibited by the hanging paragraph from cramming the car loan down to the value of the car at confirmation, an amount below the loan balance.
The Chapter 13 Trustee objected to confirmation of the Debtor’s plan stating that the proposed cram-down of the car lender to the value of the car at confirmation violated the hanging paragraph. The Trustee advocated for the application of the “dual-status” rule: for purposes of the hanging paragraph, any part of a 910 day car loan which is non-purchase money may be treated as an unsecured debt and the remainder of the debt which is directly attributed to the car purchase may not be crammed down. The parties had stipulated to the essential elements of the hanging paragraph and disputed only whether the loan lost its purchase money character because the lien secured, in part, a non-purchase money obligation. The Court held, based upon the stipulated facts and both Tenth Circuit precedent and intra-Tenth Circuit authority, that the “dual-status” rule should be applied, preventing the Debtor from cramming down the amount of the debt for the purchase of the car, and denied confirmation of the Debtor’s plan. The Court also addressed the methodology for calculating the amount of the debt which is subject to the purchase money security interest and could not be crammed down in the Plan.