The New "Purchase Money" Definition in California

People shopping for a bankruptcy attorney are often stymied trying to figure out whether or not a lawyer is competent. Well, as of last week (at least for the western part of the U.S.), the courts have inadvertently handed down a simple test.

If you mention over the phone to the prospective lawyer that you have a car loan, he or she will ask you to come in with the original car contract (typically, a group of thin, 18” yellow sheets with incomprehensible legalese) or with a recent bill (which typically includes the payoff balance and monthly payment). The lawyer who asks for the original contract can potentially save you thousands of dollars.

Federal bankruptcy law states that if you bought your car less than 910 days(30 months)ago and the debt was the “purchase money” used to buy the car for your personal use, you would have to pay the bank back in full.

A critical question concerning the definition of purchase money arises in 40% of Chapter 13 cases. When someone trades in a car with a negative equity (owing more on the car than what a dealer would offer on a trade-in), the new lender typically offers a fat loan which includes the payoff for the old trade-in car’s negative equity as well as the cost to finance this year’s shiny new model. Does the “purchase money” mentioned in the law mean this total loan package or just the money that will purchase the new automobile?

This issue was litigated all across the country. (The car companies have billions of dollars riding on the outcome.) The courts ruled, time and again, that it was all “purchase money.” Last week, however, the Ninth Circuit ruled differently from the other eight Circuits that have spoken on this topic and, once again, has decided to go its separate way.

So, make sure that the bankruptcy lawyer you hire asks for sufficient information to thoroughly evaluate your case.