In re Jones, 2018 WL 1898140 (Bkrtcy.W.D.Wash., 2018), Judge Allston found that a bankrupt debtor’s vehicle did not secure the amounts financed to pay for optional service and GAP contracts.

This claim objection appears to present an issue of first impression to the Court: whether optional contracts for gap insurance and vehicle maintenance should be treated as secured under the “hanging paragraph” of 11 U.S.C. § 1325(a). If not, the Court must then determine if and how to apportion prepetition payments on the loan between the secured and unsecured amounts of the debt. For the reasons below, the Court concludes that Kitsap’s claim is subject to bifurcation under Bankruptcy Code § 506(a)(1), Kitsap’s collateral does not secure the amounts financed to pay for the optional contacts, and the prepetition payments shall be apportioned pro rata between the secured and unsecured portions of the claim in accordance with the “dual status rule.”  On June 22, 2017, which was less than 910 days after the Debtor incurred the debt secured by the Vehicle, the Debtor filed for Chapter 13 bankruptcy relief. Prior to filing his petition, the Debtor paid a total of $2,831.57 on the financed obligation. Kitsap timely filed a proof of claim in which it asserted a secured claim in the amount of $58,230.19. The Debtor scheduled the Vehicle with a value of $40,000, and Kitsap does not challenge this valuation.  The Debtor timely objected to Kitsap’s claim, arguing the claim is not secured to the extent it seeks repayment of money advanced for the purchase of the Option Contracts. Relying on In re Penrod, 611 F.3d 1158 (9th Cir. 2010) (“Penrod II”), the Debtor argues the claim should be bifurcated and allowed as a secured claim only as to the amounts required to purchase the Vehicle. As a consequence, the amounts financed attributable to the Option Contracts can be allowed only as an unsecured claim. Kitsap responds that Penrod does not apply, as the financed debt at issue in Penrod included “negative equity” from a trade–in rather than option contracts that add value to the collateral. Kitsap contends that the Vehicle secures the entire amount financed by the Debtor. Kitsap further argues that if the Court determines the entire claim is not secured, then any prepetition payments would have been allocated only to the unsecured portion of the debt. The Debtor replies that Penrod should be interpreted broadly to include option contracts, and that the prepetition payments should be applied proportionately between the secured and unsecured portions of the debt, resulting in a smaller secured claim.

For further information about Penrod and such issues, contact Donald Cram at