Sherry Daphne Pearson

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
SHERRY DAPHNE PEARSON
DEBTOR
CASE NO.
07-00478-5-ATS
ORDER REGARDING OBJECTION TO CONFIRMATION
The matter before the court is the objection filed by CitiFinancial Auto Corporation to
confirmation of the debtor’s chapter 13 plan. A hearing took place in Raleigh, North Carolina on
October 2, 2007.
The debtor, Sherry Daphne Pearson, filed a petition for relief under chapter 13 of the
Bankruptcy Code on March 8, 2007. In 2005, Citifinancial financed the purchase of a 2003 GMC
Yukon XL-V for the debtor’s now-estranged husband, Joseph Pearson, with the debtor as cosigner.
The debtor’s proposed chapter 13 plan “crams down” CitiFinancial’s claim from $24,608 to
$19,500, the value of the collateral as stated in the plan. CitiFinancial objects to this treatment,
contending that the “hanging paragraph” following § 1325(a)(9) of the Bankruptcy Code protects
the creditor’s claim from modification in the debtor’s plan. CitiFinancial argues that the debtor must
pay the claim in full because the elements of the hanging paragraph are met: CitiFinancial has a
purchase money security interest, the debt was incurred less than 910 days before the petition filing
SO ORDERED.
SIGNED this 07 day of March, 2008.
________________________________________
A. Thomas Small
United States Bankruptcy Judge
____________________________________________________________
Case 07-00478-5-SWH Doc 38 Filed 03/07/08 Entered 03/07/08 16:03:42 Page 1 of 4

1Neither party stipulates as to the truth of the factual allegations in the stipulation.
2
date, and the vehicle was purchased for the personal use of the debtor. 	The debtor contends,
however, that the hanging paragraph does not apply because the vehicle was acquired for her
husband’s use, not the debtor’s personal use, and because the loan finances gap insurance, resulting
in a non-purchase money security interest. Because the debtor was unable to attend the hearing, the
parties agreed to submit evidence related to the personal use issue at a later date.
Since the hearing, the parties filed a stipulation as to what the debtor’s testimony would be
if she gave testimony in open court.1 According to the stipulation, the debtor only cosigned the
vehicle loan in 2005 so that her husband could purchase the vehicle for his use. However, shortly
after the couple separated in 2006, Mr. Pearson stopped making payments to CitiFinancial.
Concerned about her credit status, the debtor took possession of the vehicle and began making the
payments. At the time of filing her petition, the 2003 Yukon was the debtor’s sole vehicle.
Section 1325 of the Bankruptcy Code provides that § 506 (which would allow the debtor to
cram down CitiFinancial’s claim) shall not apply to a claim “if the creditor has a purchase money
security interest securing the debt that is the subject of the claim, the debt was incurred within the
910-day [period] preceding the date of the filing of the petition, and the collateral for that debt
consists of a motor vehicle . . . acquired for the personal use of the debtor.” 11 U.S.C. § 1325(a).
It is undisputed that the vehicle was purchased within the 910-day period preceding the filing of the
debtor’s petition. At issue is whether the vehicle was purchased for the personal use of the debtor
and whether the financing of gap insurance in addition to the purchase price of the vehicle removes
the “purchase money” status from the security interest.
Case 07-00478-5-SWH Doc 38 Filed 03/07/08 Entered 03/07/08 16:03:42 Page 2 of 4

3
The court turns first to the issue of “personal use of the debtor.” While it appears that the
vehicle was acquired for personal as opposed to business use, the question is whether the vehicle
was acquired for the use of the debtor, or solely for her husband, who did not join in the debtor’s
petition. CitiFinancial contends that the court should consider the usage of the vehicle as of the
petition date, rather than the purchase date. However, “virtually all of the decisions reviewing the
‘hanging paragraph’ . . . conclude that . . . [the court] must determine usage as of the date of
acquisition of the motor vehicle and not usage as of the date of the debtor’s bankruptcy petition.”
In re Phillips, 362 B.R. 284, 303 (Bankr. D. Va. 2007) (citing In re Hill, 352 B.R. 69, 72 (Bankr.
D. La. 2006)), see also In re Solis, 356 B.R. 398, 408-09 (Bankr. D. Tex. 2006). The facts alleged
in the stipulation indicate that the vehicle was primarily driven by Mr. Pearson upon its acquisition
in October 2005, until November 2006, when Mr. Pearson wanted to relinquish himself of the
responsibility of making the payments. At that time the debtor took possession of the vehicle and
was using it exclusively when she filed her bankruptcy petition in early 2007, but the use as of the
petition date is irrelevant to whether the hanging paragraph applies.
This court recently addressed the meaning of “personal use of the debtor” in In re O’Blenes,
Case No. 07-0284-5-ATS (Bankr. E.D.N.C. March 7, 2008). In that case, the vehicle in question
was purchased exclusively for the use of the debtor’s minor daughter, not the debtor. The court
concluded that “personal use of the debtor” meant use for a non-business purpose by the debtor, not
a family member of the debtor. Based on the reasoning in the O’Blenes opinion, the court finds that
Ms. Pearson did not acquire the vehicle for her personal use, but rather, the vehicle was acquired for
her husband’s use. Consequently, the hanging paragraph of § 1325(a) does not apply to prevent
modification of CitiFinancial’s claim. Because the “personal use of the debtor” element is not met,
Case 07-00478-5-SWH Doc 38 Filed 03/07/08 Entered 03/07/08 16:03:42 Page 3 of 4

4
the court need not address the impact of financing gap insurance on the purchase money status of
CitiFinancial’s security interest.
Accordingly, the hanging paragraph does not apply to CitiFinancial’s claim, and the
objection to confirmation is DENIED.
SO ORDERED.
END OF DOCUMENT
Case 07-00478-5-SWH Doc 38 Filed 03/07/08 Entered 03/07/08 16:03:42 Page 4 of 4