§ 162.4     Effects of Discharge on Liens after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 162.4, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Because liens are about property rights and because the discharge in bankruptcy addresses personal liability, not property rights, there has always been ambiguity in Chapter 13 cases with respect to the effect of discharge on liens.1 Many bankruptcy cases pay lip service to the concept that liens “ride through” bankruptcy unless something happens during the case to upset the property rights that a lien represents.

[2]

But reorganization cases have always been the exception to the general rule that liens “ride through” bankruptcy. Put another way, it has always been true that reorganization cases affect lien rights by defining the extent of those rights, compensating the holder for those rights and sometimes substituting or changing the rights that are held by lienholders. Chapter 13 cases are no exception, and there are provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)2 that bring new focus to this issue.

[3]

BAPCPA amended § 1325(a)(5) to provide that when the holder of an allowed secured claim provided for by the plan has not accepted the plan and the debtor chooses not to surrender the collateral, the plan must provide for retention of the lien until “the earlier of— . . . the payment of the underlying debt determined under nonbankruptcy law; or discharge under section 1328.”3 Section 1325(a)(5) as amended says plainly that liens need not be retained once the underlying debt determined under nonbankruptcy law has been paid or the Chapter 13 debtor becomes entitled to a discharge under § 1328. “Discharge” under § 1328 means absolution from personal liability. In Chapter 13 cases under § 1325(a)(5)(B), liens can be released through a confirmed plan when the debtor becomes entitled to a discharge.

[4]

Notice the important placement of new subsection 1325(a)(5)(B)—it is within § 1325(a)(5) and is subject to the predicate, “with respect to each allowed secured claim.4 When the lien at issue is not an allowed secured claim—for example, when there is no value to support the lien for § 506(a) purposes5—the new lien retention provisions in § 1325(a)(5)(B)(i) do not apply.6

[5]

Amended § 1325(a)(5)(B) may eliminate the use of plan provisions that release liens in Chapter 13 cases upon the payment of the “allowed secured claim” without regard to whether the underlying debt has been paid in full and in advance of discharge under § 1328.7 But perhaps ironically, new § 1325(a)(5)(B)(i)(I)(bb) confirms that in Chapter 13 cases, liens are released at discharge based on payment of the allowed secured claim provided for by the plan. If the plan bifurcated the debt and provided for full payment of the allowed secured portion, then the lien is released at discharge without regard to whether the “underlying debt determined under nonbankruptcy law” is paid in full.

[6]

This principle is not new to Chapter 13 practice but its expression in § 1325(a)(5)(B)(i)(I)(bb) may be important when dealing with the strange new kind of debt described in the hanging sentence at the end of § 1325(a). Detailed elsewhere,8 BAPCPA created a new kind of debt that starts out as an allowed secured claim under § 1325(a)(5), but because it is purchase money secured by a car that was acquired for the personal use of the debtor within 910 days of the petition or the collateral is any other thing of value and the debt was incurred within one year of the petition, “section 506 shall not apply.”9 Consumer bankruptcy practitioners are puzzling over the meaning of this hanging sentence, but one thing seems clear: without § 506 to tell us whether this new kind of debt is secured or unsecured and to what extent, there will be problems determining how and when to release the liens that secure these new debts in Chapter 13 cases.

[7]

Perhaps new § 1325(a)(5)(B)(i) answers the question. Without regard to what kind of debt wanders into the dangling sentence at the end of § 1325(a), the lien securing that debt can be released at discharge in a Chapter 13 case. For example, a car lender with a fully secured claim because of the hanging sentence10 still faces release of its lien at discharge notwithstanding that the plan can modify the debt, for example, by changing the interest rate.

[8]

This won’t be a complete answer for some secured claims that fall within the hanging sentence at the end of § 1325(a). Because hanging-sentence claims are treated as fully secured for purposes of confirmation,11 sometimes Chapter 13 debtors choose to treat such claims through the plan by curing default and maintaining payments under § 1322(b)(5).12 When a claim is provided for under § 1325(b)(5), the debt is excepted from discharge at the completion of payments under § 1328(a)(1).13 Without a discharge in play, the liens secured by hanging-sentence collateral must be retained until payment of the underlying debt determined under nonbankruptcy law to satisfy the confirmation requirement in § 1325(a)(5)(B)(i)(I)(aa).14

[9]

The effect of discharge on liens after BAPCPA is perhaps best illustrated when the Chapter 13 debtor is not eligible for a discharge. Detailed elsewhere,15 BAPCPA changed the rules for successive bankruptcy discharges. Somewhat oversimplified, an individual debtor is not eligible for discharge in a Chapter 13 case filed within four years of the filing of a prior Chapter 7 case or within two years of the filing of a prior Chapter 13 case if the debtor received a discharge in the prior case.16 When the debtor is not eligible for discharge in the current Chapter 13 case, the BAPCPA amendments to § 1325(a)(5)(B)(i) condition confirmation that liens are retained until payment of the underlying debt determined under nonbankruptcy law. This is exactly what the Bankruptcy Appellate Panel for the Tenth Circuit concluded in Bank of the Prairie v. Picht (In re Picht).17

[10]

In Picht, the debtors discharged personal liability to a mortgage holder in a prior Chapter 7 case and then filed a Chapter 13 case before they were eligible for discharge under § 1328(f). After the Chapter 7 discharge and before the Chapter 13 petition, the mortgage holder obtained a state court in rem foreclosure judgment for $127,000. In the Chapter 13 case, the debtors contended that the in rem claim of the mortgage holder that survived the Chapter 7 discharge under Johnson v. Home State Bank18 was not protected from modification by § 1322(b)(2)19 and could be bifurcated into secured and unsecured components for purposes of confirmation. The debtors valued the allowable secured portion of the lien at $15,000 and proposed to pay that amount with interest through the plan.

[11]

After bouncing to and from the Bankruptcy Appellate Panel on other issues,20 the bankruptcy court concluded that the debtors could confirm a plan that released the mortgage holder’s in rem lien upon payment of $15,000 notwithstanding that lien release at discharge under § 1325(a)(5)(B)(i)(I)(aa) was not available. On a second trip to the BAP, the appellate panel disagreed. Citing § 1325(a)(5)(B)(i)(I)(bb), the BAP held that because discharge was not available to release the mortgage holder’s lien, the only confirmable plan had to preserve the mortgage holder’s lien until payment in full of the underlying foreclosure judgment:

[B]ecause the Pichts are not entitled to a discharge upon the completion of their Chapter 13 plan, subsection (bb) of § 1325(a)(5)(B)(i)(I) . . . is inapplicable. Thus, the Pichts’ only remaining option is to propose a plan that complies with subsection (aa), i.e., a plan providing that “the holder of such claim retain the lien securing such claim until . . . the payment of the underlying debt determined under nonbankruptcy law[.]” . . . [T]he state court entered an in rem judgment in favor of the Bank and against the residence in the amount of $127,000. The judgment established the amount of “the underlying debt . . . determined under nonbankruptcy law.” The Pichts’ plan requires the Bank to release its lien upon receipt of approximately $15,000, which is less than the amount the Bank is entitled to recover from the residence under nonbankruptcy law. . . . Since 2005, § 1325(a)(5)(B)(i) requires a Chapter 13 plan to specifically address the issue of the duration of a creditor’s lien. . . . [T]he plan improperly discharged or extinguished the portion of the Bank’s lien that exceeded the value of the residence as of the date of confirmation, even though the Pichts are not entitled to the benefit of a Chapter 13 discharge.21
[12]

Picht illustrates that after BAPCPA, when the debtor is not eligible for a discharge, the plan cannot be confirmed over objection unless it retains liens that secure allowed secured claims until payment of the underlying debt determined under nonbankruptcy law. This is substantial incentive for Chapter 13 debtors not eligible for discharges to provide for full payment of allowed secured debt through the plan. “Full payment” in this no-discharge context means nonbankruptcy, contract and state law entitlements. Debts too large to be paid in full during the Chapter 13 case that are secured by liens cannot be fully resolved through a Chapter 13 plan after BAPCPA when the debtor is not eligible for a discharge.

[13]

In Picht there was no question that there was some value to support the lien that survived discharge in the prior Chapter 7 case—at least $15,000 according to the debtors’ plan. What happens when there is no value? Detailed elsewhere,22 many circuit courts of appeals and bankruptcy appellate panels have held that a wholly unsecured lien can be stripped off a primary residence without violating the proscription against modification in § 1322(b)(2). Does this rule hold if the debtor is not entitled to a discharge? There is no obvious statutory connection between discharge and lien stripping in this context unless there is an allowed secured claim to trigger application of § 1325(a)(5)(B)(i)(I)(bb).23

[14]

But if there is no value to support the lien, there is no allowed secured claim and § 1325(a)(5)(B) is not applicable. So, for a debtor not eligible for discharge because of § 1328(f), if there is no value to support a lien, there is no obvious impediment to stripping off the lien through the plan. That said, several courts have held otherwise, though not always on the same logic.24

[15]

It is probably a good idea after BAPCPA for every Chapter 13 plan to explicitly provide for the release of liens at discharge consistent with new § 1325(a)(5)(B)(i)(I)(bb). A simple statement—“unless stated otherwise in this plan, at the entry of discharge all liens provided for by this plan are released consistent with section 1325(a)(5)(B)(i)(I)(bb)”—could be a Chapter 13 debtor’s best position to realize the full effect of discharge on liens at the end of a Chapter 13 case.


 

1  See § 358.1 [ On Liens ] § 162.3  On Liens.

 

2  Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

3  11 U.S.C. § 1325(a)(5)(B)(i)(I)(aa), (bb), discussed in § 447.1 [ Lien Retention, Including in No-Discharge Cases ] § 74.13  Lien Retention after BAPCPA, Including in No-Discharge Cases.

 

4  11 U.S.C. § 1325(a)(5).

 

5  See §§ 104.2 [ Lien Retention ] § 74.12  Lien Retention before BAPCPA, 105.1 [ Valuation, Claim Splitting and Dewsnup ] § 76.1  Valuation, Claim Splitting and Dewsnup, 106.1 [ Is Claim Secured, and By What? ] § 76.2  Is Claim Secured, and By What?, 444.1 [ General Rules Have Changed ] § 74.2  General Rules Changed by BAPCPA and 447.1 [ Lien Retention, Including in No-Discharge Cases ] § 74.13  Lien Retention after BAPCPA, Including in No-Discharge Cases.

 

6  See below in this section, and see §§ 104.2 [ Lien Retention ] § 74.12  Lien Retention before BAPCPA, 128.1 [ Modification of Unsecured Home Mortgage: Before and After BAPCPA ] § 80.13  Modification of Unsecured Home Mortgage: Before and After BAPCPA and 447.1 [ Lien Retention, Including in No-Discharge Cases ] § 74.13  Lien Retention after BAPCPA, Including in No-Discharge Cases.

 

7  See § 104.2 [ Lien Retention ] § 74.12  Lien Retention before BAPCPA.

 

8  See § 75.1  In General: Modification Without § 506.

 

9  11 U.S.C. § 1325(a), discussed in §§ 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506, 462.1 [ 910-Day PMSI Car Claims: A Reprise ] § 87.7  910-Day PMSI Car Claims after BAPCPA: A Reprise and 509.1 [ 910-Day PMSI Car Claims: Epilogue ] § 132.8  910-Day PMSI Car Claims: Epilogue.

 

10  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

11  See § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

12  See §§ 115.1 [ Curing Default, Waiving Default, Maintaining Payments and Combinations ] § 78.4  Curing Default, Waiving Default, Maintaining Payments and Combinations, 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506 and 462.1 [ 910-Day PMSI Car Claims: A Reprise ] § 87.7  910-Day PMSI Car Claims after BAPCPA: A Reprise.

 

13  See § 351.1 [ Long-Term Debts ] § 158.7  Long-Term Debts.

 

14  See § 447.1 [ Lien Retention, Including in No-Discharge Cases ] § 74.13  Lien Retention after BAPCPA, Including in No-Discharge Cases. See, e.g., In re Lilly, 378 B.R. 232, 235–37 (Bankr. C.D. Ill. Oct. 30, 2007) (Perkins) (Rejecting In re Williams, 367 B.R. 625 (Bankr. N.D. Ill. 2007), and accepting in part In re Hopkins, 371 B.R. 324 (Bankr. N.D. Ill. July 10, 2007) (Goldgar), when debtor is not eligible for discharge because of § 1328(f)(1), plan can modify interest rate and other terms of a 910-day PMSI car claim, but lien survives bankruptcy and debtor remains personally liable for balance of debt, including contract interest. “The DEBTOR . . . is not eligible for a discharge and AFS’s claim may not be bifurcated. By operation of Section 1325(a)(5)(B)(i)(I), AFS’s lien is retained until payment of the underlying debt determined under nonbankruptcy law . . . . The Hopkins court determined that the lien retention provision of Section 1325(a)(5)(B)(i) does not override or cancel out a debtor’s power to modify the terms of the contract under Section 1322(b)(2) and cram down a secured claim at the [Till v. SCS Credit Corp., 541 U.S. 465, 124 S. Ct. 1951, 158 L. Ed. 2d 787 (May 17, 2004),] rate under Section 1325(a)(5)(B)(ii). This Court agrees with that reasoning. . . . [T]he lien retention provision is properly interpreted as not affecting the amount that must be paid on a secured claim . . . . The Court departs, however, from the determination reached in Hopkins, that the phrase ‘debt determined under nonbankruptcy law’ refers to the petition date balance . . . . [T]he lien is retained until the entire amount of the debt, calculated without regard to the modifications permitted in bankruptcy, is paid. Where a Chapter 13 debtor is entitled to receive a discharge, the interest rate reduction permitted by Section 1325(a)(5)(B)(ii) and Till becomes permanent and binding on the creditor when the debtor completes the plan and receives a discharge. . . . Where a debtor does not receive a discharge, however, any modifications to a creditor’s rights imposed in the plan are not permanent and have no binding effect once the term of the plan ends. . . . Since the DEBTOR is not entitled to a discharge, and Section 1325(a)(5)(B)(i)(I)(bb) is not operative, AFS is entitled to a plan provision that it shall retain its lien until ‘the payment of the underlying debt determined under nonbankruptcy law.’ The DEBTOR, however, is entitled to confirm a plan over AFS’s objection that pays interest at the Till rate, not the contract rate. . . . The DEBTOR remains liable for the full amount of the underlying debt determined under nonbankruptcy law, including her liability for interest calculated at the contract rate. If the interest rate reduction achieved under a confirmed plan was determined to be permanent and binding on the creditor, that would result in a de facto discharge of a portion of the underlying debt, a benefit to which the DEBTOR is not entitled. Once the plan is completed, the DEBTOR remains liable for the balance of the ‘underlying debt determined under nonbankruptcy law,’ which remains secured by the lien under Section [1325(a)(5)(B)(ii)](I)(aa).”).

 

15  See § 543.1 [ New Limitations on Successive Discharges ] § 156.2  Limitations on Successive Discharges.

 

16  11 U.S.C. § 1328(f), discussed in § 543.1 [ New Limitations on Successive Discharges ] § 156.2  Limitations on Successive Discharges.

 

17  428 B.R. 885 (B.A.P. 10th Cir. May 4, 2010) (Thurman, Rasure, Romero).

 

18  501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (June 20, 1991).

 

19  See § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.

 

20  See Bank of the Prairie v. Picht (In re Picht), 403 B.R. 707 (B.A.P. 10th Cir. Apr. 14, 2009) (Michael, Brown, Starzynski), on remand, No. 08-20677, 2009 WL 1766820 (Bankr. D. Kan. June 20, 2009) (unpublished) (Berger).

 

21  428 B.R. 885, 890–93. See also In re Blosser, No. 08-2353, 2009 WL 1064455, at *1 (Bankr. E.D. Wis. Apr. 15, 2009) (Kelley) (Debtor ineligible for Chapter 13 discharge cannot strip wholly unsecured mortgage lien. “The [In re Jarvis, 390 B.R. 600 (Bankr. C.D. Ill. July 9, 2008) (Gorman),] reasoning is compelling because allowing a debtor to file Chapter 7, discharge all dischargeable debts and then immediately file Chapter 13 to strip off a second mortgage lien would not be much different than simply avoiding the mortgage lien in the Chapter 7 itself. But Chapter 7 debtors are not allowed to use § 506 to avoid liens. Dewsnup v. Timm, 502 U.S. 410[, 112 S. Ct. 773, 116 L. Ed. 2d 903 (Jan. 15,] 1992). Moreover, lien stripping under these circumstances does not appear to comport with Congressional intent, as evidenced by the 4-year bar between a Chapter 7 discharge and eligibility for a Chapter 13 discharge, and the provisions allowing avoided liens to ‘spring back’ on conversion or dismissal of the Chapter 13 case. 11 U.S.C. §§ 348(f)(1)(C), 349(b)(1)(C).”).

 

22  See § 128.1 [ Modification of Unsecured Home Mortgage: Before and After BAPCPA ] § 80.13  Modification of Unsecured Home Mortgage: Before and After BAPCPA.

 

23  See § 447.1 [ Lien Retention, Including in No-Discharge Cases ] § 74.13  Lien Retention after BAPCPA, Including in No-Discharge Cases.

 

24  See, e.g., Smith v. Rojas (In re Smith), No. CC-09-1321-DMkJa, 2010 WL 3096573 (B.A.P. 9th Cir. July 8, 2010) (Dunn, Markell, Jaroslovsky); In re Tran, 431 B.R. 230 (Bankr. N.D. Cal. June 25, 2010) (Jellen); In re Fenn, 428 B.R. 494 (Bankr. N.D. Ill. May 17, 2010) (Cox), discussed in §§ 128.1 [ Modification of Unsecured Home Mortgage: Before and After BAPCPA ] § 80.13  Modification of Unsecured Home Mortgage: Before and After BAPCPA, 146.1 [ Debts Discharged in Prior Bankruptcy and Nonrecourse Debts ] § 85.5  Debts Discharged in Prior Bankruptcy and Nonrecourse Debts, 305.1 [ Nonrecourse Claims and Claims Discharged in Prior Bankruptcy Case ] § 138.4  Nonrecourse Claims and Claims Discharged in Prior Bankruptcy Case, 334.1 [ Cause for Dismissal, Including Bad-Faith, Multiple and Abusive Filings ] § 152.4  Cause for Dismissal, Including Bad-Faith, Multiple and Abusive Filings, 447.1 [ Lien Retention, Including in No-Discharge Cases ] § 74.13  Lien Retention after BAPCPA, Including in No-Discharge Cases, 496.1 [ Good-Faith Filing Requirement ] § 110.1  Good-Faith Filing Requirement after BAPCPA and 543.1 [ New Limitations on Successive Discharges ] § 156.2  Limitations on Successive Discharges.