§ 74.1     General Rules before BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 74.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Prior to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA),1 there were five well-developed ways to satisfy an allowed secured claim in a Chapter 13 plan:

 

 1.
Surrender all collateral to the creditor in satisfaction of the allowed secured claim.2
 

 

 

 

 2.
“Smooth down”3 by providing that the creditor retains its lien and receives payments during the plan that have a present value not less than the allowed amount of the secured claim.4
 

 

 

 

 3.
Cure default and complete contract payments during the plan.5
 

 

 

 

 4.
Cure default and maintain payments if the last payment on the claim is due after the last payment under the plan.6
 

 

 

 

 5.
Convince the creditor to accept some other treatment.7
 

 

 

[2]

BAPCPA changed the available treatments of lienholders at confirmation in important and sometimes incomprehensible ways. After BAPCPA, creditors with allowed secured claims have at least five new entitlements at confirmation:

 

 1.
All allowed secured claim holders retain liens until the earlier of payment in full of the underlying debt determined under nonbankruptcy law or discharge under § 1328—without regard to when the secured portion of the allowed claim is paid.8
 

 

 

 

 2.
All allowed secured claim holders receiving distributions under the plan in the form of periodic payments must be paid in equal monthly amounts.9
 

 

 

 

 3.
When the allowed claim is secured by personal property, periodic payments through the plan must be sufficient to provide adequate protection.10
 

 

 

 

 4.
When the allowed claim is secured by personal property, value is determined based on replacement value at the petition without deduction for costs of sale or marketing, and for most collateral replacement value means retail, considering the age and condition of the property.11
 

 

 

 

 5.
Any debt incurred within 910 days before the petition and secured by a purchase money security interest in a motor vehicle acquired for the personal use of the debtor or any debt incurred within one year of the petition and secured by any other thing of value is treated as fully secured without regard to the value of the collateral.12
 

 

 

[3]

Section 1325(a)(5) is the principal protection of secured claim holders at confirmation. With the possible exception of 910-day PMSI car claims and secured debts incurred within a year of the petition addressed by BAPCPA in the “hanging sentence” at the end of § 1325(a),13 this section only applies to allowed secured claims. The creditor must file a proof of claim and have a secured claim under 11 U.S.C. § 506 before § 1325(a)(5) is available. The consequences of failing to timely file proof of a secured claim are significant.14 Collateral the debtor does not surrender must be valued for purposes of the plan, and that value must be paid during the three- to five-year life of the plan—again, with exception for 910-day PMSI car claims and other “hanging sentence” debts in cases filed after October 17, 2005.15 Because § 1325(a)(5)(B)(ii) speaks of value “as of the effective date of the plan,” the stream of payments through the plan must have a present value of at least the value of the collateral. To preserve present value of the stream of payments through the plan, Chapter 13 debtors typically pay interest to the holders of allowed secured claims.16

[4]

Prior to BAPCPA, the principal battlefields between debtors and claim holders secured by personal property were valuation of collateral, interest rate and length of repayment through the plan.17 With respect to claims secured by personal property, so long as the present value of the collateral was paid in full through the plan and so long as the payments met or exceeded depreciation, debtors had great flexibility to modify the original contract and to design a repayment plan that matched their financial ability.

[5]

BAPCPA elevated the rights and entitlements of secured claim holders in fundamental ways, and since 2005 litigation has overwhelmed Chapter 13 practice with respect to nearly every aspect of the treatment of secured claim holders at confirmation. The new lien retention entitlement in § 1325(a)(5)(B)(i)(I) has important implications when the plan modifies interest rates or values collateral and when the debtor is not entitled to a discharge.18 The equal-monthly-payment requirement in § 1325(a)(5)(B)(iii)(I) interferes with the order of distribution of payments to all creditors, collides with the rights of administrative claimants and seems to eliminate altogether some kinds of Chapter 13 plans, such as plans that refinance or pay secured debt in a single “balloon” payment.19 The enigmatic “hanging sentence” appended by BAPCPA to the end of § 1325(a) has produced hundreds of judicial decisions and several issues that seem destined for eventual Supreme Court resolution.20 The well-understood treatment of secured claims at confirmation in Chapter 13 cases was fundamentally disrupted by BAPCPA.

[6]

If the only collateral securing a claim is real property that is the debtor’s principal residence, the debtor’s options are more limited. 11 U.S.C. § 1322(b)(2) prohibits a Chapter 13 debtor from modifying the rights of the holder of a claim that is secured only by a security interest in real property that is the debtor’s principal residence.21 This prohibition of modification has been strictly construed by the U.S. Supreme Court to prohibit a Chapter 13 debtor from modifying the contract or state law rights of home mortgage holders.22 A Chapter 13 debtor can surrender the real property securing the mortgage holder’s claim, but the effect of surrender is uncertain with respect to other state law or contract rights, such as the mortgage holder’s right to collect a deficiency from the debtor.23 11 U.S.C. § 1322(b)(5) permits a Chapter 13 debtor to cure default and maintain payments while the case is pending on a claim secured only by real property that is the debtor’s principal residence if the last payment on the claim is due after the final payment under the plan.24

[7]

In Chapter 13 cases filed before October 22, 1994, the courts disagreed about the point in the deterioration of a home mortgage after which the plan could not cure default under § 1322(b)(5).25 In Chapter 13 cases filed after October 22, 1994, the power in § 1322(b)(5) to cure default and maintain payments on a “long-term” home mortgage is available if the petition is filed before the residence is “sold” at a foreclosure sale.26 There remains disagreement about when a sale at foreclosure is completed.27

[8]

Prior to the 1994 amendments, some courts permitted Chapter 13 debtors to pay a home mortgage in full during the life of the plan even though the final payment on the claim was due before the final payment under the plan. Some of these courts avoided the prohibition against modification in § 1322(b)(2) by relying on the general power to cure or waive default in § 1322(b)(3).28 Section 1322(c)(2), added to the Code by § 301 of the Bankruptcy Reform Act in 1994, clarifies that in Chapter 13 cases filed after October 22, 1994, a plan may modify and provide for the payment in full of a claim secured only by a security interest in real property that is the debtor’s principal residence when the final payment under the mortgage contract is due before the last payment under the plan.29


 

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

 

2  11 U.S.C. § 1325(a)(5)(C). See §§ 102.1 [ Surrender or Sale of Collateral ] § 74.5  Surrender or Sale of Collateral before BAPCPA and 446.1 [ Surrender of Collateral ] § 74.6  Surrender, Sale, Vesting in Lienholder and Payment with Property after BAPCPA.

 

3  One of the gurus of Chapter 13 Land, The Honorable L. Chandler Watson, Jr., of Anniston, Alabama, coined the phrase “smooth down” to more accurately describe cramdown in a Chapter 13 case. The authors are indebted to Judge Watson for this insight and many others.

 

4  11 U.S.C. § 1325(a)(5)(B). See § 74.11  The Power to Modify. See also 11 U.S.C. § 1322(c)(2), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 301, 108 Stat. 4106 (1994), which permits debtors in cases filed after October 22, 1994, to modify and pay a secured claim in full during the plan consistent with § 1325(a)(5) if the claim is secured only by a security interest in real property that is the debtor’s principal residence and if the last payment on the original payment schedule is due before the final payment under the plan. See § 85.2  Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994. BAPCPA made important changes to 11 U.S.C. § 1325(a)(5)(B), concerning lien retention, equal monthly installments and adequate protection. See § 74.13  Lien Retention after BAPCPA, Including in No-Discharge Cases§ 74.14  Equal Monthly Installments after BAPCPA and § 74.15  “Adequate Protection” after Confirmation after BAPCPA.

 

5  11 U.S.C. § 1322(b)(3). See § 115.1 [ Curing Default, Waiving Default, Maintaining Payments and Combinations ] § 78.4  Curing Default, Waiving Default, Maintaining Payments and Combinations.

 

6  11 U.S.C. § 1322(b)(5). See § 78.4  Curing Default, Waiving Default, Maintaining Payments and Combinations and discussion of curing default with respect to home mortgages beginning at § 81.1  Overview: General Rules for Saving Debtor’s Home.

 

7  11 U.S.C. § 1325(a)(5)(A). See §§ 101.2 [ Acceptance of Plan ] § 74.3  Acceptance of Plan before BAPCPA and 445.1 [ Acceptance of Plan ] § 74.4  Acceptance of Plan after BAPCPA.

 

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

 

9  11 U.S.C. § 1325(a)(5)(B)(iii)(I), discussed in § 448.1 [ Equal Monthly Installments ] § 74.14  Equal Monthly Installments after BAPCPA.

 

10  11 U.S.C. § 1325(a)(5)(B)(iii)(II), discussed in § 449.1 [ “Adequate Protection” after Confirmation ] § 74.15  “Adequate Protection” after Confirmation after BAPCPA.

 

11  11 U.S.C. § 506(a)(2), discussed in § 450.1 [ New Valuation Standards ] § 76.7  Valuation after BAPCPA.

 

12  See hanging sentence at the end of 11 U.S.C. § 1325(a), discussed beginning at § 75.1  In General: Modification Without § 506.

 

13  See discussion of hanging sentence beginning at § 75.1  In General: Modification Without § 506.

 

14  See § 132.7  Secured Claim Holders, § 135.5  Failure to File Proof of Claim§ 135.6  Untimely Filed Claims in Cases Filed before October 22, 1994: The Hausladen Phenomenon and § 135.7  Untimely Filed Claims in Cases Filed after October 22, 1994.

 

15  See discussion of hanging sentence beginning at § 75.1  In General: Modification Without § 506.

 

16  See  § 77.1  “Value, As of the Effective Date of the Plan” Means Interest§ 77.2  Interest Rate Anarchy: Present Value before Till and § 77.3  Present Value after Till.

 

17  See § 76.1  Valuation, Claim Splitting and Dewsnup and § 76.7  Valuation after BAPCPA for discussion of valuation of collateral; § 77.1  “Value, As of the Effective Date of the Plan” Means Interest, § 77.2  Interest Rate Anarchy: Present Value before Till and § 90.6  Discount Rates and Interest after BAPCPA for discussion of interest rates; § 78.2  Calculating Payments to Secured Claim Holders, \§ 100.1  Applicable Commitment Period Calculation, § 112.1  General Rule: Three Years, More or Less and § 112.2  Length of Plan after BAPCPA for discussion of duration of payments through the plan.

 

18  See §§ 447.1 [ Lien Retention, Including in No-Discharge Cases ] § 74.13  Lien Retention after BAPCPA, Including in No-Discharge Cases, 543.1 [ New Limitations on Successive Discharges ] § 156.2  Limitations on Successive Discharges and 560.1 [ Effects of Discharge on Liens after BAPCPA ] § 162.4  Effects of Discharge on Liens after BAPCPA.

 

19  See § 448.1 [ Equal Monthly Installments ] § 74.14  Equal Monthly Installments after BAPCPA.

 

20  See discussion of hanging sentence beginning at § 75.1  In General: Modification Without § 506.

 

21  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.

 

22  See Nobelman v. American Sav. Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (June 1, 1993), discussed in § 79.1  Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman. But see discussion of exceptions to protection from modification beginning at § 80.1  In General: Claims That Are Not Secured Only by Security Interest in Real Property That Is the Debtor’s Principal Residence

 

23  See §§ 102.1 [ Surrender or Sale of Collateral ] § 74.5  Surrender or Sale of Collateral before BAPCPA, 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 and 446.1 [ Surrender of Collateral ] § 74.6  Surrender, Sale, Vesting in Lienholder and Payment with Property after BAPCPA. See also § 264.1 [ To Surrender Collateral, Account for Repossession or Change the Treatment of a Secured Claim ] § 127.7  To Surrender Collateral, Account for Repossession or Change the Treatment of a Secured Claim for discussion of postconfirmation modification to surrender collateral.

 

24  See discussion of curing default beginning at § 81.1  Overview: General Rules for Saving Debtor’s Home.

 

25  See § 130.1 [ Prepetition Defaults ] § 82.1  Prepetition Defaults—When is Property “Sold” at Foreclosure?.

 

26  11 U.S.C. § 1322(c)(1). See § 130.1 [ Prepetition Defaults ] § 82.1  Prepetition Defaults—When is Property “Sold” at Foreclosure?.

 

27  See § 130.1 [ Prepetition Defaults ] § 82.1  Prepetition Defaults—When is Property “Sold” at Foreclosure?.

 

28  See § 142.1 [ Demand, Matured and Balloon Loans; “Short-Term” Mortgages before October 22, 1994 ] § 85.1  Demand, Matured and Balloon Loans; “Short-Term” Mortgages before October 22, 1994.

 

29  See § 143.1 [ Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994 ] § 85.2  Demand, Matured and Balloon Loans; “Short-Term” Mortgages after October 22, 1994.