§ 74.11     The Power to Modify
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 74.11, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

11 U.S.C. § 1322(b)(2) permits the Chapter 13 plan to “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence.” With respect to claims secured by any property other than a principal residence, this very significant power allows debtors to change contract terms by altering interest rates and monthly payments, by changing the length of the repayment period, by changing the total amount to be repaid and by modifying acceleration and default provisions.1

[2]

Section 1322(b)(2) empowers the plan to rewrite the terms of prepetition loans, but modification of claims secured by property other than a residence must be undertaken with the confirmation requirements of 11 U.S.C. § 1325(a)(5) in mind. Absent acceptance by the secured claim holder2 or surrender of the creditor’s collateral,3 the Chapter 13 plan can force satisfaction of many secured claims, by cramdown under § 1325(a)(5)(B).4

[3]

Prior to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)5 the exception to the power to modify secured claims in Chapter 13 cases was a claim secured only by a security interest in real property that was the debtor’s principal residence.6 After BAPCPA, there is an additional exception to the broad power to modify secured claims in an enigmatic hanging sentence BAPCPA tacked onto the end of § 1325(a). Detailed elsewhere,7 a claim secured by a purchase money security interest in a motor vehicle acquired for the personal use of the debtor within 910 days of the petition and a claim secured by any other thing of value incurred within one year of the petition are protected from valuation under § 506(a) and, according to most courts, must be treated as fully secured through the plan without regard to the value of the collateral.8 Even after BAPCPA, claims protected from valuation by the hanging sentence at the end of § 1325(a) can still be modified so long as the plan treats the debt as fully secured.9 With respect to all other secured debts, BAPCPA did not upset the general power to modify the contract rights of the secured creditor through the Chapter 13 plan.10

[4]

The essence of cramdown in a Chapter 13 case is that the secured claim holder retains its lien11 and the debtor pays the lienholder the value of the collateral in installments12 with interest during the life of the plan. Two important calculations are involved: the value of the creditor’s collateral must be determined;13 and the present value of the allowed secured claim must be preserved during the repayment period by paying interest.14 When the debt is protected from valuation under § 506(a) by the hanging sentence BAPCPA added at the end of § 1325(a), all other aspects of the contract—such as interest rate, payment amount and duration—can be modified; only valuation is off the table.15


 

1  See, e.g., Salta Group, Inc. v. McKinney, 380 B.R. 515 (C.D. Ill. Jan. 4, 2008) (McDade) (Claim of tax sale purchaser can be modified under § 1322(b)(2) and paid over life of plan, with debtor continuing to own property notwithstanding tax deed. Section 108(b) does not terminate debtor’s modification rights.); In re Kasco, 378 B.R. 207 (Bankr. N.D. Ill. Nov. 8, 2007) (Hollis) (Although tax purchaser under Illinois law has no right to receive payments directly from property owner, tax purchaser is creditor, and its claim may be modified without regard to redemption under state law. Since state law right of redemption had not expired prior to bankruptcy filing, debtors could modify secured claim of tax purchaser by paying obligation in Chapter 13 plan.); In re Barton, 359 B.R. 681 (Bankr. N.D. Ill. Nov. 8, 2006) (Black) (Citing Johnson v. Home State Bank, 501 U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (June 10, 1991), county’s in rem property tax claim can be modified for payment without interest, and county is bound by terms of confirmed plan.); In re Tandy, No. 05-35140(13), 2006 WL 1044463 (Bankr. W.D. Ky. Apr. 18, 2006) (unpublished) (Cooper) (Interest rate on delinquent property taxes could be modified under § 1322(b)(2), with 6% rather than statutory rate of 12% allowed in confirmed plan.); In re Linkous, 339 B.R. 375 (Bankr. W.D. Va. Mar. 24, 2006) (Krumm) (Plan properly noticed and confirmed without objection modified car lender’s rights by providing for same monthly payments as in contract but eliminating final balloon payment.).

 

2  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.

 

3  See §§ 102.1 [ Surrender or Sale of Collateral ] § 74.5  Surrender or Sale of Collateral before BAPCPA, 446.1 [ Surrender of Collateral ] § 74.6  Surrender, Sale, Vesting in Lienholder and Payment with Property after BAPCPA and 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

4  11 U.S.C. § 1325(a)(5)(B), as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. 109-8, 119 Stat. 23 (2005), provides in part:

(5) with respect to each allowed secured claim provided for by the plan—
(B)(i) the plan provides that–
(I) the holder of such claim retain the lien securing such claim until the earlier of–
(aa) the payment of the underlying debt determined under nonbankruptcy law; or
(bb) discharge under section 1328; and
(II) if the case under this chapter is dismissed or converted without completion of the plan, such lien shall also be retained by such holder to the extent recognized by applicable nonbankruptcy law; and
(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim.

Prior to BAPCPA, § 1325(a)(5)(B) provided:

(5) with respect to each allowed secured claim provided for by the plan—
(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and
(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim.

 

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

 

6  See 11 U.S.C. § 1322(b)(2), discussed in § 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.

 

7  See discussion beginning at § 75.1  In General: Modification Without § 506.

 

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

 

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

 

10  New lien retention provisions BAPCPA added to 11 U.S.C. § 1325(a)(5)(B) could be characterized as limitations on the modification of secured claims. See §§ 104.2 [ Lien Retention ] § 74.12  Lien Retention before BAPCPA and 447.1 [ Lien Retention, Including in No-Discharge Cases ] § 74.13  Lien Retention after BAPCPA, Including in No-Discharge Cases.

 

11  See §§ 104.2 [ Lien Retention ] § 74.12  Lien Retention before BAPCPA and 447.1 [ Lien Retention, Including in No-Discharge Cases ] § 74.13  Lien Retention after BAPCPA, Including in No-Discharge Cases.

 

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

 

13  See discussion of valuation beginning at  § 76.1  Valuation, Claim Splitting and Dewsnup.

 

14  See §§ 111.1 [ “Value, As of the Effective Date of the Plan” Means Interest ] § 77.1  “Value, As of the Effective Date of the Plan” Means Interest and 112.2 [ Present Value After Till ] § 77.3  Present Value after Till.

 

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