§ 74.7     Classification of Secured Claims
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 74.7, at ¶ ____, LundinOnChapter13.com (last visited __________).

Typically, each secured claim in the Chapter 13 plan is in a class by itself. Each secured claim is usually provided a unique treatment—a different value for the collateral, a different preferred monthly payment (if any), a different interest rate or some other treatment (surrender, for example1) specific to that secured claim. It is usually true that the collateral securing each secured claim is unique. The courts have long recognized that each secured claim can be placed in a separate class.2


Curiously, the statutory authority for the separate classification of each secured claim is not as clear as the statutory authority for separate classification of unsecured claims. Discussed in detail elsewhere,3 11 U.S.C. § 1322(b)(1) permits a Chapter 13 plan to “designate a class or classes of unsecured claims, as provided in Section 1122 . . . .” (emphasis added). There is no similar provision of Chapter 13 directly authorizing the separate classification of secured claims. This oversight likely resulted because separate classification of secured claims was the norm prior to enactment of the 1978 Code, and it never occurred to the drafters that there was a need for (new) statutory authority to separately classify secured claims. Unfortunately, at least one court has cited the lack of precise statutory authority as a reason for refusing to recognize the separate classification of secured claims in the context of modifying a Chapter 13 plan after confirmation to surrender collateral to a secured claim holder.4


Prohibiting Chapter 13 debtors from separately classifying secured claims reads too much into the absence of an analogue for § 1322(b)(1). Other provisions of Chapter 13 are inconsistent with the view that secured claims cannot be separately classed in a Chapter 13 plan. For example, 11 U.S.C. § 1322(a)(3) mandates that if the Chapter 13 plan classifies claims, the plan must “provide the same treatment for each claim within a particular class.” On its face, § 1322(a)(3) applies to classification of secured and unsecured claims. If Chapter 13 debtors cannot separately classify secured claims, then all secured claims must be in the same class. If all secured claims are in the same class, then all secured claims must be provided the same treatment under § 1322(a)(3).5 This is impossible in most Chapter 13 cases because each secured claim holder has unique collateral, and the monthly payment, interest rate and valuation with respect to each secured claim will be different. If Chapter 13 debtors cannot separately classify secured claims, it is likely that no Chapter 13 plan can be confirmed when the debtor has more than one secured claim to be dealt with through the plan. Several courts have recognized that Chapter 13 debtors must be permitted to separately classify secured claim holders if reasonable meaning is to be given to § 1322(a)(3).6 This view is consistent with pre-Code practice and allows Chapter 13 debtors the flexibility Congress intended in designing a plan that deals with each secured claim holder in a manner that is appropriate to the particular collateral, the underlying contract terms, the debtor’s intended use of the collateral, the length of the plan, the debtor’s financial condition and so forth. To require that all secured claims be placed in a single class would be the death of Chapter 13 as we know it.


The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)7 complicated the treatment of secured creditors in many ways that support the view that each secured claim must be separately classified through the plan. For example, there are new statutory provisions that require adequate protection before8 and after9 confirmation in Chapter 13 cases. Traditionally, adequate protection—especially with respect to cars and other personal property—is based on valuation and depreciation.10 It is only reasonable that adequate protection payments would be calculated and provided for on a claim-by-claim basis in Chapter 13 cases—each secured claim in a separate class.


Also, detailed elsewhere,11 BAPCPA enacted a strange hanging sentence at the end of § 1325(a) that excepts from the ordinary application of valuation principles under § 506 debts incurred within 910 days of the petition secured by a purchase money security interest in a motor vehicle acquired for personal use of the debtor and debts incurred within a year of the petition secured by a PMSI and any other thing of value.12 Secured debts falling within the hanging sentence must be treated as fully secured by the plan—without regard to the actual value of the collateral.13 It is not obvious how a plan with more than one secured creditor would satisfy the special rules in the hanging sentence without separate classification when some but not all of the secured debt falls within the hanging sentence.


The statutory standard for separate classification of unsecured claims in § 1322(b)(1)—that separate classification may not unfairly discriminate14—does not apply to classification of secured claims. In other words, although there are many tests for the propriety of the treatment of secured claims in a Chapter 13 case,15 the unfair-discrimination standard is not a condition on the separate classification of a secured claim. In some reported decisions, the propriety of the separate classification of a claim for more favorable treatment has turned on the determination whether the claim was secured.16


Notwithstanding the absence of clear statutory foundation, several reported decisions measure the separate classification of a secured claim against the same “unfair discrimination” standard applicable to unsecured claims under § 1322(b)(1).17 For example, in In re Crussen,18 the plan proposed to accelerate the payment of a second mortgage by increasing the contract payment from $475 to $1,125 per month. The bankruptcy court found that accelerated payment of the second mortgage would “indeed operate to benefit the debtor,” but the required higher monthly payment would be “unfair” to unsecured creditors.19 Similarly, in In re McNichols,20 through several iterations of the plan, the debtor attempted to put off payment of a judgment lienholder until 36 months or more after confirmation. The bankruptcy court found that the proposed delay “constitutes unfair discrimination for purposes of § 1322” because other creditors would receive principal and interest commencing with confirmation.21 Perhaps the moral here is that separate classifications of secured claims that are “unfair” to either the separately classified lienholder or to other creditors are sometimes refused by the bankruptcy courts applying language and logic similar to that used to measure the propriety of classifications of unsecured claims under § 1322(b)(1) notwithstanding the absence of a clear statutory route to this outcome.


1  See § 102.1 [ Surrender or Sale of Collateral ] § 74.5  Surrender or Sale of Collateral before BAPCPA.


2  In re Disney, 386 B.R. 292 (Bankr. D. Colo. Mar. 18, 2008) (Tallman) (“Each secured creditor in a Chapter 13 case represents a separate class of creditor.”); In re Eason, 181 B.R. 127, 135 (Bankr. N.D. Ala. Feb. 15, 1995) (Cohen) (“Because secured creditors have particular properties with different values and interest rates, each may be classified separately.”). Accord In re Knappen, 281 B.R. 714, 717 (Bankr. D.N.M. Jan. 17, 2002) (Starzynski) (“[E]ach secured claim is generally treated as a separate class.”); In re Anderson, 153 B.R. 527 (Bankr. M.D. Tenn. Apr. 13, 1993) (Paine); In re Rimmer, 143 B.R. 871 (Bankr. W.D. Tenn. July 24, 1992) (Brown); In re Powell, 15 B.R. 465 (Bankr. N.D. Ga. Nov. 17, 1981) (Robinson); In re Wittenmeier, 4 B.R. 86 (Bankr. M.D. Tenn. Mar. 10, 1980) (Jennings).


3  See discussion of classification of unsecured claims beginning at § 87.1  Power to Classify Unsecured Claims: Tests for Unfair Discrimination.


4  See Sharpe v. Ford Motor Credit Co. (In re Sharpe), 122 B.R. 708 (E.D. Tenn. Jan. 2, 1991) (Jarvis) (In the context of modification of a plan after confirmation to surrender collateral to a secured claim holder, court observed it is “implausible” that each secured claim holder is in a different class for purposes of § 1329(a)(1).). Contra Bank One, NA v. Leuellen (In re Leuellen), 322 B.R. 648 (S.D. Ind. Mar. 16, 2005) (Hamilton) (For purposes of modification after confirmation, each secured creditor is in a separate class and can be treated individually by the debtor under § 1329(a).); In re Knappen, 281 B.R. 714 (Bankr. D.N.M. Jan. 17, 2002) (Starzynski) (Because each secured claim can be treated as a separate class, debtor can modify the plan under § 1329(a)(1) to reduce to zero the amount payable to a secured claim holder that repossesses its collateral after confirmation.). See §§ 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 and 265.1 [ To Decrease Payments to Creditors ] § 127.8  To Decrease Payments to Creditors.


5  See First Bank & Trust v. Gross (In re Reid), 179 B.R. 504, 507 (E.D. Tex. Feb. 28, 1995) (Cobb) (Plan violates § 1322(a)(3) by proposing to pay one secured claim holder directly and another through the Chapter 13 trustee. The debtor scheduled a bank as partially secured by a car and Dillard’s as partially secured by other collateral. The plan called for a reaffirmation agreement with the bank and payments directly to the bank by the debtor. Dillard’s would be paid through the Chapter 13 trustee. “The amended plan fails to treat all impaired secured creditors equally under 1322(a)(3) and, as such, fails to satisfy 1325(a)(1). Dillard’s, an impaired secured creditor, is treated differently than the Bank. The debtors do not pay Dillard’s directly under their amended plan and, as a result, Dillard’s could not avoid the administrative expenses trustee’s fee during the loan repayment period. Under the amended plan, only the Bank could avoid these expenses by ‘booking’ its collateralized cash flow. Consequently, the plan violates section 1322(a)(3).”), aff’d, 77 F.3d 473 (5th Cir. Dec. 11, 1995) (per curiam) (Table decision).


6  In re Hernandez, No. 08 B 72148, 2009 WL 1024621 (Bankr. N.D. Ill. Apr. 14, 2009) (unpublished) (Barbosa) (Citing §§ 1322(a)(3) and 1322(b)(2), debtor may classify home mortgage lender separately and treat differently from other secured creditors; GMAC mortgage is in class separate from automobile lender.); In re Linnear, No. 07 B 19131, 2008 WL 268799, at *3 (Bankr. N.D. Ill. Jan. 29, 2008) (unpublished) (Schmetterer) (Plan that disburses current payment to mortgage holder before payment of car loan does not violate equal-treatment requirement in § 1322(a)(3) because mortgage debt is entitled to special treatment under § 1322(b)(2) and secured creditors are typically separately classified in a Chapter 13 case. “While § 1322(b)(1) specifically allows classification of unsecured claims . . . the Bankruptcy Code is silent regarding such issues as they relate to secured claims. . . . [S]ecured creditors can, and usually must, be classified separately. . . . [Section] 1322(b)(2) . . . provides a justification for debtors to treat home mortgage lenders differently than other secured creditors. It is held that a debtor may create different classes of secured creditors. Thus, the priority levels in . . . Debtor’s Plan do not violate § 1322(a)(3) or any other provision of the Bankruptcy Code.”); In re Wilson, No. 07 B 17012, 2008 WL 268798 (Bankr. N.D. Ill. Jan. 29, 2008) (unpublished) (Schmetterer) (Section 1322(a)(3) generally requires each secured creditor to be in separate class, with § 1322(b)(2) supporting separate classification of secured creditors. Ford Motor Credit’s objection to home mortgage lender’s receiving payments prior to car lender is rejected when plan separately classified each secured creditor.); In re Stewart, 290 B.R. 302, 304 (Bankr. E.D. Mich. Mar. 21, 2003) (Rhodes) (Plan can separately classify secured claims and pay some secured claims ahead of others. “There is no provision which prohibits a debtor from separately classifying secured creditors. . . . [S]eparately classifying secured vehicle claims and home mortgage claims does not violate the Code, and indeed is necessary because such claims simply cannot legally be provided the same treatment.”); In re Rimmer, 143 B.R. 871 (Bankr. W.D. Tenn. July 24, 1992) (Brown) (Because § 1322(a)(3) requires the same treatment for each claim within a class, each secured claim holder must be separately classed; the monthly payment, interest rate and valuation with respect to each secured claim is different.).


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


8  See 11 U.S.C. § 1326(a)(1)(C), discussed in § 426.1 [ Adequate Protection Rights before Confirmation ] § 57.3  Preconfirmation Adequate Protection Rights after BAPCPA.


9  See 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.


10  See §§ 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1  Adequate Protection of Lienholders before Confirmation, 426.1 [ Adequate Protection Rights before Confirmation ] § 57.3  Preconfirmation Adequate Protection Rights after BAPCPA and 449.1 [ “Adequate Protection” after Confirmation ] § 74.15  “Adequate Protection” after Confirmation after BAPCPA.


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


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


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


14  See § 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1  Power to Classify Unsecured Claims: Tests for Unfair Discrimination.


15  See discussion of secured claims beginning at § 74.1  General Rules before BAPCPA.


16  See, e.g., In re Brigance, 219 B.R. 486 (Bankr. W.D. Tenn. Mar. 13, 1998) (Latta) (Claims of deferred presentment service providers were not secured claims because the checks they held were not collateral separate from the underlying loan; separate classification for more favorable treatment of check-cashing service-claims was not appropriate based on their putative secured claims.), aff’d, 234 B.R. 401, 407 (W.D. Tenn. Mar. 22, 1999) (Turner) (Applying four-part test from In re Kovich, 4 B.R. 403 (Bankr. W.D. Mich. June 9, 1980) (Howard), “the court is aware of no legal distinction between EZ Cash’s rights and the rights of the other general unsecured creditors. . . . EZ Cash’s asserted failure to obtain security on its loan to Brigance does not entitle it to favorable treatment over unsecured creditors who never attempted to obtain security.”); In re Buchferer, 216 B.R. 332, 342–43 (Bankr. E.D.N.Y. Dec. 29, 1997) (Bernstein) (Not unfair discrimination to separately classify for payment in full loans from debtor’s pension plan while paying 14.4% dividend to unsecured claim holders because pension fund is a secured claim holder by virtue of its state law right to set off the pension loans against the debtor’s interest in the pension plan. “It is not ‘unfair discrimination’ under the plan for the debtor to pay a secured claim in full, while paying the class of unsecured claims less than their full amounts. . . . [Harshbarger v. Pees (In re Harshbarger), 66 F.3d 775 (6th Cir. Sept. 19, 1995) (Keith, Kennedy, Siler),] . . . is not persuasive. . . . [B]orrowing from one’s pension fund is the equivalent (and surely no more blameworthy) of refinancing one’s first mortgage and using the net loan proceeds to meet accrued unsecured debts. . . . How is that any different in economic result than repaying a pension loan and rebuilding the debtor’s equity in his pension plan which is also exempt from execution from federal and state law? . . . If the trustee could establish that the pension loan at issue can be collaterally attacked as a fraudulent transfer, then we might have a different case.”); In re Dukes, 213 B.R. 202 (Bankr. S.D. Ga. Sept. 15, 1997) (Walker) (Debtor cannot classify car loan as a secured claim where through an employee error the lender released its lien and the trustee can defeat the unperfected lien under § 544.); In re Cheak, 171 B.R. 55 (Bankr. S.D. Ill. Aug. 17, 1994) (Meyers) (Separate classification for more favorable treatment is not justified by debtor’s argument that bank is a secured claim holder where bank’s claim is based on a credit card debt and bank’s proof of claim does not evidence the recording of a judicial lien.).


17  See also § 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1  Power to Classify Unsecured Claims: Tests for Unfair Discrimination.


18  264 B.R. 723 (Bankr. W.D. Okla. July 17, 2001) (TeSelle).


19  264 B.R. at 726. Accord In re Liles, 292 B.R. 138, 141 (Bankr. E.D. Tex. Sept. 9, 2002) (Sharp) (Plan cannot separately classify a secured claim for accelerated payment at the expense of distributions to unsecured claim holders. Plan proposed to pay mobile home secured creditor in full in 46 months by increasing the contract payment from $408 to $979.18 per month. “Certainly, one may divide creditors into classes and treat those classes differently. . . . Section 1322(b)(1) of the Code prohibits unfair discrimination between classes of unsecured creditors. No specific statute prohibits unfair discrimination between secured and unsecured creditors but this Court concludes that to do so is abhorrent to the spirit of the Code and to Congressional intent.”).


20  258 B.R. 892 (Bankr. N.D. Ill. Jan. 11, 2001) (Squires), and 254 B.R. 422 (Bankr. N.D. Ill. Oct. 26, 2000) (Squires), motion to alter or amend denied, 255 B.R. 857 (Bankr. N.D. Ill. Dec. 14, 2000) (Squires); In re McNichols, 249 B.R. 160 (Bankr. N.D. Ill. May 25, 2000) (Squires).


21  249 B.R. at 178.