Cite as: Keith M. Lundin, Lundin On Chapter 13, § 76.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
When a Chapter 13 debtor keeps property (other than a residence) subject to a lien, the debtor can require the lienholder to accept the present value of the property in full satisfaction of the lien even if the total debt exceeds the value of the property. When the lienholder is undersecured—that is, when the debt exceeds the value of the collateral—valuing the collateral and dividing the debt into its secured and unsecured components is called claim splitting.1 Reducing the allowed secured claim to the value of the undersecured lienholder’s collateral is the predicate for lien stripping—the lien is stripped off the property by paying the allowed secured claim through the confirmed plan; the unsecured portion of the debt is separated from the lien and paid (or not paid) along with other unsecured claim holders.
Section 1325(a)(5)(B)(ii) states that the present value of property to be distributed under the plan on account of an allowed secured claim must be not less than the “allowed amount of such claim.” The allowed amount of a secured claim is determined by 11 U.S.C. § 506(a). An allowed claim is a secured claim “to the extent of the value of such creditor’s interest in the estate’s interest in . . . property.”2 For example, if the bank has a lien on the debtor’s car, the bank’s allowed secured claim will be the amount of its allowed claim up to the value of the car. If the car is worth $5,000 and the bank has a $3,000 claim, then the bank’s $3,000 claim is fully secured. If the bank’s claim is $7,000 and the car is worth $5,000, then the bank’s secured claim will be $5,000, and the bank will also have an unsecured claim for $2,000. To satisfy § 1325(a)(5)(B), the debtor must pay the present value of the allowed secured claim, which translates into the present value of the collateral or the present value of the allowed claim, whichever is smaller.3 If the plan is properly constructed, the lien retained by the secured claim holder will be coextensive with its allowed secured claim and payment of the allowed secured claim through the confirmed plan will retire the lien.4
This explanation of § 506(a) and its interaction with § 1325(a)(5)(B) is fundamental to all of Chapter 13 practice. The accuracy of the above example and the use of § 506(a) to define the extent of a secured claim in a Chapter 13 case were not controversial prior to the Supreme Court’s decision in Dewsnup v. Timm.5
Dewsnup is one of two Supreme Court decisions discussing lien stripping by consumer debtors. Dewsnup was a Chapter 7 case in which the Supreme Court held that a Chapter 7 debtor cannot use § 506(d) to void a lien to the extent a creditor’s claim exceeds the value of its collateral. The majority opinion in Dewsnup shakes the foundation principle that a claim is unsecured to the extent that it exceeds the value of collateral. Dewsnup could be misread to require that the unsecured portion of an undersecured claim continues as a lien on a debtor’s property notwithstanding that the claim is split into its secured and unsecured components by § 506(a).6
If read expansively, Dewsnup would eliminate lien stripping in Chapter 13 cases because debtors could not satisfy the secured portion of an undersecured claim by paying the present value of the collateral under § 1325(a)(5)(B). The certainty of application of § 506(a) in Chapter 13 cases would evaporate, and the power to modify secured claims in § 1322(b)(2) would be severely restricted. Applying Dewsnup in Chapter 13 cases would run afoul of Justice Blackmun’s instruction that Dewsnup was limited to Chapter 7 cases in which the debtor invoked § 506(d) to void a lien on real property.7
One year after Dewsnup, the Supreme Court directly addressed lien stripping in Chapter 13 cases in Nobelman v. American Savings Bank.8 Nobelman held that the exception to the power to modify claims in § 1322(b)(2) for claims secured only by real property that is the debtor’s principal residence prohibited a Chapter 13 debtor from splitting an undersecured home mortgage into secured and unsecured components.9 Nobelman has big consequences in Chapter 13 cases when a claim is secured only by real property that is the debtor’s principal residence.10 Nobelman establishes no limitation on the power of a Chapter 13 debtor to modify claims secured by property other than the debtor’s principal residence.
The courts have much debated whether Dewsnup or Nobelman is a limitation on a Chapter 13 debtor’s power to modify claims secured by personal property. Most courts have concluded that neither Dewsnup nor Nobelman limits claim splitting in Chapter 13 cases with respect to claims secured by property other than the debtor’s principal residence.11 As explained by one court:
In my view the [Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992)] decision was informed largely by the unbroken decades under the prior Bankruptcy Act of almost a hundred years of settled law, that chapter 7 straight bankruptcies did not affect liens and there was no such thing as lien stripping in a chapter 7 proceeding. . . . There is no such unbroken history with regard to chapter 13 under the new Bankruptcy Code. For one thing, the new Bankruptcy Code, unlike chapter XIII of the prior Bankruptcy Act, has specific provisions dealing with secured creditors in a chapter 13 proceeding, and that I believe undercuts one of the major rationales for the Dewsnup decision in chapter 7. . . . [Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993)] itself implies there is such a power in chapter 13. . . . [B]ifurcation of secured claims can occur in chapter 13 with regard to claims secured by real property interests unless they come within the specific prohibition of section 1322(b)(2). . . . [T]he bifurcation power should be found to exist in chapter 13, regarding both personal property and secured property liens.12
[I]t would make no sense to hold that the debtors can bifurcate in chapter 13, yet still face a lien that would “spring up” again after the chapter 13 plan is completed. . . . [A]ny voiding of the lien could not occur until the debtors have fully performed their plan, . . . any order providing for the avoidance of a lien would have to be contingent upon full performance of the plan. . . . With regard to chapter 13, . . . the Code does make an explicit and significant change from the prior bankruptcy laws. Chapter 13 under the current Code now provides for modification of the rights of secured creditors. The prior Chapter XIII under the Bankruptcy Act did not permit a plan to so provide. . . . I believe the Supreme Court would rule that lien stripping is permissible in chapter 13 if the prohibiting proviso which is the subject of the Nobelman decision is not applicable.13
For secured claim holders not protected from modification by § 1322(b)(2),14 claim splitting and lien stripping are realities of Chapter 13 life. Valuation of collateral becomes all important because secured claim holders are often undersecured, and the value of the collateral will determine the maximum amount that must be paid to satisfy § 1325(a)(5)(B). In the example above, if the car is really worth $7,000 and not $5,000, the additional $2,000 would be added to the allowed secured claim and would have to be paid at present value—that is, with interest—during the life of the plan.15 To the extent the undersecured claim is not secured by value, it can be dealt with in the same manner as other unsecured claims through the plan, often at significantly less than 100 percent payment.16 There are thus great incentives for secured claim holders to argue for the highest values imaginable and for debtors to argue the worthlessness of all collateral they wish to keep. The truth is almost always somewhere in between.
1 “Claim splitting” for eligibility purposes is discussed in § 14.1 [ Are Claims Split under 11 U.S.C. § 506(a)? ] § 14.4 Are Claims Split under 11 U.S.C. § 506(a)?. “Claim splitting” as a violation of the prohibition against modification in § 1322(b)(2) with respect to claims secured only by real property that is the debtor’s principal residence is 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.
2 11 U.S.C. § 506(a).
3 See, e.g., Barnes v. Barnes (In re Barnes), 32 F.3d 405 (9th Cir. 1994) (The confirmation requirement in § 1325(a)(5)(B)(ii) that a secured claim holder be paid not less than the allowed amount of its secured claim through the Chapter 13 plan is mandatory, not discretionary. Creditor was owed $69,000 under purchase agreement for 40 acres of land. Bankruptcy court fixed value of the real property at $43,000 and confirmed a Chapter 13 plan that provided for annual payments on the allowed claim of $43,000 with 10% interest amortized over the 19 years remaining under the original agreement. During the five-year term of that plan, secured claim holder would receive only $25,703.25. This violated the mandatory requirement of § 1325(a)(5)(B)(ii). Plan also violated five-year maximum duration limitation in § 1322(c) [redesignated as § 1322(d) by Pub. L. No. 103-394, § 301, 108 Stat. 4106 (1994)].); IRS v. Stewart (In re Stewart), 172 B.R. 14, 15–16 (W.D. Va. 1994) (Bankruptcy court erred in confirming a Chapter 13 plan “subject to resolution of the IRS’s objections” where the IRS filed a proof of claim listing part of its claim as secured, no objection to the proof of claim was filed, but the “confirmed” plan treated the IRS as wholly unsecured. “[T]he plan fails to provide that the IRS may retain its lien or that Debtor must surrender the property serving as security for the claim to the IRS. Since the § 1325 requirements are not yet met, Debtor’s plan is not ‘confirmable.’”); In re Famisaran, 224 B.R. 886, 892 (Bankr. N.D. Ill. 1998) (Plan fails confirmation requirement in § 1325(a)(5) because it fails to provide for payment in full of an allowed secured claim. Creditor took judgment for $25,151.18 that was declared nondischargeable in a prior Chapter 7 case. Creditor perfected lien on debtors’ employment contract with the postal service. Plan proposed to pay the creditor $320 per month for 60 months for a total of only $19,200, less than the principal amount of the judgment. “[T]his plan does not satisfy the requirements of § 1325(a)(5) because it does not provide for the full satisfaction of the judgment awarded to Seoul Travel found nondischargeable in the prior case by Judge Wedoff now secured by a pre-petition statutory lien. The value of the property to be distributed under the plan on account of Seoul Travel’s claim is less than the allowed amount of its statutory lien claim which extends to the Debtors’ pre-petition and post-petition earnings from the postal service, even those which come due after the term of the plan. Seoul Travel has not accepted the plan.”); In re Marshall, 181 B.R. 599 (Bankr. N.D. Ala. 1995) (Debtor undervalued a car and thus does not propose to pay the present value required by § 1325(a)(5).); In re Cox, 133 B.R. 198 (Bankr. N.D. Ohio 1991) (Plan provision for payment of $1,200 to repairman with statutory lien on and possession of debtor’s car satisfies § 1325 where the car is worth $3,400 and a lender has a $2,200 lien that is superior to the repairman’s lien under state law.); In re Jones, 119 B.R. 996 (Bankr. N.D. Ind. 1990) (Plan proposal to pay the present value of $19,000 fails to comply with § 1325(a)(5)(B)(ii) when the value of the collateral is $21,800); In re Folk, 70 B.R. 13 (Bankr. S.D. Ohio 1986) (Section 1325(a)(5) requires debtor to retire full value of collateral securing debt. When value of collateral is higher than the amounts proposed to be paid, plan cannot be confirmed.).
4 See § 104.2 [ Lien Retention ] § 74.12 Lien Retention before BAPCPA.
5 502 U.S. 410, 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992).
6 See § 80.13 Modification of Unsecured Home Mortgage: Before and After BAPCPA, § 85.5 Debts Discharged in Prior Bankruptcy and Nonrecourse Debts and § 121.2 Notice and Due Process Considerations, Including Claims Allowance and Valuation. See, e.g., In re Hernandez, 162 B.R. 160, 164–66 (Bankr. N.D. Ill. 1993) (Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992) and the long-standing principle that liens survive bankruptcy preclude confirmation from limiting the lien on a car to the value of the car at confirmation. “Dewsnup expressly held that a debtor is not allowed to use § 506(d) to strip down the undersecured portion of a lien. . . . The Court made clear that its holding was narrow. . . . However, its rationale applies to attempts to strip down any lien in a proceeding under any chapter of the Bankruptcy Code, including Chapter 13. . . . [T]his Court finds that a Chapter 13 debtor is not allowed to ‘strip down’ a lien, even one secured by personal property. . . . [P]ayment on the secured claim in this Chapter 13 proceeding is limited to the fair market value of collateral securing the debt. . . . The balance of the creditor’s claim is treated as unsecured. . . . Notwithstanding the for[e]going, VCI’s lien remains on the automobile, and will fully survive completion of the Chapter 13 Plan. The debtor will be discharged of personal liability if the Plan completes. However, the lien will remain on the vehicle to secure a debt that will then be without personal recourse.” The court acknowledges that § 1325(a)(5)(B) is inconsistent with the general principle that secured liens survive bankruptcy; however, the court construes § 1325(a)(5)(B) to only require “payment” under the plan in the amount of the secured “claim.”), rev’d, 175 B.R. 962 (N.D. Ill. 1994).
7 502 U.S. at 417.
8 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993).
9 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.
10 The 1994 amendments to 11 U.S.C. § 1322(c)(2) may have limited the effect of Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993) with respect to home mortgages on which the last payment “on the original payment schedule” is due before the final payment under the plan. 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.
11 See Ford Motor Credit Co. v. Lee (In re Lee), 162 B.R. 217 (D. Minn. 1993) (Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993) does not prevent confirmation of a Chapter 13 plan that splits an undersecured car lender’s claim into a secured and unsecured claim and provides that the car will vest in the debtor free and clear of any lien upon completion of payment of the secured portion of the claim. Nobelman limited the power of modification in § 1322(b)(2) only with respect to a debtor’s principal residence. Chapter 13 debtors can strip down the undersecured portion of an automobile lender’s lien.); In re Flowers, 175 B.R. 698, 700–01 (Bankr. N.D. Ill. 1994) (Disagreeing with In re Hernandez, 162 B.R. 160 (Bankr. N.D. Ill. 1993) (later reversed by district court), Chapter 13 debtor can strip down an undersecured automobile lender’s claim. “In language that is as plain as language can be, section 1322(b)(2) allows a plan to ‘modify’ the rights of holders of secured claims. . . . [S]ection 1322(b)(2), by its own words, does not limit the power to modify the rights of secured creditor to ‘payment terms.’ One of the rights of a secured creditor is the right to enforce its lien to the full extent of the contract debt. Nothing in the Code or in any Supreme Court decision excludes that right from the rights subject to modification in a chapter 13 plan. . . . We know . . . that ‘allowed secured claim’ in section 1325(a) has the section 506(a) meaning and is the portion of the total claim equal to the value of the collateral. . . . [U]nder § 1325(a)(5)(B) . . . the only lien retained is the lien securing the secured claim; that is, the claim to the extent of the value of the collateral.”), aff’d, 183 B.R. 509, 514–18 (N.D. Ill. 1995) (“[Section] 506(d) has a different effect in Chapter 13 reorganizations than that mandated by the Supreme Court’s [Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992)] decision in Chapter 7 liquidations. . . . Following § 506(a) treatment, § 506(d) seemingly acts to void any lien against a debtor that is not an ‘allowed secured claim.’ . . . [T]he Dewsnup decision in no manner dictated that its statutory construction and textual analysis of § 506(d) should extend beyond Chapter 7 of the Bankruptcy Code. . . . In this case, Creditor’s claim is secured by Debtor’s car, not Debtor’s principal residence, and § 1322(b)(2) therefore permits Debtor’s Chapter 13 payment plan to modify the ‘rights’ of Creditor’s secured claim. . . . [T]he language of § 1325(a) is connected with the language of § 506(a) and only requires that Chapter 13 creditors retain an enforceable lien on the ‘allowed secured claim,’ as described by 506(a). In other words, § 1325(a) only requires that Chapter 13 creditors retain an enforceable lien in an amount equal to the value of the collateral or security interest. . . . [T]his court interprets § 1325(a)(5)(B) to mean that a bankruptcy court must confirm a Chapter 13 debtor’s payment plan if such plan provides that the holders of allowed secured claims (in the § 506(a) sense) retain the liens securing such allowed secured claims and if the value of the property distributed under the plan is equal to the value of such allowed secured claims.”); In re Wilson, 174 B.R. 215, 220, 221 (Bankr. S.D. Miss. 1994) (Neither Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992) nor Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993) prohibits a Chapter 13 debtor from bifurcating an undersecured car loan, and upon completion of payments under the plan, the debtor is entitled to the car free and clear of the car lender’s lien. Dewsnup “itself limited the application of its ruling to the factual situation before it.” The legislative history to § 1325(a)(5)(B)(i) specifically authorizes lien stripping with respect to personal property. “[I]t is clear that Congress intended to allow a Chapter 13 debtor to bifurcate a claim and strip the lien upon payment to the secured creditor of its allowed secured claim.”); In re Cooke, 169 B.R. 662, 666 (Bankr. W.D. Mo. 1994) (“[Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993)] did not prohibit all lien stripping in Chapter 13, nor did the Supreme Court refer to [Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992)] in Nobelman. . . . The plain language of § 1322(b) indicates that a debtor may lien strip a creditor’s lien when that lien is in something other than the debtor’s principal residence.” Debtor paid allowed claim secured by a car during Chapter 13 case and prior to conversion to Chapter 7. After conversion, debtor can redeem the car for zero dollars under § 722.); In re Hernandez, 162 B.R. 160 (Bankr. N.D. Ill. 1993), rev’d, 175 B.R. 962, 965, 967 (N.D. Ill. 1994) (“The rationale of the [Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992)] Court, however, does not, on its face, apply to Chapter 13. . . . 11 U.S.C. § 1327 . . . provides . . . evidence of Congress’s intent to change the pre-Code practice that the Supreme Court found wanting in Dewsnup. . . . Section 1325 does not prohibit Debtor from stripping down [the creditor’s] lien on Debtor’s automobile. . . . [C]hapter 13 Debtors can strip down creditor’s liens without resorting to Code § 506(d).”); In re Ross, 162 B.R. 785, 790 n.6 (Bankr. N.D. Ill. 1993) (In a footnote, nothing in Dewsnup v. Timm, 502 U.S. 410, 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992) or Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993) prevents a Chapter 13 debtor from bifurcating a claim secured by a car and providing for full satisfaction of the lien by payment of the secured portion of the claim.).
12 Gibbons v. Opechee Distribs., Inc. (In re Gibbons), 164 B.R. 717, 718–19 (Bankr. D.N.H. 1993).
13 Gibbons v. Opechee Distribs., Inc. (In re Gibbons), 164 B.R. 207, 208–09 (Bankr. D.N.H. 1993).
15 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.
16 See discussion beginning at § 86.1 In General.