§ 87.7     910-Day PMSI Car Claims after BAPCPA: A Reprise
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 87.7, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

It may be years before the appellate courts are finished telling us what the hanging sentence at the end of § 1325(a) means.1 In the meantime, a guess is that the lobbyists who wrote this provision of BAPCPA intended special treatment for purchase money car loans incurred within 910 days of a Chapter 13 petition and purchase money liens secured by anything of value incurred within one year of a Chapter 13 petition.2

[2]

Between the cup and the lip, the hanging sentence at the end of § 1325(a) will interfere with the normal application of § 506 to determine the secured portion of allowable claims in Chapter 13 cases. This could have (unintended?) implications for the classification of unsecured claims.

[3]

Imagine a car acquired by the debtor for personal use within 910 days of a Chapter 13 petition. The car has a replacement value3 of $8,000 at the petition and it secures a debt of $10,000. But for the hanging sentence in § 1325(a), § 506(a) would split the car lender’s claim into an allowable secured claim of $8,000 and an allowable unsecured claim for $2,000. Under § 1325(a)(5), the plan would pay the $8,000 secured claim with present value interest and the $2,000 unsecured claim would be classified with other unsecured creditors to receive a pro rata share of distributions.4

[4]

After BAPCPA, § 506 “shall not apply” to the allowed secured claim just imagined.5 It may be that the allowed secured claim to which the hanging sentence refers is the $8,000 claim described above. By that interpretation, no obvious classification issues arise because the balance of the $10,000 claim would be the $2,000 unsecured claim treated in the normal fashion along with other unsecured debts.

[5]

But at this writing, a strong majority of courts addressing the issue has interpreted the hanging sentence at the end of § 1325(a) to work some alchemy with the result that the “allowed secured claim” for § 1325(a)(5) purposes becomes the entire $10,000 debt of the car lender.6 This construction of the hanging sentence produces a classification question: is there an unsecured claim buried in the 910-day PMSI car debt that must be treated under § 1325(a)(5) as if it is a fully secured claim?

[6]

If the hanging sentence is construed to have this effect, it creates a classification of unsecured claims that is provided (very) favorable treatment—the unsecured portion of the undersecured car claim in the example is paid in full with postpetition interest. There is nothing in the new hanging sentence to except this classification from the unfair discrimination test in § 1322(b)(1).7 Separate classification of the unsecured portion of an undersecured claim for payment in full with postpetition interest may be unfair discrimination in any Chapter 13 plan that does not pay all unsecured claims in full with postpetition interest.

[7]

Similar issues arise when Chapter 13 debtors try to pay undersecured claims using the permissive power in § 1322(b)(5). Under § 1322(b)(5), a Chapter 13 plan can cure default and maintain payments on any secured or unsecured claim when the last payment under the plan is due before the last payment under the debt contract.8 When the debt is undersecured, long-term treatment under § 1322(b)(5) can have the effect of paying the unsecured portion of the debt as if it is fully secured—with postpetition contract interest. This is a separate classification of the unsecured portion of the long-term debt, and payment under § 1322(b)(5) is unfair discrimination against other unsecured claims that are not being fully paid with postpetition interest through the plan.9

[8]

The hanging sentence at the end of § 1325(a) could be interpreted to have the same effect on 910-day PMSI car claims that are undersecured and on debts incurred within a year of the Chapter 13 petition that are undersecured by any other thing of value. Fully secured treatment for such claims is unfair discrimination against other unsecured creditors whenever the car or other collateral is worth less than the debt and general unsecureds are not being paid in full with postpetition interest through the plan. When the collateral is worth less than the debt, upon objection under § 1322(b)(1), the debtor might have to surrender the collateral or reach an agreement with the lienholder to limit the secured portion of the claim to the approximate value of the collateral to avoid unfair discrimination.10

[9]

All of this assumes that the hanging sentence added to § 1325(a) by BAPCPA has the effect of treating the unsecured portion of an undersecured claim more favorably than other unsecured claims under a Chapter 13 plan. There are other possible interpretations of the hanging sentence that avoid these classification and unfair discrimination issues.11


 

1  The hanging sentence at the end of 11 U.S.C. § 1325(a) provides:

For purposes of [§ 1325(a)(5)], section 506 shall not apply to a claim described in that paragraph if the creditor has a purchase money security interest securing the debt that is the subject of the claim, the debt was incurred within the 910-day [sic] preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle (as defined in section 30102 of title 49) acquired for the personal use of the debtor, or if collateral for that debt consists of any other thing of value, if the debt was incurred during the 1-year period preceding that filing.

 

2  See 11 U.S.C. § 1325(a), discussed beginning at § 75.1  In General: Modification Without § 506.

 

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

 

4  See §§ 101.1 [ General Rules ] § 74.1  General Rules before BAPCPA, 103.3 [ Partially Secured Claims ] § 74.10  Partially Secured Claims, 105.1 [ Valuation, Claim Splitting and Dewsnup ] § 76.1  Valuation, Claim Splitting and Dewsnup and 114.1 [ Calculating Payments to Secured Claim Holders ] § 78.2  Calculating Payments to Secured Claim Holders.

 

5  See discussion of hanging sentence at the end of 11 U.S.C. § 1325(a) in § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.

 

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

 

7  See 11 U.S.C. § 1322(b)(1), discussed in §§ 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1  Power to Classify Unsecured Claims: Tests for Unfair Discrimination and 457.1 [ In General ] § 87.2  Classification after BAPCPA.

 

8  See 11 U.S.C. § 1322(b)(5), discussed in §§ 155.2 [ Long-Term Debts ] § 88.9  Long-Term Debts and 171.1 [ Curing Default and Maintaining Payments on Unsecured Debt ] § 101.4  Curing Default and Maintaining Payments on Unsecured Debt.

 

9  See § 155.2 [ Long-Term Debts ] § 88.9  Long-Term Debts.

 

10  Surrender of collateral under 11 U.S.C. § 1325(a)(5)(C) is discussed in §§ 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; acceptance by the holder of an allowed secured claim under 11 U.S.C. § 1325(a)(5)(A) is discussed in §§ 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.

 

11  See further discussion of the hanging sentence in 11 U.S.C. § 1325(a) in § 451.1 [ In General: Modification Without § 506 ] § 75.1  In General: Modification Without § 506.