§ 78.1 — Full Payment of Allowed Secured Claim
Revised: May 28, 2004
Except with respect to “long term” secured claims dealt with under § 1322(b)(5),1 the allowed claim of a creditor secured by property other than the debtor’s principal residence must be paid “not less than the allowed amount of such claim” to satisfy the confirmation requirement in § 1325(a)(5)(B)(ii). Full payment of allowed secured claims means two things: (1) the plan cannot treat an allowed secured claim as if it is unsecured;2 and (2) the plan must pay the present value3 of the allowed secured claim in full during the plan, not just part.4
But payment in full of the present value of the allowed secured claim is not the whole story: The full payment required by § 1325(a)(5) can be accomplished in an almost infinite combination of interest rates, time periods and installment payments. Subject to the present value (interest rate) rule in the district,5 the debtor has discretion with respect to each allowed secured claim as to how much to pay each month and over how many months to satisfy § 1325(a)(5).6
There are limitations on the debtor’s discretion with respect to full payment of allowed secured claims. The lien retention requirement in § 1325(a)(5)(B)(i) constrains the debtor to propose monthly payments that exceed the rate of depreciation of the collateral and that will retire the present value of the allowed secured claim before the collateral becomes worthless.7 The order of payments through the plan must be structured so that distributions available to allowed secured claim holders stay ahead of depreciation.8 And at the other extreme, the debtor can only pay toward allowed secured claims an amount that fits within the debtor’s budget else the plan will fail the feasibility test for confirmation.9
1 See § 129.1 [ Overview: General Rules for Saving Debtor’s Home ] § 81.1 Overview: General Rules for Saving Debtor’s Home.
2 See, e.g., In re Krueger, 192 F.3d 733, 736 (7th Cir. 1999) (Plan provision that bank release its second mortgage does not satisfy § 1325(a)(5) because contract required debtor to be current on all payments before bank was required to release its lien. Debtor’s plan must satisfy one of the three conditions in § 1325(a)(5)—“The secured creditor accepts the plan . . . the debtor surrenders the property securing the claim to the creditor . . . or the debtor invokes the so-called ‘cram down’ power . . . . In this case, Mr. Krueger’s plan did not attempt to satisfy any of those alternatives. It proposed, instead, that the Bank release the second mortgage on the debtor’s residence.”); New Jersey v. United States (In re Johns), 242 B.R. 265 (D.N.J. 1999) (Because New Jersey tax lien was choate before federal tax lien, New Jersey is entitled to secured claim that must be paid in full to accomplish confirmation.); In re Berry, 268 B.R. 819 (Bankr. E.D. Tenn. 2001) (Plan fails requirement that secured claims be paid in full because IRS lien reaches debtor’s pension plan.); In re Terry, 262 B.R. 657 (Bankr. E.D. Va. 2001) (Because contractor perfected its mechanic’s lien under Virginia law before the Chapter 13 petition, contractor’s claim must be treated as a secured claim to the extent of the value of the work performed.); In re Mizell, 260 B.R. 586 (Bankr. S.D. Ga. 2000) (When second lienholder objects to confirmation and proves that value of collateral is greater than the amount accepted by first lienholder, second lienholder must be treated as secured to extent of additional value. Plan proposed to pay first lienholder $10,000 as the value of a car. First lienholder did not object. Second lienholder objected and proved that the car was worth $11,000. Plan could not be confirmed unless second lienholder was treated as a secured claim holder for $1,000.); In re McMillan, 251 B.R. 484 (Bankr. E.D. Mich. 2000) (Plan violates § 1325(a)(5) because plan invalidates a second mortgage under the Michigan Home Improvement Finance Act without there having been the filing of an adversary proceeding. In the absence of an adversary proceeding, plan must treat the filed claim of the second mortgage holder as an allowed secured claim.); In re O’Gorman-Sykes, 245 B.R. 815 (Bankr. E.D. Va. 1999) (Plan fails because the IRS has a lien on all of the debtor’s assets, but the plan does not provide for all of the IRS’s secured claim.); In re Bosak, 242 B.R. 400 (Bankr. N.D. Ohio 1999) (Because agricultural lien was valid under Ohio law, Chapter 13 plan must treat lienholder as the holder of an allowed secured claim.); In re Blackerby, 208 B.R. 136 (Bankr. E.D. Pa. 1997) (Confirmation denied under § 1325(a)(5) because plan treats IRS as unsecured and IRS has a lien.); In re Leftwich, 174 B.R. 54 (Bankr. W.D. Va. 1994) (Plan fails confirmation requirement in § 1325(a)(5)(B)(ii) because it treats a furniture lender as an unsecured claim holder when the lender has an unavoidable security interest in the debtor’s furniture that must be valued and provided for through the plan.).
3 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.
4 See, e.g., Pletz v. United States (In re Pletz), 221 F.3d 1114 (9th Cir. 2000) (Confirmation denied because debtor’s interest as tenant by the entireties was properly valued using joint-life actuarial tables, and the resulting value was substantially greater than the amount the plan proposed to pay the IRS on account of its lien.); Barnes v. Barnes (In re Barnes), 32 F.3d 405 (9th Cir. 1994) (Plan fails confirmation requirement in § 1325(a)(5)(B)(ii) that proposes to pay $25,703.25 during the five-year term of the plan when allowed secured claim is $43,000. Confirmation requirement of § 1325(a)(5)(B)(ii) is mandatory.); Bank Am. Hous. Servs. v. Nenonen (In re Nenonen), 232 B.R. 803, 805 (M.D. Fla. 1998) (When debtor crams down an undersecured claim, § 1325(a)(5)(B)(ii) requires the plan to pay the present value of the allowed secured claim during the maximum five year life of the plan; reverses bankruptcy court’s sua sponte extension of payment of claim secured by a mobile home over 22 years with interest at the rate fixed in the contract. Citing Rash, “the United States Supreme Court, in analyzing the provisions of section 1325(a)(5)(B)(ii), has authoritatively construed the phrase ‘under the plan’ to mean ‘over the life of the plan.’”); In re Nosker, 267 B.R. 555 (Bankr. S.D. Ohio 2001) (Pro se debtor’s cryptic provision to pay judgment lienholder 10% does not satisfy requirement in § 1325(a)(5) that plan provide for full payment of secured claim.); In re Bookout, 231 B.R. 306, 310 (Bankr. E.D. Ark. 1999) (Section 1325(a)(5)(B)(i)–(ii) is not satisfied by plan that proposes to pay $400 per month until “other financing can be arranged.” This provision is “too vague” when bank has judgment lien on real property valued at $67,000.); In re Famisaran, 224 B.R. 886 (Bankr. N.D. Ill. 1998) (Plan fails confirmation requirement in § 1325(a)(5) because it proposes to pay $19,200 toward an allowed secured claim of $25,151.18.).
5 See § 112.1 [ Interest Rate Anarchy: Present Value Before Till ] § 77.2 Interest Rate Anarchy: Present Value before Till.
6 See § 114.1 [ Calculating Payments to Secured Claim Holders ] § 78.2 Calculating Payments to Secured Claim Holders for discussion of calculating payments to secured creditors.
7 See § 104.2 [ Lien Retention ] § 74.12 Lien Retention before BAPCPA.
8 See § 204.2 [ Order of Payments to Creditors ] § 113.7 Order of Payments to Creditors before BAPCPA.
9 See § 198.1 [ Able to Make Payments and Comply with Plan ] § 111.1 Able to Make Payments and Comply with Plan.