§ 86.4 — What Claims Are Unsecured: The Hanging-Sentence Enigma after BAPCPA
Revised: July 13, 2007
For more than a quarter century, it was true in bankruptcy cases: if there was no security or collateral for a debt and no right of setoff, the debt was an unsecured claim.1 Prior to BAPCPA, identifying unsecured claims in Chapter 13 cases included determining the portion of an undersecured claim that was an unsecured claim after application of § 506(a).2
BAPCPA generally respects the principle that debts without security are unsecured claims, but this respect broke down in Chapter 13 cases for a not-so-narrow class of car lenders and other lienholders. As detailed elsewhere,3 there is an almost incomprehensible sentence dangling at the end of § 1325(a), which reads as follows:
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.4
Several constructions of this sentence are plausible in Chapter 13 cases after BAPCPA.5 By some interpretations, even the unsecured portion of a hanging-sentence claim is entitled to the treatment reserved for allowed secured claim holders under § 1325(a)(5).
Before BAPCPA, an undersecured car lender or creditor with a purchase money lien on any other thing of value if provided for by the plan under § 1325(a)(5) would pass through § 506(a) on the way to confirmation. After valuing collateral, the claim would be split into a secured claim up to the value of the collateral and an unsecured claim for any debt in excess of that value.6
After BAPCPA, with use of § 506 forbidden, there is uncertainty about what happens at confirmation to the portion of an undersecured claim described in the hanging sentence. The hanging sentence may be interpreted to require Chapter 13 debtors to treat the “unsecured” claim of an under-secured 910-day PMSI car lender as if it were fully secured for purposes of § 1325(a)(5).7 This perversion of the usual entitlements of creditors at confirmation will mean that undersecured car lenders and other undersecured claim holders described in the hanging sentence will be entitled to full payment with present value interest even when other unsecured claim holders are receiving little or nothing through the confirmed plan. By this construction, the hanging sentence will divert money that would otherwise be equitably distributed to all unsecured claim holders to payment of the unsecured portion of an undersecured claim described in the dangling sentence.
Under pre-BAPCPA bankruptcy law, all claims entitled to priority under § 507 were unsecured claims with the possible (rare) exceptions of a secured administrative expense8 or alimony, maintenance or support secured by a lien in cases filed after October 22, 1994.9 After BAPCPA, with the possible (equally rare) exception of administrative expenses allowed under § 503(b),10 all priority claims are unsecured claims—including claims for alimony, maintenance or support, now known as domestic support obligations (DSOs).11 BAPCPA eliminated the possibility that a priority claim for a DSO might also be secured. Secured DSOs are still nondischargeable in a Chapter 13 case under § 1328(a)(2),12 but a secured DSO would not be entitled to priority under § 507(a)(1).
1 See 11 U.S.C. § 506(a), discussed in § 148.2 [ What Claims Are Unsecured Claims? ] § 86.3 What Claims Are Unsecured Claims?.
3 See discussion beginning at § 75.1 In General: Modification Without § 506.
4 Hanging sentence at end of 11 U.S.C. § 1325(a).
5 See § 451.1 [ In General: Modification Without § 506 ] § 75.1 In General: Modification Without § 506.
6 See 11 U.S.C. § 506(a)(1), discussed in § 105.1 [ Valuation, Claim Splitting and Dewsnup ] § 76.1 Valuation, Claim Splitting and Dewsnup.
7 See § 451.1 [ In General: Modification Without § 506 ] § 75.1 In General: Modification Without § 506.
8 See §§ 298.1 [ Miscellaneous Administrative Expenses and Other Priority Claims ] § 136.14 Miscellaneous Administrative Expenses and Priority Claims before BAPCPA and 300.1 [ Secured Priority Claims? ] § 136.18 Secured Priority Claims before BAPCPA.
9 See § 73.2 What Claims Are Priority Claims?, § 73.7 Secured Priority Claims?, § 136.1 Treatment of Priority Claims and § 136.20 Alimony, Maintenance and Support in Cases Filed after October 22, 1994.
10 See 11 U.S.C. § 507(a)(2).
11 See 11 U.S.C. § 507(a)(1), discussed in § 440.1 [ New and Changed Priority Claims ] § 73.3 Priority Claims Added or Changed by BAPCPA.
12 See 11 U.S.C. § 1328(a)(2), incorporating 11 U.S.C. § 523(a)(5), discussed in § 552.1 [ Domestic Support Obligations: § 523(a)(5) ] § 159.5 Domestic Support Obligations: § 523(a)(5).