Courts have recently been wrestling with, and finding creative ways of interpreting, the un-numbered “hanging paragraph” at the end of 11 U.S.C. §1325(a) in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). This is the provision that makes 11 U.S.C. §506 inapplicable to a claim in which the creditor has a purchase-money security interest on the subject debt incurred within the 910-day period prior to the filing of the bankruptcy petition (popularly referred to as a 910 claim). One such case out of Tennessee is In re Ezell, __ B.R. ___, 2006 WL 598142 (Bankr. E.D. Tenn.) (R. Stair, Jr.). The Ezell court held that a creditor with a 910 claim must accept a chapter 13 debtor’s surrender of the motor vehicle collateral under §1325(a)(5)(C) as full satisfaction of the secured claim and is foreclosed from asserting any deficiency.
In Ezell, the creditor, JP Morgan Chase Bank (Chase), held a secured claim of approximately $25,000 on a Nissan Xterra, purchased by the debtor, Mrs. Ezell, for the Ezells’ personal use. The Xterra was to be surrendered in full satisfaction of the debt owed under the terms of the chapter 13 plan. Chase filed an objection to confirmation, arguing that because §506 was no longer applicable in determining value of a secured claim under the provisions of §1325(a)(5), its claim was fully secured for the entire value of the Xterra after surrender. Thus, Chase argued, it should be entitled to have any deficiency that may exist after liquidating the Xterra be provided for under the Ezells’ chapter 13 plan.
Surrendering Collateral Pre- and Post-BAPCPA
The Ezell court arrived at its decision by analyzing the interplay between §1325(a)(5)(C) and §506(a) in pre-BAPCPA decisions where the debtor surrendered collateral. The court wanted to determine whether pre-BAPCPA §506(a) was utilized in debtor surrender cases under §1325(a)(5)(C), or only in cramdown cases under §1325(a)(5)(B). Pre-BAPCPA, when collateral was surrendered pursuant to §1325(a)(5)(C), the creditor’s allowed secured claim would be fixed at the liquidation value. The creditor was also allowed an unsecured claim for the deficiency balance. The court found, in each case, that §506(a) was applied, directly or indirectly, to the bifurcation of the secured creditor’s claim into secured and unsecured components when the collateral was surrendered. However, §506(a) was only called upon in these pre-BAPCPA cases when valuation of the secured claim was in question.
Post-BAPCPA, the court explained that recourse to the §506(a) bifurcation of a claim into secured and unsecured portions has been eliminated by the hanging-paragraph provision of §1325(a).1 A 910 claim may not be reduced or bifurcated under §506(a), so the value of a creditor’s 910 claim is fixed at the amount at which the claim is filed, unless there are other reasons for reduction unrelated to value of the collateral, according to the Ezell court.
The court reasoned further that if a chapter 13 debtor decides to retain the collateral pursuant to §1325(a)(5)(B), and such debtor must treat the creditor’s entire claim as secured, then the same analysis should apply when the debtor opts to surrender the collateral under §1325(a)(5)(C). In other words, a creditor that is fully secured when the debtor opts to retain the collateral is also fully secured when the debtor opts to surrender the collateral and such surrender satisfies the allowed secured claim in full.
What Does It All Mean?
Ezell gives debtors a powerful option in the face of an obstinate creditor. A debtor in such a position could potentially surrender the car under the chapter 13 plan, satisfy that debt and have his or her plan confirmed over that creditor’s objection.
Secured creditors may be fully secured in their 910 claims, but they run the risk of being forced to take back their motor vehicle collateral and swallow any deficiency that may result from liquidation, along with the additional costs inherent in selling that surrendered collateral. Given that most motor vehicles depreciate the moment they are driven off the lot, there rarely will be a situation in which such creditors will not face a deficiency should a chapter 13 debtor opt to surrender and the creditor is forced to liquidate. This gives creditors with 910 claims the incentive to negotiate and, perhaps, accept treatment under a chapter 13 plan that is more akin to a traditional pre-BAPCPA cramdown. A chapter 13 debtor could keep the vehicle and offer to pay a negotiated value to the creditor that would be somewhere above liquidation value, but below the lien amount. In return, the creditor receives more than it would if it was forced to liquidate, plus it saves the inherent costs associated with liquidation. Such a position is arguably beneficial to both the debtor and creditor and carries with it the blessing of the Ezell court.
1 The Ezell court refers to this paragraph as the “Anti-Cramdown Paragraph.” This author believes that such a designation breeds confusion between the provision in §1325(a)(5)(B) that allows for a chapter 13 plan to be confirmed over creditor objections (i.e., crammed-down), and the “lien-stripping,” or “strip-down” provisions in §506, in which a secured creditor’s secured claim is limited to the replacement value. The “hanging paragraph” does not prohibit the cramdown of a 910 claim.