By: Charles J. Schneider with contributions by Jeffrey Sieving
Amongst the many infirmities of BAPCPA, the “hanging paragraph” of 11 USC §1325(a)(9) has ripened into divergent interpretations from the local bench leaving chapter 13 creditor attorneys rejoicing and debtor attorneys scratching their heads. The “hanging paragraph” presents the question: can a chapter 13 debtor surrender collateral consisting of a vehicle in full satisfaction of a creditor’s secured claim or does the secured motor vehicle lender have a right to file an unsecured claim if the surrender results in a deficiency.
The “hanging paragraph” provides that “...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 preceding the date of the filing of the petition, and the collateral for that debt consists of a motor vehicle...”
The majority of courts across the nation have interpreted the “hanging paragraph” as allowing the debtor to surrender the vehicle in full satisfaction of the debt. Judge Rhodes has held, with the majority, that a debtor could surrender a vehicle in full satisfaction of a creditor’s claim. In re Evans, 349 BR 498 (Bankr.E.D.Mich. 2006). He states that the “hanging paragraph” is clearly unambiguous in its application to 910 creditors. The plain language of §1325(a)(9) makes it clear that section 11 USC § 506 does not apply to 910 creditor claims. A 910 creditor is deemed fully secured regardless of whether a debtor decides to retain the vehicle and make payments over time in accordance with 11 USC §1325(a)(5)(B) or if the debtor decides to surrender the vehicle complying with 11 USC §1325(a)(5).
Michigan is unique in that there are two recent opinions upholding the minority’s position. See In re Particka, 2006 WL 3350198 (Bankr.E.D.Mich.) and In re Hoffman, 2006 WL 3813775 (Bankr.E.D.Mich.). In these subsequent cases, Judge Shefferly and Judge Tucker, in their respective opinions, conclude that a 910 creditor can have a deficiency claim after surrender of a vehicle. The cases distinguish their position based on an analysis of §506's applicability to §1325(a)(5). Accordingly, §506 only applies to claims relating to §1325(a)(5)(B) and not §1325(a)(5)(C). When a debtor decides to retain the vehicle, §506 is used to determine the value of the secured claim. The effect of the “hanging paragraph” bars the debtor only from paying the “cram down” value. The court states that §506 had never applied to §1325(a)(5)(C) because the “estate does not have an interest in the property securing the claim”. Inasmuch as the estate no longer retains an interest in the vehicle, the creditor is allowed to pursue a deficiency claim under state law.
The inability of the local bench to rule uniformly on this issue is a testament to BAPCPA and the continuing difficulty judges and attorneys will have interpreting it. What should a chapter 13 debtor’s attorney do? Debtor’s attorneys should be composing an unsecured base plan (sometimes called a pot plan) rather than a percentage plan. By composing an unsecured base plan, a potential deficiency claimant has potentially no impact upon a chapter 13 plan. The deficiency claimant would just take a pro rata share imposing smaller shares on other unsecured claimants. This was a better practice prior to BAPCPA and remains the same today as it minimizes the impact that any claim can have upon the plan when the scheduled claim is understated.
