CHAPTER 6 TREATMENT OF CLAIMS IN CHAPTER 13 PLANS
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CHAPTER 6: TREATMENT OF CLAIMS IN CHAPTER 13 PLANS
Chapter 13 bankruptcy cases can be a long commitment, and given the changes in life that may occur, debtors may wish to change the treatment of claims after a plan confirmation when their personal circumstances change. Can a debtor change the secured status of a claim under § 1329 by proposing to surrender collateral? One interpretation is that if the debtor proposes the modification in good faith and would have had the ability to retain or surrender the collateral at the beginning of the plan, then the option must be available after the confirmation before completion of the plan. Another view is that § 1329 does not include surrender as an option, and so the section does not allow the debtor to reclassify a secured claim to an unsecured claim after plan confirmation.
Chapter 13 allows debtors to cram down the amount of a secured claim down to the value of the property, with the unsecured portion of the claim treated along with the general unsecured claims. This leaves a question on whether a mixed-use property, or a property that serves as a debtor's primary residence and that also includes commercial activity such as rental units or a store, also fall under the anti-modification provision. Courts have differed in their approaches to this question, resulting in three general approaches.
Another consideration in using the cramdown provision for a property, is whether the proposed lower valuation may induce the secured creditor to seek relief from the automatic stay for lack of adequate protection. For instance, the debtor may provide evidence of the property's state of disrepair as proof of its value, but may conversely end up demonstrating no ability to adequately protect the secured creditor's interest as the debtor has no ability to make the necessary repairs.
A. A Fresh Start with Flexibility
ABI Journal
August 2018
Written by:
Michelle H. Bass
Wolfson Bolton PLLC
Troy, Mich.
Five years is a long time. For many consumer bankruptcy debtors, committing to a five-year reorganization plan is a challenge. "What if I move, get married or lose my job?," are frequent questions clients may ask prior to executing a petition, schedule, statement and plan. The decision to retain a secured vehicle or home, while at the same time committing to making up to 60 months of plan payments, can be daunting.
Congress acknowledged this difficulty that honest-but-unfortunate debtors face as they attempt to plan for the next five years of their life on a fixed budget. Section 1329 of the Bankruptcy Code serves as the all-important "peace-of-mind" factor, providing the ground rules for a debtor, trustee or holder of an allowed unsecured claim to seek modification of a plan after confirmation.
Although this section does not spell out a specific formula for changing the treatment of a secured claim to an unsecured claim by surrendering collateral, the language of § 1329 has been interpreted to permit this very act. A thorough analysis of this Code section demonstrates that the value of a secured creditor's claim is more than adequately provided for based on other statutory requirements at the time of confirmation. The flexibility accorded to § 1329 by courts across the nation has no doubt contributed to the success of many plans that would have otherwise ended in dismissal. It follows that the equitable principle of allowing consumer debtors to have a "post-confirmation change of heart" is rightfully upheld by a majority of bankruptcy courts, giving debtors the freedom to alter the treatment and classification of secured claims at any time prior to the completion of their plan payments.
In the chapter 13 context, the most commonly filed post-confirmation modification involves the surrender of a car or house and the resulting treatment of that creditor's claim. The authority of § 1329(a) establishes the threshold requirement for applications to modify a confirmed plan. Any proposed modified plan must (1) increase or reduce the amount of payments on claims of a particular class provided for by the plan; (2) extend or reduce the time for such payments; or (3) alter the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim, other than under the plan. Critics argue that this language does little to alleviate the debtor from making full payments on a secured obligation. How, then, does this language actually translate to the surrender of collateral and the reclassification of a claim mid-plan?
The majority of courts that have dealt with this issue have looked beyond the plain meaning of the statute. At first blush, this language appears to be silent as to a modification that wholly changes the qualification of a creditor. On its face, § 1329 only provides for modifications that increase or reduce the amount of payments on a claim, or enlarge or reduce the time for making payments to a particular class of claims. However, the phrase "particular claims," as used in § 1329(a)(1), is synonymous with the phrase "allowed secured claims" by virtue of secured creditors being a class of claims unto themselves.1 Thus, where each secured claim is considered to be its own "unique" class in a chapter 13 plan, the proposed increase or reduction in payments on that claim will constitute a permissible modification.
Practically speaking, § 1329(a)(1) might be read to allow for a proposed reduction in payments on a secured car loan. For example, a plan modification under § 1329(a)(1) might propose for the secured creditor to go from receiving full equal monthly installments to receiving no payments whatsoever. Under § 1329(a)(1), any modification to alter payments made to a creditor in a particular class is a valid modification of the treatment of that class. Changing the classification of a secured auto lender to an unsecured creditor might therefore be accomplished, notwithstanding the additional requirements under § 1329(b) and (c).
Likewise, § 1329(a)(3) provides that distributions to a creditor treated under a plan might be modified to account for payments made outside the plan. Courts that allow for debtors to change the treatment of a secured creditor have ruled that the act of "surrendering collateral" constitutes a form of payment other than under the plan.2 Section 1329(a)(3) provides a mechanism to alter a
secured claim and its treatment in light of any non-plan payment made on the claim (i.e., the surrender of collateral in full satisfaction of the claim3 in lieu of continued equal monthly installment payments). However, what about the so-called "binding effect" of the order confirming a plan? How is it possible, critics in the minority might ask, that this omnipotent contract between the debtor and his/her creditors can so easily be undone?
The answer is simple: A post-confirmation modification will amend the order confirming a plan as long as the modification itself conforms with the standards set forth under title 11 as of the time of confirmation. These significant requirements can be found in the remaining two subsections of § 1329, which encompass the prerequisites for confirmation. Subsection (c) prohibits a proposed modification from either extending the plan terms beyond 60 months or altering the debtor's original plan-commitment period. Under the loftier subsection, § 1329(b)(1), any proposed plan modification must comport with the requirements of §§ 1322(a) and (b), 1323(c) and 1325(a).
While secured creditors tend to argue that under this provision debtors do not possess a universal right to make changes to the classification of their claims, it must be noted that secured creditors themselves are never permitted to seek modification of a debtor's plan. All secured creditors must be treated in accordance with the provisions of §§ 1322 and 1325 as of the time of confirmation. In other words, by the time that an allowed party-in-interest seeks modification of the plan, the debtor has already elected one of three treatments with respect to his/her secured creditors: He/she may (1) retain the collateral under § 1325(a)(5)(B), (2) surrender the collateral under § 1325(a)(5)(C), or (3) propose a modification of the secured claim so long as it falls within the confines of § 1325(a). Therefore, it makes sense that one of the three basic requirements for a plan to be modified necessitates that the modification comply with the standards for confirmation.
Under this analysis, any plan modification that is proposed in good faith pursuant to § 1325(a)(3), as incorporated by § 1329(b)(1), will automatically satisfy the statutory requirements for an allowed modification. Likewise, if a debtor has the option of retaining or surrendering secured collateral to satisfy a claim at the outset of his/her case, logic follows that this option must be available during the course of the confirmed plan. After all, § 1329 is regarded by most courts as being a nonprohibitive Bankruptcy Code section; it does not prevent the debtor or an allowed party from taking any action. Instead, it is generally recognized as permitting certain types of modifications.4
Understanding this analysis is important for debtors because of the great possibility of a change in their circumstances following confirmation. A negative unforeseeable change in circumstances will likely affect the debtor's ability to make payments on secured collateral and ultimately receive a chapter 13 discharge. The filing of a plan modification to surrender a vehicle might be the factor that allows a debtor to remain in chapter 13. While courts have disagreed on what constitutes the level of "change" necessary to substantiate a viable reclassification modification in order to surrender collateral, only the minority view continues to uphold what the Sixth Circuit...
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