One of the many changes made to bankruptcy practice by the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 (BAPCPA) is the treatment of a
claim for a debt secured by a motor vehicle or other personal property of the
debtor. New language inserted at the end of 11 U.S.C. Section 1325(a) by BAPCPA
changed the pre-BAPCPA practice of bifurcating (separating) a secured claim
into secured and unsecured components if the value of the collateral was less
than the amount of the claim. The new statutory language, nicknamed the
"hanging paragraph" because of its physical location and appearance on the
printed page, appears to eliminate the bifurcation of a secured claim, allowed
by 11 U.S.C. Section 506 if the debt was incurred within 910 days prior to
petition and if it is collateralized by a motor vehicle, or within one year
prior to petition if it is secured by other personal property.
Prior to BAPCPA, there were several options available for treatment of
secured claims in Chapter 13. The first option was an agreement between a
debtor and a secured claimant. Neither the "hanging paragraph" nor the current
language of 11 U.S.C. Section 1325(a)(5)(A) alters that possibility.
The second option was the so-called "cram down." Under this option, a debtor
could retain the property and pay the secured claim over the life of his plan,
despite the creditor's objection to the contrary.
In Assocs. Commercial Corp. v. Rash,the United States Supreme Court
explained this option:
Under the cram down option, the debtor is permitted to keep the
property over the objection of the creditor; the creditor retains the lien
securing the claim, see § 1325(a)(5)(B)(i), and the debtor is required to
provide the creditor with payments, over the life of the plan, that will total
the present value of the allowed secured claim, i.e., the present value of the
collateral, see § 1325(a)(5)(B)(ii). The value of the allowed secured claim is
governed by § 506(a) of the Code.
The last sentence was important because it effectively allowed bifurcation
of the claim into secured and unsecured components.
BAPCPA dramatically changed this option by excepting recently incurred
secured debt from bifurcation. In the words of one court, "Debtors must now
treat the entire allowed amount of the secured creditor's claim in the plan as
one claim. That is what the hanging paragraph requires."
The third option for a debtor was to surrender the collateral. Prior to
BAPCPA, any deficiency still owed to the creditor, resulting from the
collateral's value being less than the secured claim, was treated as an
unsecured claim. Treatment of claims arising from surrendered property,
pursuant to the new "hanging paragraph" under BAPCPA, is not as settled. Courts
are divided over whether the inapplicability of 11 U.S.C. Section 506 to
secured claims described eliminates the bifurcation of a claim after a debtor
has surrendered the collateral, such surrender thereby fully satisfying the
Most courts find that the statutory language very clearly and unambiguously
eliminates claim bifurcation. The wording plainly states that "[f]or purposes
of paragraph (5), section 506 shall not apply" if the debt was incurred within
910 days prior to petition and if it is collateralized by a motor vehicle, or
within one year prior to petition if it is secured by other personal property.
A Court explained:
...[T]he language of the hanging paragraph is not ambiguous. If § 506
does not apply, there can be no bifurcation of the claim, whether or not the
collateral is worth less than the claim and whether or not the collateral is
surrendered. Thus, removing the bifurcation provisions of § 506 means that the
910-claim is satisfied in full by surrender of the collateral under §
The court detected a fairness and balance in this approach, observing:
Ironically, the same provision that prevents the debtor from lien
stripping and reducing a creditor's allowed secured claim prevents the creditor
from claiming a deficiency against the debtor. While this new language may not
operate to hoist the 910-creditor by his own petard, surely the creditor may be
said to hang by his own paragraph.
A minority of courts do not find the language of the "hanging paragraph" to
be clear. For example, one court resorted to an examination of legislative
history to inform what it perceived to be ambiguous statutory language. It
determined that while Congress certainly could have written into the statute
clear and unambiguous language prohibiting a deficiency claim after surrender
of property, it did not.
While the "hanging paragraph" clearly prohibits bifurcation of a claim for
debt recently incurred, it does not preclude a secured claimant from pursuing
any applicable state law remedy, including an unsecured claim, for a deficiency
resulting from a debtor's surrender of the collateral. One appellate court
It seems extremely unlikely, given the purposes expressed in the
titles of the amendments, that the intent of the amendment was to eliminate the
long existing right of creditors in bankruptcy to an unsecured deficiency
claim.... Even those courts that have adopted the majority position denying
deficiency claims have acknowledged that the result is probably not what
Congress intended, but have figuratively shrugged their shoulders and relied on
the conclusion that the statute unambiguously requires a contrary result.
Thus it seems that, as so often happens, what is clear and unambiguous to
one court is not so to another. While the "hanging paragraph" of 11 U.S.C.
Section 1325(a) appears to eliminate the bifurcation of a secured claim
pursuant to 11 U.S.C. Section 506 if the debt was incurred within 910 days
pre-petition and if it is collateralized by a motor vehicle, or within one year
pre-petition if it is secured by other personal property, it may not completely
deny a creditor any recourse to satisfy a deficiency created by the surrender
of collateral that is worth less than the amount of the creditor's claim.
This is another issue under BAPCPA that is expected to go through the
appellate process and eventually reach the Supreme Court. Until then, secured
creditors are governed by the divergent opinions of how their claim will be
treated. Thus, the jurisdiction of the court will determine whether a
deficiency claim will be allowed after surrender.
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