Opinion ID: 410407
Heading Depth: 1
Heading Rank: 1

Heading: the statutory concept underlying treatment of secured claims

Text: 3 Chapter 13 of the new Code is considerably more helpful to debtors than either the old Chapter XIII or the old or new straight bankruptcy provisions under Chapter 7. See Epstein, Chapter 13: Its Operation, Its Statutory Requirements as to Payment to and Classification of Unsecured Claims, and its Advantages, 20 WASHBURN L.J. 1 (1980). Creditors no longer have to agree to the Chapter 13 plan; it is court imposed. Business debtors are eligible to file now. Creditors may not file an involuntary proceeding as in Chapter 7 cases. Creditors are not necessarily entitled to full but delayed payment as under the old Chapter XIII but only to an amount equal to what they would have received in a straight bankruptcy. The stay and retention of property provisions are more protective than Chapter 7; and Chapter 13 also provides more favorable treatment of liens, defaults and taxes than Chapter 7. 4 On the question of discharge, under section 1328(a) of the new Chapter 13, the only debts excepted from discharge are alimony and child support, claims not included in the plan and certain long-term obligations voluntarily excepted from the plan. Thus except for alimony and child support the nine exceptions to discharge, including fraud, applicable to Chapter 7 are not applicable to Chapter 13. A debtor who obtains credit by fraud or other dishonesty receives a discharge under Chapter 13 but not under Chapter 7. 5 The concept behind the treatment of secured claims under the new Chapter 13 is fairly simple. The total claim of the secured creditor which is to be allowed is divided into two parts, the secured portion of the claim and the unsecured portion. These two are called in section 1325 the allowed secured claim and the allowed unsecured claim. 1 The secured portion of the total claim represents the present value of the collateral and the unsecured portion is the remainder, i.e., the amount the allowed claim exceeds the value of the collateral. The House Report on the new Code explains the reason for this division: 6 Most often in a consumer case, a secured creditor has a security interest in property that is virtually worthless to anyone but the debtor. The creditor obtains a security interest in all of the debtor's furniture, clothes, cooking utensils, and other personal effects. These items have little or no resale value. They do, however, have a high replacement cost. The mere threat of repossession operates as pressure on the debtor to repay the secured creditor more than he would receive were he actually to repossess and sell the goods. 7 Current chapter XIII does little to recognize the differences between the true value of the goods and their value as leverage. Proposed chapter 13 instead views the secured creditor debtor relationship as a financial relationship, and not one where extraneous, non-financial pressures would enter. The bill requires the court to value the secured creditor's interest. To the extent of the value of the security interest, he is treated as having a secured claim, entitled to be paid in full under the plan, unless, of course, he accepts less than full payment. To the extent that his claim against the debtor exceeds the value of his collateral, he is treated as having an unsecured claim, and he will receive payment along with all other general unsecured creditors. 8 H.R. No. 95-595, 95th Cong., 2nd Sess. 1,124, reprinted in [1978] U.S.Code Cong. & Ad.News 179, 301. 9 Section 1325(a)(5)(B) seems to require the Bankruptcy Court to assess interest on the secured claim for the present value of the collateral (if it is not to be paid immediately) in order not to dilute the value of that claim through delay in payment. In effect the law requires the creditor to make a new loan in the amount of the value of the collateral rather than repossess it, and the creditor is entitled to interest on his loan. 2 II. THE FACTS OF THE INSTANT CASE 10 The instant case involves an automobile loan in the principal amount of $5,659, which was to have been paid over 42 months at $233 per month, making a total debt of $9,799, consisting of interest at 21% in the amount of $2,922 and insurance and other charges of $1,217. Having made no payments under the contract, the debtor, a divorced woman with three children, filed a Chapter 13 complaint two months after incurring the debt. The judge found that although the debtor puffed her income somewhat on her loan application, the basic reason for her default was a reduction in wages. He declined to find that she acted dishonestly in securing the loan. She filed a payment plan asking to reduce the monthly payment on the automobile from $233 to $157 and to extend the time to 60 months. The judge at the confirmation hearing found that her conduct in securing the loan and immediately filing under Chapter 13 for a reduction in payments made the proposed plan lack good faith. He indicated he would approve a plan that continued monthly payments at $233 until the contract debt was paid in full, and the debtor amended her plan to embody this proposal. 11 The Bankruptcy Court then wrote an opinion in which it apparently changed its mind. The reasons for the change are not clear. At one point in its written opinion, in line with its statements at the confirmation hearing, the Court indicates that it is confirming a plan paying 100% of the Bank's claim. At another point in the written opinion the plan seems to contemplate a secured claim for the present value of the collateral, $4,800, plus an unsecured claim for the difference in this figure and the total contract price, plus 10% interest on the secured claim. The general thrust of the opinion seems to be to require full payment under the original contract. Yet at the end of its opinion the Court orders payment of a secured claim of $4,800 (the value of the collateral), plus interest on this amount at a 10% rate, plus an unsecured claim of $2,171.74, a figure that omits any contract interest. The Court states that it is subtracting the contract interest because under Chapter 13 contract interest stops upon the filing of the petition. The District Court affirmed. 12