CHAPTER 13 – PART III

1. CHAPTER 13 – PART III Classification of unsecured claims §1322(b)(1) allows for classification of claims so long as each claim within the class are substantially similar. §§1322(b)(1) and 1122. However, the plan may not unfairly discriminate between classes. Compare chapter 11: Voting in chapter 11 vs. no voting in Chapter 13 The sole reason for classification in Chapter 13 is to prefer one class over another in terms of how much each of the class members are paid. The only guidance provided in the code is that the discrimination cannot be unfair. A consumer debt where an individual is also liable with the debtor can be separately classified from other unsecured claims. §1322(b)(1). The question here, however, is how differently can chapter 13 treat “co-signed” debts. Separate classification of non-dischargeable claims from other unsecured claims to prefer the non-dischargeable claims. Majority view: at least with educational loans it cannot be done Minority view: as long as the non-preferred creditors get what they would have received in chapter 7 the plan may discriminate. This view treats the interests of the debtor is paramount. In re Crawford [Supp. Pg 96] Plausible test for unfair discrimination? Classification of Student Loans

2. Secured Claims • Secured Claims • Security Interests in Personal Property • Example: Collateral is a vehicle worth $16,000 securing a debt of $18,000. • Chapter 7 • Choices: abandonment §554, redeem §722 (requires secured claim be paid in full) or reaffirm §524(c) (may require payment of full claim both secured and unsecured). • Chapter 13 • Prior law quite favorable and allowed a “strip down” to the amount allowed under §506(a). • Cram down (§1325(a)(5)(B) allows the debtor to retain possession and use of the encumbered asset, without consent, by providing in the plan (in deferred cash payments over the life of the plan) with a present value equal to the allowed secured claim. • The unsecured deficiency would be treated like all other unsecured claims. • In essence under this section the debtor could accomplish a redemption by installment which could not be accomplished under Section 722. • The 2005 Act limits lien stripping on PMSI’s [§1325(a)] • Cannot strip lien on vehicle acquired within 910 days of the petition date • Other personal property collateral 1 year prior to petition dated. • Eliminates a major incentive for filing chapter 13. • Section 1325(a)(5)(B)(i) was also added to require that the plan provide that the holder of the secured claim must retain its lien until the earlier of: (1) payment of the underlying debt under applicable non-bankruptcy law; (2) discharge under 1328; and (3) if the case is dismissed or converted with out plan completion then the lien will be retained to the extent recognized under applicable non-bankruptcy law.

3. Secured Claims Cont’d • Valuation of Collateral • In the consumer debtor context valuation questions typically arise in connection with • Redemption under §722 • Cramdown under §1325(a)(5) • Purpose of cramdown is that debtor wants to retain collateral, cannot afford to pay the lump sum required by §722 and the secured creditor will not consent. Cramdown allows the debtor to make installment payments, provided the secured creditor receives the present value of its collateral. • Section 506(a) states that the value shall be determined in light of the purpose of the valuation and the proposed disposition or use of the property. • Litigation has revolved around whether wholesale or retail is the appropriate measure. AS WE EARLIER DISCUSSED, THE SUPREME COURT RESOLVED THE ISSUE IN Associates Commercial Corporation v. Rash [text pg. 117]. Replacement, not liquidation, value was the appropriate standard where retention was proposed by the debtor. • 2005 limits Rash for PMSIs such as vehicles. See §1325(a) • Rash also limited by amendment to 506 which adds sub-section (a)(2).

4. SECURED CLAIMS CONT’D • Section 1325(a)(5)(B)(ii) provides no specific guidance on the interest rate to be used in discounting future payments to arrive at the present value of secured claims. • Till v. SCS Credit Corporation., 541 U.S. 465 (2004). Plurality adopted a rule that appears to require the bankruptcy court to use a market based approach (such as “prim rate”) that is current as of the time of plan confirmation to compensate the secured creditor for delay in payment and to adjust that rate upward to compensate the creditor for risk of nonpayment. • Dicta in Till suggests that in most circumstances a risk adjustment in the range of 1-3% above the prime rate is appropriate, at least in the chapter 13 context. • Secured Claims in Personal Residence. • Section 1322(b) provides that the power to modify the rights of secured creditors does not extend to claims secured only by the debtor’s principal residence. • Also cannot bifurcate the claims under 506(a) as a means of getting around the 1322(b)(2) limitation. Nobleman v. American Savings Bank [ Pg 570]

5. Chapter 11 Hypo Debtor’s Analysis Bank’s Analysis Assets Assets Cash $ 400,000 $ 400,000 Accounts 5,000,000 3,500,000 Inventory (at cost) 6,500,000 2,600,000 Prepaid Expenses 100,000 0 Property & Plant (leashold 1,500,000 1,250,000 & improvements net of depreciation Equipment (net of depreciation) 2,500,000 (included in preceding amount) Total Assets $16,000,000$7,750,000 Liabilities A/P $ 7,500,000 Bank Debt 10,000,000 Capitalized Leas Obligations 1,000,000 Total Liabilities $18,500,000