Kentucky Bankruptcy Law

Counsel with Care

Objecting to a claim in a Chapter 13 for a 506 cram down

I previously talked about the purpose of claims in bankruptcy. I want to focus in now on objecting to a claim. Some districts, including the Eastern District of Ketucky Bankruptcy Court, treat a confirmed plan as a court order. The plan contains motions made to the court and upon confirmation, these motions are granted. One such motion is an 11 U.S.C. Sec. 506 motion to value a secured claim.

This code section, 506, allows for certain secured debts to be altered based on the value of the underlying collateral. Practitioners refer to this as “cramming down” or “stripping off” a secured loan. An example of using 506 to “cram down” a loan would be where the debtor has a car they purchased for $15,000.00. However, at the time of filing, the fair market value of the car is only $10,000.00. They still owe $12,000.00 on the car. Under the 506 cram down, the secured part of the debt is only $10,000.00 and the rest is treated as unsecured in the Chapter 13 plan. For a car, this can only be done on vehicles purchased more than 910 days (about 2.5 years) prior to the bankruptcy petition is filed. On other secured items, there is no such limitation with the exception of real property.

There no longer is an ability to “cram down” a debt voluntarily secured against your home. This is where “stipping off” comes into play. If your home is now only worth $150,000.00 and your first mortgaged loan payoff is $155,000.00, then any other debt secured against the house is considered to be wholly “under water”. So if there is a second mortgage such as a home equity line of credit, that is completely “under water” in terms of equity in you home, then under 506 it can be treated as wholly unsecured through the plan.

By now you are wondering what this has to do with objecting to claims. Well, the secured creditor on that second mortgage and the lien holder on that car are going to file claims that say the amount of the secured debt is the entire loan. There is a presumption that a claim filed is valid since to file a false claim carries heavy penalties. So, which wins in a contest later on: the presumed valid claim or the confirmed plan? It is my opinion that the confirmed plan is going to win every time, but here is the question: why wait until then and find out? So, if you want an extra margin of confidence that your 506 motion and confirmed plan cram down or strip off that secured debt, then object to the claim.

Two strategy points come to the fore here. First, you want to wait and object to the claim only after the plan has been confirmed. There is no hard and fast rule as to when objections to claims must be filed, but you also want to do it in a reasonable time. So, objecting to the claim just after the plan is confirmed is the optimal time. Second, since this involves additional work, fees and a court appearance or two, you only want to object to claims when it is really important to get it right. In other words, to do so in the case of cramming down a car loan by a few thousand dollars would be like deer hunting with a bazooka. But, if you have tens of thousands of dollar in a second mortgage that can be stripped off, it may well be worth the extra work and effort.

January 29, 2011 Posted by | Uncategorized | , , , , , , , , , | 4 Comments