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910 Claims: An Exception to Discharge

8.10.2007

For debtors in Chapter 13 bankruptcies in North Carolina, it is becoming increasingly difficult to discharge the unsecured portion of a purchase money loan for a motor vehicle purchased within 910 days before the bankruptcy filing. Some debtors had attempted to discharge the unsecured portion of such debts through use of a self-serving provision slipped into their Chapter 13 plan. At least one bankruptcy court in our area has now held that a creditor is entitled to specific notice if the debtor proposes to impair the creditor's rights on a "910 Claim," and the creditor's failure to object to the plan does not make the debtor's improper treatment of a 910 Claim permissible.

In the case of Regional Acceptance Corporation v. Williams, Adversary Proceeding No. 06-09024 (Bankr. M.D.N.C. January 12, 2007), the United States Bankruptcy Court for the Middle District of North Carolina held that a creditor's lien and the debtor's personal liability will not be discharged upon the completion of a Chapter 13 plan where the plan failed to provide for the full payment of the creditor's secured claim as required by § 1325(a) of the Bankruptcy Code, notwithstanding the fact that the creditor failed to timely object to the treatment of its claim in the plan.

The debtor purchased a 2002 Mercury Sable two years prior to filing her Chapter 13 case, and Regional Acceptance Corporation ("RAC") provided the purchase money financing for the transaction. When the debtor filed her Chapter 13 bankruptcy case, the value of the vehicle was only $8,300, but the balance owed to RAC was over $13,000. The Chapter 13 plan provided RAC with a secured claim for $8,300 to be paid at 10.25% over the life of the plan, and an unsecured claim for the balance. RAC failed to object, resulting in the plan being confirmed under these terms. Instead of attacking the confirmation order, which could only be done by proving that the plan was confirmed as a result of fraud by the debtor, RAC brought an adversary proceeding seeking a determination that the balance remaining to be paid at the conclusion of the debtor's case would not be discharged because the treatment of its claim did not comply with the provisions of § 1325(a). The court agreed with RAC and held that the amount of its claim not paid through the plan would not be discharged because RAC was not afforded the proper due process and notice that the treatment of its claim was inconsistent with the requirements of § 1325(a).

This case addresses an issue of first impression under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). With the enactment of BAPCPA, a new class of claims was created by the unnumbered paragraph found at the end of § 1325(a), commonly referred to as the "Hanging Paragraph" because of its unique placement in the Bankruptcy Code. This section makes § 506 inapplicable to purchase money claims secured by motor vehicles acquired by the debtor for personal use within the 910-day period prior to the filing of the debtor's case. This type of claim is referred to as a "910 Claim." By making § 506, the Code section that governs the valuation of property, inapplicable to these claims, debtors are now required to pay the full balance of these claims to the secured creditors through their plans.

In this case, the debtor attempted to get around this provision by proposing a plan treatment that failed to pay the claim in full and then relied upon the preclusive effect of the confirmation order to say that the creditor could not later challenge the treatment of the claim in the plan. The debtor argued that RAC should have objected to the plan, and because it did not, it was bound by the terms of the plan. RAC argued that they were not bound by the plan because the treatment of its claim was inconsistent with the requirements of the "Hanging Paragraph."

The Bankruptcy Court focused on the lack of due process afforded to RAC and the fact that the debtor had not properly notified RAC that it held a 910 Claim and that its rights under the "Hanging Paragraph" as a 910 Claimant would be affected by the plan. RAC's claim was never identified by the debtor or the plan as a 910 Claim, nor was there any notice provided to RAC that it had rights that would be impaired by the plan. In fact, the plan itself indicated the claim was subject to valuation under § 506, which it was not. Therefore, the court held that RAC's lien and the debtor's personal liability survived the debtor's discharge. This case is currently on appeal to the United States District Court for the Middle District of North Carolina.

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