11 U.S.C. Section 506 -- Determination of Secured Status

What Is Section 506?

Section 506 of Title 11 of the United States Code (Determination of Secured Status) is a foundational provision of the Bankruptcy Code. It determines how secured claims are valued in bankruptcy and allows bifurcation of undersecured claims -- splitting them into a secured portion (up to the value of the collateral) and an unsecured deficiency. This is the legal basis for cramdown.

Key Provisions of Section 506

Key provisions of Section 506:

• 506(a)(1) -- Secured Claim Valuation: An allowed claim secured by a lien is a secured claim to the extent of the value of the creditor's interest in the collateral. The excess is an unsecured claim. Value is determined by the court in light of the purpose of the valuation and the proposed disposition of the property.
• 506(a)(2) -- Replacement Value Standard: For individual debtors, if the property is personal property (like a car), the value is replacement value -- what a retail buyer would pay for property of similar age and condition. This standard was added by BAPCPA in 2005.
• 506(b) -- Oversecured Creditors: An oversecured creditor (one whose collateral exceeds the debt) is entitled to interest, fees, and costs provided in the agreement, to the extent the collateral covers them.
• 506(d) -- Lien Voidance: To the extent a lien secures a claim that is not allowed, the lien is void. This provision has been narrowly construed by the Supreme Court in Dewsnup v. Timm.

How This Affects You

Section 506 directly affects common bankruptcy strategies:

• Car cramdown (Chapter 13): If you purchased your vehicle more than 910 days before filing, 506(a) lets you pay only the car's current value as a secured claim. The hanging paragraph of Section 1325(a) prevents cramdown for cars purchased within 910 days.
• Lien stripping: In Chapter 13, if your home is worth less than your first mortgage, Section 506 combined with Section 1322(b)(2) allows you to strip off (remove) wholly unsecured junior liens, converting them to unsecured claims.
• Valuation disputes: The value of collateral is frequently contested. Creditors want high values (more secured claim, more payment). Debtors want low values (less secured, more dischargeable). Courts use replacement value for personal property under 506(a)(2).
• Oversecured creditors: If a creditor is oversecured, they accrue interest and fees during the case under 506(b). This is why mortgage lenders' claims often grow during bankruptcy.

Related Bankruptcy Code Sections

Section 506 works in conjunction with several other provisions of the Bankruptcy Code:

• Section 1325 -- Chapter 13 plan confirmation (uses 506 valuation)
• Section 1322 -- Plan contents (cramdown provisions)
• Section 363 -- Sales use 506 valuation
• Keep Your Car -- Practical cramdown guide

Understanding how these sections interact is critical for anyone navigating the bankruptcy process, whether as a debtor, creditor, or attorney.