Section 506 determines how much of a creditor's claim is actually secured by collateral. It controls vehicle cramdown in Chapter 13, lien stripping on underwater mortgages, and the valuation standard for every secured claim in bankruptcy.
11 U.S.C. Section 506 splits a creditor's claim into two pieces based on the value of the collateral securing it. The claim is secured only up to the collateral's value. Everything above that becomes an unsecured claim.
You owe $15,000 on a car loan. The car is worth $10,000 today. Under Section 506(a), the creditor has a $10,000 secured claim (backed by the car) and a $5,000 unsecured claim (backed by nothing). The unsecured portion is treated the same as credit card debt -- it may receive pennies on the dollar through the plan.
This splitting applies to all types of secured debt: car loans, mortgages, equipment liens, judgment liens, and tax liens. The principle is straightforward -- a creditor's security interest is worth what the collateral is worth, not what the debtor agreed to pay.
Section 506(a)(1) says the court determines collateral value "in light of the purpose of the valuation and of the proposed disposition or use of such property." For individual debtors who propose to keep the collateral, Section 506(a)(2) specifies replacement value -- what it would cost the debtor to purchase comparable property in its existing condition.
The Supreme Court established this standard in Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997). Before Rash, courts were split on whether to use foreclosure value (lower) or retail replacement value (higher). The Court chose replacement value for debtors retaining the property, reasoning that the creditor is being forced to accept the property's value in lieu of repossession and sale.
In practice, courts rely on:
Either party can request a valuation hearing under Section 506(a). The debtor might argue the car has high mileage and body damage; the creditor might argue it is in excellent condition. The court decides. Valuation is as of the date of the petition (or the date the court determines value, depending on the jurisdiction). Getting the number right can save or cost thousands of dollars.
The combination of Section 506(a) and Section 1325(a)(5) creates what practitioners call a "cramdown." In Chapter 13, the debtor can propose a plan that pays the secured creditor only the value of the collateral -- not the full loan balance. The creditor is crammed down to the collateral's worth.
You owe $18,000 on a car worth $12,000. Your Chapter 13 plan proposes to pay $12,000 to the lender as a secured claim, plus interest at the Till rate (prime + 1-3%, per Till v. SCS Credit Corp., 541 U.S. 465 (2004)), over the life of your plan. The remaining $6,000 is treated as unsecured debt. At discharge, the lien is satisfied. You keep the car and save thousands compared to paying the full loan balance.
Cramdown is one of the most powerful tools in Chapter 13. It works on car loans, furniture loans, equipment liens, and other secured debts -- with one major exception.
BAPCPA (the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) added an unnumbered paragraph after Section 1325(a)(9) -- commonly called the "hanging paragraph" because it is not assigned a subsection number. It blocks cramdown in two situations:
| Collateral Type | Lookback Period | Rule |
|---|---|---|
| Motor vehicle purchased for personal use | 910 days (~2.5 years) | If the vehicle was purchased within 910 days before filing AND the debt was incurred to buy the vehicle, the full claim amount must be paid -- no cramdown |
| Any other thing of value (purchase money security interest) | 1 year | If the property was purchased within 1 year before filing AND the debt was incurred to buy it, the full claim amount must be paid |
The 910-day rule is the single biggest limitation on Chapter 13 cramdown. If you bought a car 2 years ago for $30,000 and it is now worth $18,000, you might assume you can cram down to $18,000. But if the purchase was within 910 days of your filing date, you must pay the full $30,000 (minus any payments already made). This catches many debtors off guard and can make the difference between a feasible plan and one that fails. Always count backward 910 days from your filing date before assuming cramdown is available.
The hanging paragraph applies only to purchase money security interests -- debt incurred specifically to buy the collateral. It does not apply to title loans, refinanced auto loans (in most circuits), or loans secured by property the debtor already owned. Courts have split on some edge cases, such as negative equity rolled into a new car loan.
Section 506(d) provides that a lien securing a claim that is not an allowed secured claim is void. In practice, this means that if the collateral is worth less than the senior liens against it, a junior lien can be stripped off entirely.
The most common example is a second mortgage on an underwater home:
Your home is worth $200,000. You owe $220,000 on the first mortgage and $40,000 on a second mortgage. Because the home's value does not even cover the first mortgage, the second mortgage is wholly unsecured under Section 506(a) -- it has zero secured claim. In Chapter 13, the second mortgage lien can be stripped (voided), and the $40,000 is treated as unsecured debt. At discharge, the second mortgage is gone.
Lien stripping requires the junior lien to be completely unsecured. If the home is worth even one dollar more than the first mortgage balance, the second mortgage retains its lien (though the secured portion may be very small). This is sometimes called the "one dollar rule."
The Supreme Court held in Dewsnup v. Timm, 502 U.S. 410 (1992), that Section 506(d) does not permit lien stripping in Chapter 7. The Court interpreted "allowed secured claim" in 506(d) differently than in 506(a), holding that a lien passes through Chapter 7 even if the claim is underwater. The Court reaffirmed this in Bank of America, N.A. v. Caulkett, 575 U.S. 790 (2015), holding that even wholly unsecured junior liens survive Chapter 7. Lien stripping on underwater mortgages is available in Chapter 13 but not Chapter 7.
| Case | Holding | Practical Impact |
|---|---|---|
| Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997) | Replacement value is the proper standard for valuing collateral retained by the debtor | Sets the valuation method for every cramdown -- debtor pays what it would cost to replace the property, not what a foreclosure sale would bring |
| Till v. SCS Credit Corp., 541 U.S. 465 (2004) | The "formula approach" (prime rate plus a risk adjustment of 1-3%) determines the cramdown interest rate in Chapter 13 | Sets the interest rate debtors must pay on crammed-down secured claims -- typically lower than the original contract rate |
| Dewsnup v. Timm, 502 U.S. 410 (1992) | Section 506(d) does not allow lien stripping in Chapter 7 | Liens pass through Chapter 7 intact even if the collateral is underwater -- debtors must use Chapter 13 to strip liens |
| Bank of America, N.A. v. Caulkett, 575 U.S. 790 (2015) | Even wholly unsecured junior liens cannot be stripped in Chapter 7 | Closes the argument that Dewsnup applied only to partially secured liens -- no lien stripping of any kind in Chapter 7 |
| Chapter 7 | Chapter 13 | |
|---|---|---|
| Claim splitting (506(a)) | Yes | Yes |
| Vehicle cramdown | No (redemption only) | Yes (if outside 910-day window) |
| Lien stripping (506(d)) | No (Dewsnup / Caulkett) | Yes (wholly unsecured liens) |
| Valuation standard | Replacement value (if retaining) | Replacement value (Rash) |
Check whether a discharge bar applies to your filing dates before planning your Chapter 13 strategy.
Eligibility CheckerRelated sections
This tool is free and open-source. Donations fund PACER access fees and our goal of forming a 501(c)(3) nonprofit for bankruptcy court transparency.
Support on Ko-fiPACER cases made free through RECAP: 0 of 37.9 million
Every document we access becomes permanently free for the next researcher, attorney, or debtor.
$0 of $5,000 Q1 PACER research goal
1,500+ hours. No grants, no institutional backing. 0 supporters so far.
Fund this research