OPINION
Dеbtors Stanley and Deborah Harris appeal an order by the bankruptcy court denying confirmation of debtors’ proposed Chapter 13 plan. The bankruptcy court denied the plan because it included the cramdown of two mortgages secured only by the debtors’ principal residence in violation of the provisions set forth in 11 U.S.C. § 1322(b)(2). This section prohibits modificatiоn of the rights of a holder of a claim that is secured only by a security interest in real property that is the debtor’s principal place of residence. Appellants argue, however, that the two mortgages are unsecured under the definition of 11 U.S.C. § 506 and that 11 U.S.C. § 1322(b)(2) does not apply to unsecured or undersecured claims. In addition, debtors claim that the protection afforded by 11 U.S.C. § 1322(b)(2) does not apply to short-term home improvement loans.
For the reasons stated herein, this court holds that the protection afforded under § 1322(b)(2) does not apply to unsecured and undersecured loans. In addition, the court holds that the § 1322(b)(2) protection does apply to home improvement loans. Because the bankruptcy court held that thе section protects any claim secured only by the debtor’s principal residence, the bankruptcy court is reversed and the case is remanded.
I.
The first mortgage on debtors’ residence is held by United First Mortgage Corporation (hereinafter “United”). In May 1983, debtors executed a home repair installment sale contract and consumer note in favor of Ameriсan National Funding and Investment Co. in order to finance installation of a swimming pool for debtors’ residence. The note was assigned to Metropolitan Federal Savings and Loan Association (hereinafter “Metropolitan”). Debtors also executed a second mortgage, recorded on June . 20, 1983, on their residence to Metropolitan as security for the nоte. A third mortgage on debtors’ residence is held by Broadway Bank and Trust (hereinafter “Broadway”). 1 Debtors’ brief indicates that this mortgage was issued to Broadway in order to finance the installation of home siding.
Debtors value their residence at $43,-000.00, with an estimated amount due to United under the first mortgage of $44,-000.00. Debtors estimate the amount due to Metropolitan under the second mortgage to be $11,212.86. Debtors value the amount due Broadway under the third mortgage to be $9,435.82.
Under the debtors’ proposed plan, United would receive the sum of $9,565.52, the amount necessary to cure debtors’ default under the first mortgage. Debtors also would make regular monthly mortgage payments to United outside of the Chapter 13 plan. Metropolitan would receive the sum of $2,000.00 which wоuld cure debtors’ default on the second mortgage. The plan also provided for the cramdown of the unsecured balance of $9,212.86 owed to Metropolitan. Debtors’ plan further provided for the cramdown of the entire amount owed to Broadway under the third mortgage and for the payment of 20 percent of the claims held by unsecured creditors.
The bankruрtcy court denied confirmation of the plan holding that the plan modified claims in violation of 11 U.S.C. § 1322(b). The court based its decision on the reasoning articulated in
In re Hynson,
Debtors claim that 11 U.S.C. § 1322(b)(2) does not prohibit the modification of claims that are not “secured” claims as defined by 11 U.S.C. § 506(a). Debtors argue that part of their second mortgage and 100 percent of their third mortgage are unsecured since debtors’ residence lacks sufficient value to support those claims. For this reason, debtors claim that the bankruptcy court erred in denying confirmation.
Appellees argue that the Bankruptcy Court was correct in applying § 1322(b)(2) so as to deny confirmation of debtors’ proposed Chapter 13 plan. Appellees maintain that the plain language of § 1322(b)(2) does not allow a debtor to modify any mortgage debt which is secured only by the debtor’s principal residence.
The issue on аppeal concerns conclusions of law that are subject to de novo review by the district court. 2
II.
Determining whether the protection afforded under § 1322(b)(2) applies to un-dersecured and unsecured claims requires analysis of two sections of the Bankruptcy Reform Act of 1978, as amended by the Bankruptcy Amendments and Federal Judgeship Act of 1984 (Bankruptcy Code). The conflict arises between thе general definition section, 11 U.S.C. § 506, and the more specific chapter 13 provision contained in 11 U.S.C. § 1322(b)(2).
Section 506(a) of the Bankruptcy Code dictates to what extent a claim is a “secured claim” for bankruptcy purposes. The section is one of general applicability' that applies in cases under Chapters 7, 11 and 13 of the Bankruptcy Code. 11 U.S.C. § 103(a). Seсtion 506(a) provides:
An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to setoff, as the case may bе, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest, (emphasis added.)
Section 1322(b)(2), which applies only in cases filed under Chapter 13 of the Bankruptcy Code, defines whether a plan may modify rights of holders of claims. Specifically, the section provides:
(b) Subject to subsections (a) and (c) of this section, the plan may—
(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims; (emphasis added.)
The crucial issue is whether the above emphasized language of § 1322(b)(2) is specifically limited to protection of “secured” claims as defined by § 506(a), or whether such language includes any “claims” that are secured only by a security interest in the debtor’s principal residence, including undersecured claims.
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A number of bankruptcy courts have attempted to reconcile the two sections. The cases are split in determining whether the protection afforded by § 1322(b)(2) applies only to fully secured clаims or whether it also applies to undersecured claims. Some bankruptcy courts, including the United States Bankruptcy Court, District of New Jersey, have held that the protection does apply to undersecured claims.
See, e.g., In re Hynson,
Two recent district court cases have reached opposite conclusions. In
In re Hougland,
In determining whether the protection of § 1322(b)(2) applies to all claims secured only by the debtor’s principal residence, the court must examine the legislative intent behind the statute through analysis of the statutory language and policy behind the statute. In analyzing the construction of the statute, “the starting point” is the “language itself.”
Blue Chip Stamps v. Manor Drug Stores,
On its face, § 1322(b)(2) allows “modification of the rights of holders of
secured claims,
other than a claim secured only by a security interest in real property that is the debtor’s principal residence.” 11 U.S. C. § 1322(b)(2) (emphasis added). However, it is ambiguous whether the term “seсured claim” applies only to claims that meet the § 506 definition for secured claims or whether it applies to any claim secured by the residence. For example, in
Hynson,
the court focused on whether the creditor had a “claim” secured by the principal residence rather than a “secured claim” secured by the residence as defined by § 506.
The legislative history of § 1322(b)(2) has been used by different courts to reach contrary results on this issue. For еxample, in
In re Neal,
the court, after extensive study of the legislative history, held that § 1322(b)(2) applied only to claims wholly secured by the principal residence.
Determination of the legislative intent is also complicated by the fact that a portion of the statute was deleted during the compromise sessions between the House of Representatives and the Senate during the drafting of the Bankruptcy Code. The Senate version of § 1322(b)(2) provided that the plan may
modify the rights of holders of secured claims (other than claims wholly secured by mortgages on real property) or of holders of unsecured claims ...
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The compromise version, in relevant part, changed the “wholly” in the Senate version to “only” which resulted in the final form of § 1322(b)(2) that the plan may “modify the rights of holders of secured claims, other than a claim secured
only
by a security interest in real property that is the debtor’s principal residence....” It is clear that this version represents the intent of Congress to protect home mortgage lenders.
See, e.g., In re Seidel,
After careful review of the conflicting cases and the legislative history, this court holds that the § 1322(b)(2) protection applies only to claims that are “secured claims” as defined by § 506(a). The court rejects the
Hynson
line of cases that focus on the word “claim” in the clause “other than a claim secured only by a security interest in real property that is the debtor’s principal residence.”
This court’s holding attempts to reconcile the different policies behind the bankruptcy code. First, the decision will “promote [the] fresh start purpose” of bankruptcy law “by not strapping the debtor with preexisting unsecured debt.”
[I]t would violate the spirit of the Chapter 13 law, as well as the legislative intent of Congress, to allow FMCC to veto confirmation of a Chapter 13 plan where, in the final analysis, it is receiving no less than the full benefit of its bargain as that benefit extended at the time of the filing of this Chapter 13 petition. It is well to remember that the assertion оf the rights of a creditor in a bankruptcy case rests, under the Code, on the status of that creditor as the holder of a claim, either secured, unsecured, or both.
Id. at 540.
Because the bankruptcy court applied the protection of § 1322(b)(2) to claims that were not secured by adequate unencumbered collateral and thus failed to meet the § 506(a) definition of a “secured claim”, the decision must be reversed and remanded. On remand, the court should apply § 506(a) and bifurcate where necessary any creditor’s claim to an allowable secured claim and unsecured claim. Only those claims that are secured under § 506(a) will be entitled to the protection afforded by section 1322(b)(2), and the exception provided in § 1322(b)(2) will not аpply to any unsecured claim.
III.
Finally, debtors contend that the exception provided under § 1322(b)(2) was intended by Congress to apply solely to long-term purchase mortgages secured only by a debtor’s residence. However, § 1322(b)(2) as enacted provides that the plan may:
(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or' of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.
While a number of courts have recognized that the Congressional intent of the special protection of § 1322(b)(2) was to protect holders of long-term home mortgages and not junior liens,
see, e.g., In re Morpkis,
In conclusion, this court holds that § 1322(b)(2) protects only those claims that are secured as defined by § 506(a). In addition, the court holds that § 1322(b)(2) applies to shоrt-term home improvement loans which meet the § 506(a) definition for secured claims.
An appropriate order will be entered.
Notes
. The record is not clear as to whether Broadway holds a second or third mortgage. Debtors claim that Broadway holds the second mortgage. Metropolitan asserts that its mortgage was recorded prior to the Broadway mortgage. The resolution of this dispute, however, is not determinative of the issues before the court. Therefore, for the purposes of this opinion, it will be assumed that Metropolitan holds the second mortgage and that Broadway holds the third mortgage.
. Appellees also argue that this court should dismiss the complaint because debtors allegedly failed to serve appellees with a designation of the record within the time period provided under Bankruptcy Rule 8006. It is clear from the record that debtors filed the designation of the record with the bankruptcy court within the time period allowed under Rule 8006. In addition, appellees have not shown any prejudice or bad faith with respect to the assertion that debtors failed to comply with the procedural requirements of Rule 8006. Accordingly, this court declines to dismiss the appeal.
Cf. In re Comer,
. The
Neal
court used the Senate version to support its determination that Congress intended § 1322(b)(2) to protect only creditors holding fully secured liens.
. Debtors do not argue that the second and third loans are non-home related loans; therefore, the court need not decide whether short-term, non-home-related finance company loans that are secured claims under § 506(a) are within the § 1322(b)(2) protection.
Compare In re Shaffer,