What Is Section 506 Valuation in Bankruptcy?

Section 506 generally treats an allowed creditor claim as secured up to the value of the creditor’s interest in estate property and unsecured for the remaining balance. Valuation can shape adequate protection, plan payments, interest, voting, and restructuring options.

How a Claim Can Be Split

When debt exceeds collateral value, Section 506(a) may create a secured portion equal to the relevant collateral value and an unsecured deficiency portion. The result can be affected by Section 1111(b), lien validity, setoff, and other Code provisions.

Valuation Depends on Purpose and Use

The statute directs courts to determine value in light of the valuation’s purpose and the proposed disposition or use of property. A going-concern use, sale, surrender, or different hearing may produce distinct valuation questions.

Evidence Used in Valuation

Appraisals, market comparables, income projections, equipment condition, accounts-receivable collectability, expert testimony, and proposed use may be relevant. Valuation disputes should be supported with credible evidence rather than unsupported estimates.

Why Valuation Matters to a Plan

Collateral value affects secured payment amounts, interest and present-value analysis, equity cushions, relief from stay, and whether the debtor can propose a feasible plan. Review 11 U.S.C. § 506.

Frequently Asked Questions

Is tax-assessment value controlling?

Not necessarily. The court determines value for the bankruptcy purpose at issue using appropriate evidence.

Can value change during a case?

Yes. Markets, operations, collateral condition, and the valuation date can affect the evidence and result.

Related Bickham Law Resources

Learn more about Chapter 11 bankruptcy, business reorganization, Subchapter V, and continued business operations.

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This article provides general information and is not legal advice. Outcomes depend on current law and the facts of each case.