Protecting Present Value

• Published in: American Bankruptcy Institute journal 2017-07, Vol.36 (7), p.16
• Main Author: Fischer, Jeremy R
• Format: Article
• Language: English
• Subjects: Bankruptcy laws; Bankruptcy reorganization; Creditors; Debtors; Federal court decisions; Federal courts; Interest rates; Personal bankruptcy; Present value; Prime rate; State court decisions; Variable interest rates
• ISSN: 1931-7522

The lender objected to the debtors' chapter 13 plan, which proposed to repay the lender at 9.5 percent interest per year based on a formula, the national prime rate of interest (8 percent) plus a premium of 1.5 percent to account for the increased risk of nonpayment based on the debtors' financial situation.5 The bankruptcy court confirmed the plan over the lender's objection under the cramdown provisions of § 1325(a)(5), holding that the interest-rate formula ensured that the lender received the present value of its secured claim under the plan.1® On appeal, the district court reversed, adopting the socalled "forced-loan" approach, which required the debtors to pay the lender the same rate it would have received "if it had foreclosed on the truck, sold the collateral, and reinvested the proceeds in loans of equivalent duration and risk. "11 The Seventh Circuit then generally affirmed the application of the forced-loan approach, finding that the contract rate of 21 percent was presumptive, but remanding for consideration whether that rate should have been adjusted higher or lower based on the facts and circumstances of the case,12 The Supreme Court reversed and adopted the bankruptcy court's formula approach, holding that "we think Congress would favor an approach that is familiar in the financial community and that minimizes the need for expensive evidentiary proceedings By contrast, the forced-loan approaches adopted by the district court and Seventh Circuit were "complicated, imposefd] significant evidentiary costs, and aim[ed] to make each individual creditor whole rather than to ensure...