SECURED CLAIMS AND INTEREST RATES ON CHAPTER 13 CLAIMS

One of the most persistent questions I receive from lending clients is with respect to the confirmable interest rate in a Chapter 13 case.The lender has a vehicle financed at a contract rate of 9.5%, and is understandably upset when a Chapter 13 plan shows up in the mail with a 4.5% rate.

In order to address this question, it is also necessary to understand how secured claims are treated in Chapter 13 cases. Whether you are entitled to interest, and on what, needs to be decided before you even reach the rate. This summary addresses these practical questions:

1.                 What amount of my debt is secured?

2.                 What is the rate of interest payable on the allowed amount of the secured claim?

3.                 What in the dickens is a Section 910 claim, and better yet, what is the “hanging paragraph?”

4.                 If I’m unhappy with the treatment of 1-3 above, what are my options?

1.         Secured claim, unsecured claim, or, both?

            In Chapter13, in order for a plan to be confirmed over the objection of a creditor, the debtor must either (1) surrender the collateral securing the debt, or, (2) pay the creditor the amount of the “allowed secured claim.”  11 U.S.C. § 1325(a)(5).  The amount of the allowed secured claim is determined by reference to 11 U.S.C. § 506, which provides that the claim is secured to the extent of the value of the creditor’s collateral on the date the case is commenced.  So, if your debt is $10,000, secured by a car that is worth $5,000, you have a secured claim of $5,000 and an unsecured claim of $5,000 (i.e. a bifurcated claim or stripped down claim). Note, however, that Section 910 claims are treated differently,and will be addressed later in this summary.

            As you might expect, the valuation of your collateral is critical. The plan cannot be confirmed under Section 1325 unless you are paid the present value of your collateral, or the part of your claim allowed as secured. If the debtor’s proposed valuation of your collateral is unsatisfactory, file an objection to confirmation. The date by which objections are due will be included in the notices you receive from the clerk’s office when the plan is filed. It would also be my suggestion that you appear at the confirmation hearing, because that is typically the best time to “work it out” with debtor’s counsel.

2.         Interest Rates in Chapter 13

            Simply stated, the rate of interest that must be paid in Chapter 13 cram-down situations (creditor objects to the plan) is the so called “Till rate.” This term derives from the decision of the U. S. Supreme Court in Tillv. SCS Credit Corp., 541 U.S.465, 124 S. Ct. 1951, 158 L.Ed.2d 787 (2004).

            The courtin Till considered the rate to be paid to insure that a creditor received the “present value” of its allowed secured claim under §1325(a)(5)(B)(ii).The court starts out with the “national prime rate” and includes an enhancement should the bankruptcy court find an unreasonable risk of non-payment.  The Till court expressly rejected the use of the contract rate of interest to satisfy the present value requirement.  In short, the rate is the national prime rate, plus an enhancement if you can get it.

            Most plans I see in the Middle District propose a national prime + 1% formula, which from about 2008 forward resulted in a fairly typical rate in the 4.5% range.  My suspicion is that the judges assume any loan includes risk of non-payment (hence collateral), so to get an enhancement beyond the typical 1%, you will need some additional circumstances suggesting risk that is unusual.

3.         Section 910 Claims, and the Infamous“Hanging Paragraph”

            The Bankruptcy Abuse Prevention and ConsumerProtection Act of 2005 inserted an unnumbered and unlettered paragraph atthe end of § 1325 that has cometo be known as the “hanging paragraph.” Without reproducing it here, it has theeffect of excluding from the operation of §506 certain claims, known as “910 Claims.” 

            If a creditor has a claim (1) incurred within 910 days of the Chapter 13, (2) secured by a purchase money security interest in a motor vehicle, (3) acquired for the personal use of the debtor, then §506 does not apply to that claim. So what does this mean to the lender?

            The vast majority of courts hold that a §910 claim (i.e. §506 does not apply) is fully secured, notwithstanding the actual value of the collateral.  In re Ezell, 338 B.R. 330 (Bankr. E.D.Tenn. 2006) This is important, because for a plan to be confirmed under §1325, allowed secured claims must be paid their present value, which for the 910 claim is the amount of the debt (since it is deemed fully secured) when the bankruptcy is commenced. So if your claim qualifies as a §910 claim, the debtor must either pay you the full amount of your debt as of the filing of the case,or, surrender the collateral.

            Fine, now what interest rate is payable if the debtor wants to keep the collateral?  Because Till involved a bifurcated claim, and §910 claims cannot be bifurcated, the courts have wrestled with the question of whether the Till rate applies to §910 claims. The majority of cases hold that Till is applicable, and Judge Williams has so ruled in a Middle District case. In re Wright, 338 B.R. 917 (Bankr. M.D. Ala. 2006) (Till applies in “allChapter 13 cases which are being confirmed over the objection of a secured creditor irrespective of the value of its collateral in relation to the amount of its claim.”)

            Bottom line-if your collateral qualifies as a §910 claim, it is fully secured, and either the plan provides for it to be paid in full, with interest at the Till rate, or the debtor can surrender the collateral.  The debt cannot be “bifurcated” or “stripped down” to the collateral’s value.

4.         Options if the Plan is Objectionable

A.                 Contest the valuation of your collateral in non-§910 situations. I recommend objecting to confirmation, being prepared to prove up an alternative value at the hearing set on your objection. You should also file a Proof of Claim, with supporting documentation, setting forth what you believe to be the value of your collateral. And, please, don’t be unrealistic. The Chapter 13 docket is congested, and your chances with the judge are enhanced if you are reasonable.You should also make every reasonable effort to negotiate the matter with debtor’s counsel and get the plan modified.

B.                If you have a case where unusual circumstances exist which place you at risk of non-payment, consider an objection to confirmation based on the interest rate proposed. I submit, however, that you reserve such objections for cases in which risk of non-payment is unusually high.

C.                If your claim is a §910 claim and debtor’s counsel has overlooked it, object to confirmation.

D.                In a §910 situation, and maybe in others, consider negotiating for the return of your vehicle. The success rate of Chapter 13 cases in the Middle District is probably in the low to  mid-30% range. You may diddle around for a couple of years and then get collateral you can’t pay someone to take off your hands.  But I digress into the credit analysis arena, where I don’t belong.

E.                ALWAYS file a proof of claim in Chapter 13. ALWAYS. If you get it wrong, it can always be amended.