How Courts Determine Interest Rates in Bankruptcy Cases
An objection to failure to pay the appropriate interest rate in a chapter 13 plan typically arises when a secured creditor’s claim is being paid over time through the plan, but the proposed interest rate (also called the “cramdown rate”) is too low to satisfy the creditor’s rights under the Bankruptcy Code.
Under 11 U.S.C. § 1325(a)(5)(B)(ii), if a debtor proposes to retain collateral and pay a secured creditor over time, the creditor must receive at least the present value of its allowed secured claim. This requires interest to compensate for the time value of money.
The Standard: Till v. SCS Credit Corp.
In Till v. SCS Credit Corp., 541 U.S. 465 (2004), the U.S. Supreme Court held that the appropriate interest rate in Chapter 13 is the prime rate plus a risk adjustment—typically between 1% and 3%, depending on the risk of nonpayment.
The prime interest rate was at 3.25% for an extended period of time, from December 2008 through March 2022. However, the Federal Reserve began raising rates and in recent years, we see rates around 7.00%. This has led to a marked increase in interest requirements for confirming a chapter 13 plan.
If a creditor objects to the confirmation of a Chapter 13 repayment plan, the bankruptcy court will hold a hearing to review the objection and make a decision. The debtor and the creditor will have the opportunity to present evidence and argue their case, and the court will ultimately decide whether to confirm the plan or modify it based on the objections raised.
