Chapter 13 Interest Rates-Just How Bad Is It?
It's bad enough to get a notice of the commencement of a bankruptcy case in the mail. To add insult to injury, it is a Chapter 13 case, and debtor proposes to halve the value of your collateral (a very fine motor vehicle) and drop your interest rate from 14% to 4.5%. Why even bother getting a note signed? Or getting out of bed? Can they do this?
I have a short article on my website which deals with interest rates, secured claims, and Section 910 claims in a bit more detail. But for now, a few basics.
First, the debtor has to pay you the present value (that's where the interest comes in) of that part of your claim that is allowed as secured. This is required for confirmation by Section 1325. More on the allowed amount of your secured claim another day. Let's assume your principle balance is $10,000 and your vehicle collateral is worth $5,000 and that you didn't finance the vehicle within 910 days of bankruptcy (a Section 910 claim). You have a secured claim of $5,000 and an unsecured claim for the balance. Question: what rate of interest does debtor have to pay to meet the "present value" requirement?
This question was answered, for the most part, by the United States Supreme Court's decision in Till v. SCS Credit Corp.,, 541 U.S. 465, 124 S. Ct. 1951, 158 L.Ed.2d 787 (2004). In Till, the Court held that the rate payable is the prime plus rate, or the national prime rate (or the "fed rate"), plus a debtor specific rate adjustment for risk of non-payment. The Court specifically rejected the contract rate as being determinative. It is also worthy of note that the debtor specific rate enhancement for risk was a plurality finding, and not a majority. Justice Thomas specifically rejected the notion of a debtor specific risk enhancement. For a case in the Middle District in which the court declined to enhance the prime rate, take a look at In re Yelverton, 06-10664-DHW, Middle District of Alabama, which is found on the court's searchable website.
At present, the national prime rate is 3.5%, and has been for some time. In the Middle District, it seems customary to use a 1% enhancement, and a fairly typical rate is 4.5%. Should there be circumstances indicating a higher than usual risk of non-payment, the court could certainly enhance the rate further. But my suspicion is that you will need some compelling facts to get beyond a 1% enhancement. There is risk on any loan (why else require collateral), so most often, you lose this argument. Your better recourse is to try and get the secured portion of your claim increased.
