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FORMULA FOR INTEREST RATE FOR SECURED CLAIMS IN CHAPTER 13

The Supreme Court, in a complicated split, has ruled on the appropriate interest rate for a Chapter 13 plan for a secured claim (whose collateral is an automobile).

The Court”s opinion, written by Justice Stevens and joined by Justices Souter, Ginsberg and Breyer, states that the appropriate rate is the market rate which includes an element of risk, with a likely result of the prime rate plus an additional 1% to 3%. Justice Thomas ruled that the discount rate need not include an adjustment for risk and, therefore, under the circumstances in which the case was presented, concurred with Justice Stevens.

In the case at bar, the debtors purchased a truck for approximately $6,700, including taxes and charges. After a $300 down payment, the balance of just over $6,400 was financed at a rate of 21%. In the Chapter 13 case, after the parties had agreed that the vehicle was worth $4,000 (in contrast to the outstanding balance of approximately $4,900), and, after an evidentiary hearing, the Bankruptcy Court approved the debtors” plan which included an interest rate of 9.5%. The Court of Appeals reversed, utilizing a rate that could be obtained if a new loan was obtained under the circumstances, and ruling that the “original contract rate should serve as a presumptive [cram down] rate.”
TILL ET UX. v. SCS CREDIT CORP. (St. Court 2004)

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