Virtually all of the claims being treated in a
Chapter
11 plan are based on underlying agreements that call for
debtor to pay some form of interest to the creditor.
For example, take ordinary Joe Debtor. He may have the following
claims:
|
 |
|
Unsecured:
|
|
A).
|
Credit
card agreements charging 22 to 30% interest
|
|
B).
|
Default
judgment against him bearing simple interest at 10% per
annum
|
|
C).
|
$
7500 owed to his beloved Aunt Iphigenia bearing interest
at 5% per annum
|
|
Secured:
|
|
A).
|
$
180,000 home mortgage loan at 6%;
|
|
B).
|
$
16k car loan at 8.75% on the 2009 Debtor family minivan
|
|
C).
|
$
10k at 11% interest on the debtor's 4-year- old Bayliner
boat and trailer, with the collateral being worth only
$ 6k and thus "underwater".
|
|
Taxes:
|
|
A).
|
Delinquent
real property taxes on the Debtor homestead,
at 18% interest/yr.
|
|
B).
|
Income taxes with interest at the applicable IRS federal
rate
|
|
Solvent
Debtors
If Joe Debtor is solvent
and his assets exceed his liabilities, then all of his creditors would
receive interest. This would be a very unusual case.
Insolvent Debtors
If, however, Joe Debtor is like the normal Chapter 11 debtor, his
assets are well exceeded by his liabilities, meaning that he is insolvent.
In this case, very few of his creditors are going to be entitled to
interest under a Chapter 11 plan. The likely result would be:
|
Unsecured
Nonpriority Claims |
|
A).
|
The
credit cards will receive no interest and a fraction of
the principal.
|
|
B).
|
The
judgment creditor will receive no interest and a fraction
of the principal.
|
|
C).
|
Beloved
Aunt Iphigenia will receive no interest and a fraction
of the principal.
|
|
|
|
A).
|
The
home mortgage will receive interest at the note rate,
unless it agrees to less favorable treatment.
|
|
B).
|
The
car loan will need to be paid in full and receive the
note rate of interest, 8.75%, since it is less than 910
days old.
|
|
C).
|
The
boat claim is subject to "cramdown", since the
debt exceeds the value. The boat claim is a secured claim
up to $6k, the value of the boat, and unsecured as to
the $4k balance. The $4k portion would receive the same
treatment as the credit cards and Aunt Iphigenia. Only
the $6k secured portion would be entitled to interest.
It would not necessarily be the 11% note rate. The court
is authorized to set a new interest rate which is based
on the national prime rate that a bank would charge a
creditworthy commercial borrower, and then adjust that
rate for the circumstances of the individual case, such
as credit risk, the type of collateral, and the duration
and feasibility of the proposed plan. In many cases, this
comes out to prime + 1 or 2%.
|
|
|
|
A).
|
The
income taxes will receive interest if they are "priority"
in nature (generally, less than 3 years old), but no interest
otherwise.
|
|
B).
|
The
property taxes will bear interest at the statutory rate,
according to most courts. In practice, this often prompts
the mortgage lender to advance money to cure the tax arrears,
and then add the advance to the principal of the loan.
|
|
Summary
of Interest on Claims
By way of general summary, then: interest must be paid
on pre-bankruptcy secured claims if the claim is "fully-secured",
i.e., the collateral is worth more than the amount of the claim. If
not fully-secured, then interest is payable only on the secured portion,
and the court can modify the interest rate via a "cram-down".
Generally, no interest is payable on pre-bankruptcy unsecured nonpriority
claims. Priority tax claims will generally be paid interest at the statutory
rate, as will real property tax claims. No interest is payable on unsecured
nonpriority tax
claims (generally, taxes which are more than 3 years old).
Written
by Henry
Rendler
| |
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