In 1998, Mr. and Mrs. Till bought a truck from Instant Auto Finance for $6,395. The Tills put down a $300 down payment, and financed the balance at a 21% interest rate. One year after buying the truck, the Tills filed a joint Chapter 13 bankruptcy petition. Though they still owed $4,894.89 on the truck, the Tills and the bankruptcy trustee agreed the truck was only worth $4,000. Auto Finance thus had a $4,000 secured claim and an $894.89 unsecured claim.
The Tills’ Chapter 13 proposed debt adjustment plan required them to pay Auto Finance back the $4,000 secured claim at a 9.5%, not a 21%, interest rate. The Tills had successfully argued to the bankruptcy trustee that a 9.5% subprime interest rate was a more reasonable interest rate based on their risk factors. Auto Finance objected arguing that the 21% interest rate was more reasonable for subprime loans, which the Tills were since they had a poor credit rating. Auto Finance also argued it was owed “interest at the rate of 21%, which is the rate … it would obtain if it could foreclose on the vehicle and reinvest the proceeds in loans of equivalent duration and risk as the loan” originally made to petitioners.
The Bankruptcy Court approved the cramdown interest rate of 9.5%. The District Court reversed. The 7th Circuit Court of Appeals held the 21% interest rate was the correct rate, then remanded the case back to the Bankruptcy Court to allow both the Tills’ and Auto Finance to present arguments as to why the 21% interest rate should be lowered. The case was appealed to the U.S. Supreme Court.
In a Chapter 13 bankruptcy, the debtor ‘s repayment plan must pay back the creditor an amount “that equals or exceeds the value of the creditor’s allowed secured claim–in this case.” Though the word interest is not mentioned in this Bankruptcy Code section, the U.S. Supreme Court found that Section 1325 was sufficient to “give Bankruptcy Courts the authority to modify the rights of any creditor whose claim is secured by an interest other than real property” in a Chapter 13 bankruptcy. Essentially, Bankruptcy Courts have the power to “cramdown” a lower interest rate, even if the creditor objects, after four factors are analyzed:
- the probability of plan failure;
- the rate of collateral depreciation;
- the liquidity of the collateral market; and
- the administrative expenses of enforcement.”
The judgment of the Court of Appeals was reversed. The case was remanded to the Bankruptcy Court for further proceedings consistent with this opinion. In re Till.
Cramdowns only apply to Chapter 13, not Chapter 7, bankruptcies.
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