Cite as: Keith M. Lundin, Lundin On Chapter 13, § 77.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
11 U.S.C. § 1325(a)(5)(B)(ii) requires that at smoothdown the present value of payments to a secured claim holder “provided for by the plan”1 must be not less than the allowed amount of the secured claim. The typical Chapter 13 debtor cannot cash out secured claim holders on the effective date of the plan.2 The usual proposal is to retire the secured claim with periodic payments over the life of the plan.
The phrase “value, as of the effective date of the plan” means that the stream of future payments must be discounted to a present value that is not less than the allowed amount of the secured claim. The accepted way to satisfy the present value requirement in § 1325(a)(5)(B)(ii) is to determine the allowed amount of the secured claim and then apply an appropriate interest rate to guarantee that the present value of payments through the plan will equal or exceed the allowed amount of the secured claim.3
For example, if the creditor has a $5,000 claim secured by a car worth $3,600, the creditor has an allowed secured claim of $3,600. Suppose the debtor proposes a 36-month plan and wants to make monthly payments to the lienholder on the car. Payments of $100 a month for 36 months will not satisfy § 1325(a)(5)(B)(ii) because a stream of 36 payments of $100 per month has a present value significantly less than $3,600—the precise present value will depend on the discount factor that is applied. If the creditor and the debtor agree that a 10 percent discount factor is appropriate to determine present value, then the debtor can satisfy § 1325(a)(5)(B)(ii) by paying the creditor $3,600 plus 10 percent interest—a monthly rate of $116.16 for 36 months, generated from an amortization table or financial calculator.
The use of an interest factor to provide value as of the effective date of the plan under § 1325(a)(5)(B) should not be confused with the allowance of postpetition interest as part of a creditor’s claim or the entitlement of a creditor to adequate protection. Unless the creditor is oversecured,4 § 502(b)(2) disallows the accrual of postpetition interest as part of the creditor’s claim. The payment of interest through the plan to the holder of an allowed secured claim to satisfy the present value requirement of § 1325(a)(5)(B)(ii) does not change the allowed amount of the secured claim. The payment of interest is just a mathematical technique for ensuring that the secured claim holder gets the present value of its allowed claim while it waits for payments through the plan.
The present value that must be paid to satisfy § 1325(a)(5)(B) is not the same as adequate protection in § 361, though the present value requirement may lead to similar results.5 Between the filing of the petition and confirmation, lienholders may be entitled to adequate protection at least equal to the loss in value of the collateral caused by the debtor’s possession and use.6 Adequate protection is typically measured by the depreciation in value of the collateral and only coincidentally bears any relationship to interest on the underlying secured debt. At confirmation, installment payment of the allowed secured claim must at least equal the loss in value of the collateral else the lien retention requirement in § 1325(a)(5)(B)(i) fails.7 But staying ahead of depreciation is not the same as paying present value of the allowed secured claim. The debtor’s plan cannot be confirmed if it fails to compensate for discounting of the future stream of payments to the secured claim holder notwithstanding that the proposed payments would protect against depreciation during the life of the plan. Calculating the exact amount of the periodic payments to a secured claim holder through the plan requires attention to several factors: the value of the collateral,8 the interest rate or discount rate necessary to preserve that value9 and the requirement that payments must compensate the lienholder for loss of value through depreciation.10
For § 1325(a)(5)(B)(ii) purposes, “effective date of the plan” is most reasonably understood to mean the date of confirmation.11 There are reported decisions allowing the effective date in this present value context to slide away from the date of confirmation.12
1 See Rake v. Wade, 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993) (Undersecured mortgage holder is entitled to interest on arrearages cured through the plan pursuant to § 1322(b)(5) because arrearage claim is part of the secured claim that is “provided for” by the plan for purposes of § 1325(a)(5)(B)(ii). “Section 1325(a)(5) applies by its terms to ‘each allowed secured claim provided for by the plan.’ The most natural reading of the phrase ‘provid[e] for by the plan’ is to ‘make a provision for’ or ‘stipulate to’ something in a plan. . . . [P]etitioners’ plans clearly `provided for’ respondent’s home mortgage claims. . . . [E]ach plan treated the arrearages as a distinct claim to be paid off within the life of the plan pursuant to repayment schedules established by the plan. Thus, the arrearages, which are a part of respondent’s home mortgage claims, were ‘provided for’ by the plans, and respondent is entitled to interest on them under § 1325(a)(5)(B)(ii). . . . [R]espondent is entitled to the present value of the arrearages that were paid off under the terms of the plans as an element of an ‘allowed secured claim provided for by the plan.’”).
2 “Cash out” could also mean surrendering the creditor’s collateral. See § 102.1 [ Surrender or Sale of Collateral ] § 74.5 Surrender or Sale of Collateral before BAPCPA.
3 See United States v. Haas (In re Haas), 203 B.R. 573, 575 (E.D. Pa. 1996) (Upon objection, bankruptcy court cannot confirm plan that does not provide “present value” interest to the holder of an allowed secured claim. “[A] secured creditor is ordinarily entitled to the payment of interest under § 1325(a)(5)(B)(ii) on its secured claim.”); In re Nosker, 267 B.R. 555 (Bankr. S.D. Ohio 2001) (Omission of interest to mortgage holder fails confirmation requirement in § 1325(a)(5)(B)(ii).); In re Ehrhardt, 240 B.R. 1, 4 (Bankr. W.D. Mo. 1999) (“[I]f the Plan proposes to pay the secured claim over time, it is necessary that the Plan provide for interest at such a rate that will put the creditor into the same economic position that is would have been if it had been paid its claim immediately rather than over time.”); In re Felipe, 229 B.R. 489, 491 (Bankr. S.D. Fla. 1998) (“To insure payment of the present value as of the plan’s effective date, Chapter 13 plan payments must incorporate an appropriate discount interest rate.”); In re Jones, 188 B.R. 281 (Bankr. D. Or. 1995) (Plan cannot be confirmed because it fails to provide present value.); In re Schyma, 68 B.R. 52 (Bankr. D. Minn. 1985) (Debtor must provide for accrual and payment of interest on the secured portion of a debt under § 1325(a)(5)(B)(ii).); In re Trent, 42 B.R. 279 (Bankr. W.D. Va. 1984) (Section 1325(a)(5)(B)(ii) requires that the present value of payments to the holder of an allowed secured claim must be not less than the allowed amount of that creditor’s claim. Future payments must be discounted to “present value” and the total of the present values of all payments must at least equal the allowed amount of that claim.). Accord GMAC v. Lefevre, 38 B.R. 980 (D. Vt. 1983); In re Johnson, 63 B.R. 550 (Bankr. D. Colo. 1986); In re Mothershed, 62 B.R. 113 (Bankr. E.D. Ark. 1986). See also the similar present value language in § 1325(a)(4), discussed in § 168.1 [ Payment-in-Full Option ] § 91.7 Payment-in-Full Option, and in § 1325(b)(1)(A), discussed in §§ 160.1 [ In General: Plan Payments vs. Hypothetical Liquidation ] § 90.1 In General: Plan Payments vs. Hypothetical Liquidation and 254.1 [ Application of Tests for Confirmation ] § 126.2 Application of Tests for Confirmation; contrast the absence of present value language in § 1322(a)(2) (payment of priority claims), discussed in §§ 100.2 [ Interest Not Required, with Exceptions ] § 73.5 Interest Not Required, with Exceptions and 299.1 [ Postpetition Interest on Priority Claims ] § 136.16 Postpetition Interest on Priority Claims before BAPCPA.
4 See § 116.1 [ Oversecured Claim Holders ] § 78.5 Oversecured Claim Holders.
5 See In re Schyma, 68 B.R. 52 (Bankr. D. Minn. 1985).
6 See § 48.1 [ Adequate Protection of Lienholders prior to Confirmation ] § 47.1 Adequate Protection of Lienholders before Confirmation.
7 See § 104.2 [ Lien Retention ] § 74.12 Lien Retention before BAPCPA.
8 See discussion beginning at § 76.1 Valuation, Claim Splitting and Dewsnup.
9 See § 112.1 [ Interest Rate Anarchy: Present Value Before Till ] § 77.2 Interest Rate Anarchy: Present Value before Till.
10 See §§ 104.2 [ Lien Retention ] § 74.12 Lien Retention before BAPCPA and 114.1 [ Calculating Payments to Secured Claim Holders ] § 78.2 Calculating Payments to Secured Claim Holders.
11 See Rake v. Wade, 508 U.S. 464, 469, 113 S. Ct. 2187, 2191, 124 L. Ed. 2d 424 (1993) (“Section 1325(a)(5)(B)(ii) guarantees that property distributed under a plan on account of a claim, including deferred cash payments in satisfaction of the claim . . . must equal the present dollar value of such claim as of the confirmation date.”).
12 See, e.g., In re Allen, 240 B.R. 231, 236 & 241 (Bankr. W.D. Va. 1999) (For purposes of § 1325(a)(5)(B)(ii), “‘1. An undersecured creditor is not entitled to any interest upon its allowed secured claim between the date of filing and the date first set for the confirmation hearing on the plan originally filed by the debtor. 2. Thereafter the creditor will be entitled to interest upon the amount of its allowed secured claim until the effective date of the plan, ordinarily the date of the final hearing upon plan confirmation, or the date the collateral is surrendered to the creditor, whichever comes first.’ . . . Once a plan has been confirmed by the Court, the value of payments to be made to that creditor under the terms of that plan will include appropriate interest . . . so that their present value will equal the amount of the creditor’s ‘allowed secured claim.’ Another way of stating this ruling is that the ‘effective date’ of the plan for the purpose of determining the undersecured creditor’s entitlement will be the date of the first scheduled confirmation hearing, which generally is the date the plan would have been confirmed had the debtor originally proposed a plan free of valid objection.”). See also discussion of similar effective date language in §§ 160.1 [ In General: Plan Payments vs. Hypothetical Liquidation ] § 90.1 In General: Plan Payments vs. Hypothetical Liquidation and 254.1 [ Application of Tests for Confirmation ] § 126.2 Application of Tests for Confirmation.