§ 90.6     Discount Rates and Interest after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 90.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

When a hypothetical liquidation of the Chapter 13 estate would produce a dividend for unsecured creditors, it is a requirement of the best-interests-of-creditors test in § 1325(a)(4) that the value as of the effective date of the plan of property to be distributed under the plan be not less than the amount that would be paid as a liquidation dividend.1 The present value language in § 1325(a)(4) means that Chapter 13 debtors sometimes must pay postpetition interest to unsecured creditors—for example, when the estate would liquidate to pay unsecured creditors in full. Even when hypothetical liquidation of the estate would pay less than 100 percent of unsecured claims, the amount to be distributed to unsecured creditors over the life of the Chapter 13 plan must be discounted to present value to ensure that the § 1325(a)(4) test is respected as of the effective date of the plan. This discounting requires selection of an appropriate interest rate.

[2]

There is no consensus about the applicable interest rate or discount factor to use to determine whether a Chapter 13 plan satisfies the best-interests-of-creditors test in § 1325(a)(4).2 BAPCPA did not speak directly to this issue, but there is a new § 511 titled “Rate of interest on tax claims”:

(a) If any provision of this title requires the payment of interest on a tax claim or on an administrative expense tax, or the payment of interest to enable a creditor to receive the present value of the allowed amount of a tax claim, the rate of interest shall be the rate determined under applicable nonbankruptcy law.
(b) In the case of taxes paid under a confirmed plan under this title, the rate of interest shall be determined as of the calendar month in which the plan is confirmed.3
[3]

It is arguable, at least with respect to tax claims, that new § 511 fixes the interest rate and discount rate that must be used for Chapter 13 purposes by reference to nonbankruptcy law.4 There are often tax claims in Chapter 13 cases and § 511 promotes “applicable nonbankruptcy law” as the source of the discount rate or interest rate for best-interests-of-creditors-test purposes.

[4]

Applicable nonbankruptcy law is not further defined by BAPCPA. It is not clear how the present value calculation would be performed at confirmation in a Chapter 13 case when there are other claims that would be paid in whole or in part in a hypothetical liquidation in addition to tax claims. It is possible that a split-rate calculation might be constructed to give present value to the tax claims at the applicable nonbankruptcy rate and to give present value to the nontax claims at some other rate.


 

1  11 U.S.C. § 1325(a)(4), discussed in § 162.2 [ Discount Rates and Interest If Liquidation Would Produce Dividend ] § 90.5  Discount Rates and Interest If Liquidation Would Produce Dividend.

 

2  See § 162.2 [ Discount Rates and Interest If Liquidation Would Produce Dividend ] § 90.5  Discount Rates and Interest If Liquidation Would Produce Dividend.

 

3  11 U.S.C. § 511.

 

4  See, e.g., In re Jones, No. 06-35051, 2007 WL 1170620 (Bankr. S.D. Tex. Apr. 18, 2007) (Oversecured tax lienholder is entitled to interest under § 506(b) at the rate provided by nonbankruptcy law, consistent with § 511 as amended by BAPCPA; because Texas law limits interest on a tax claim to principal, lienholder has no statutory right to interest on interest, interest on penalties or interest on legal fees.).