§ 78.2 — Calculating Payments to Secured Claim Holders
Revised: May 28, 2004
Practice varies whether Chapter 13 debtors must specify for each secured claim the exact dollar amount of the monthly payment through the plan. In some jurisdictions, the plan lists the value of the collateral, the interest rate and the proposed monthly payment for each secured claim. In other jurisdictions, the plan describes payments to secured claim holders generically, for example, “the value of the collateral in full with interest over the life of the plan.”
The better practice is to be as specific as possible in describing the treatment of secured claims through the plan. As detailed elsewhere,1 the binding effect of confirmation may depend on the adequacy of notice to creditors of the treatment of claims by the plan. A copy of the proposed plan or a summary of the plan is sent to every secured claim holder (and all creditors) either by the Chapter 13 trustee or by debtor’s counsel.2 It is in the debtor’s best interest that this notice completely inform secured claim holders of the proposed treatment of their claims through the plan. When possible, the plan should state the exact amount of the allowed secured claim, the exact monthly payment, the interest rate that will apply and the duration in months of payments to the creditor through the plan. General statements like “payment in full of allowed secured claims” will be binding after confirmation but provide uncertain leverage in any postconfirmation battle with an unhappy secured claim holder.3
For the typical secured claim that is not protected from modification by § 1322(b)(2),4 three things must be known to specify the creditor’s treatment under the plan: the value of the collateral (or, the allowed amount of the secured claim, whichever is lower), the interest rate to which the creditor is entitled, and the length of the payment period through the plan. In a district that delays confirmation until after the claims bar date,5 there may be a fourth factor in this calculation—the amount of adequate protection paid by the debtor prior to confirmation.6 The value of property for confirmation purposes in Chapter 13 plans is usually determined by negotiation between debtor’s counsel and the creditor’s representative.7 Value of collateral can be determined at a hearing in advance of confirmation on the motion of the debtor or the creditor under Bankruptcy Rule 3012.8 In many jurisdictions, disputes over the value of collateral are combined with the hearing on confirmation of the plan.
The interest rate payable to secured claim holders to ensure the present value of the allowed secured claim is also typically determined by agreement between the debtor and the creditor. Prior to the Supreme Court’s decision in Till v. SCS Credit Corp.,9 there was little consensus among the reported opinions as to what discount factor or interest rate was required for confirmation purposes in Chapter 13 cases.10 After Till, the rule is prime rate plus a risk factor.11
The period of repayment through the plan can be any number of months up to the maximum five-year duration of the plan.12 However, liens secured by depreciating property or property that will be exhausted through use or the passage of time must be retired through the plan at least as quickly as the value of the collateral declines.13
Once the value of the collateral and the interest rate are determined, debtor’s counsel can calculate the remaining variables by either fixing the amount of the monthly payment and then calculating the number of payments that will be required, or by fixing the duration of the proposed payments and then calculating the amount of the monthly payment. Either calculation is easily performed on any business calculator in finance mode or using standard amortization tables out of a finance textbook. The better practice is to match the payments to the budget by first determining the amount of money that is available each month to be paid to secured claim holders and then modeling the payments to secured claim holders to fit the debtor’s budget.14 If the resulting calculation requires payments beyond the length of the plan or beyond the limits on modification of secured claims,15 then counsel must extend the plan if possible, or increase the monthly payment to the secured claim holder by shifting funds between claimants, by finding more money in the budget, by reducing an interest rate or by reducing the value of collateral by surrender or appraisal or negotiation.
For example, assume the debtor wants to keep a car. The car lender is owed $10,000. By agreement or after a valuation hearing, the car is valued at $7,000. The original terms of the car loan do not extend beyond the life of the plan, thus long term treatment under § 1322(b)(5) is not available.16 The original contract terms are not favorable, thus the debtor does not want to cure (or waive) the default and complete the contract under § 1322(b)(3).17 The debtor’s remaining option to keep the car is § 1325(a)(5)—the creditor retain its lien, and the plan must pay the present value of the allowed secured claim ($7,000).
Using a business calculator, we know that the present value that must be preserved through the plan is $7,000. The interest rate necessary to maintain that present value while payments are made over time through the plan is probably known in the district or negotiated at confirmation.18 Assume it is 10 percent for this example. Most business calculators require that the interest rate in a present value calculation be reduced to a monthly rate, here .83 percent.
With present value ($7,000) and interest rate (.83 percent) entered, the calculator can provide us with an infinite number of possible monthly payments, depending on how many months of repayment are allowed; or the calculator can give us an infinite set of possible months of repayment if we enter the amount for each monthly payment.
If the plan is a 36-month plan and counsel’s first thought is to spread payment of the present value of the car over the entire plan, then “N” or the number of months in our calculation should be 36. The business calculator then tells us that a $7,000 claim retired with a 10 percent rate of interest in 36 months required a monthly payment of $225.87. If $225.87 fits in the debtor’s budget and if $225.87 exceeds the anticipated monthly depreciation in the value of the car, then proposing 36 months, 10 percent and $225.87 is one possible treatment of the car lender through the Chapter 13 plan.
If the debtor only has $200 per month available in the budget for payment of the car lender, then enter $200 as the monthly payment, $7,000 as the present value and 10 percent (.83 percent per month) as the interest rate. The calculator then projects a repayment period of 42 months. If $200 per month exceeds depreciation and if cause is shown to extend the plan beyond 36 months,19 then the plan might propose to pay the car lender $200 per month for 42 months with 10 percent interest to satisfy the $7,000 secured claim.
If interest rates less than 10 percent are available or if plan lengths longer than 42 months are allowable, then monthly payments less than $200 could be found to satisfy the car lender under § 1325(a)(5). The endless combinations of interest rate, monthly payment and number of payments that will satisfy § 1325(a)(5) give debtors and creditors more than enough room to negotiate the treatment of most secured claims through Chapter 13 plans. And this example assumes that the value of the car is not in play!20
1 See §§ 229.1 [ 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors ] § 120.2 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors and 233.1 [ Notice and Due Process Considerations, Including Claims Allowance and Valuation ] § 121.2 Notice and Due Process Considerations, Including Claims Allowance and Valuation.
2 See §§ 38.2 [ Time for Filing Schedules, Statement of Financial Affairs, Plan and Other Documents ] § 37.4 Time for Filing Schedules, Statement of Financial Affairs, Plan and Other Documents and 55.1 [ Debtor Must File a Plan ] § 51.2 Debtor Must File a Plan.
3 See discussion of effects of confirmation beginning at § 120.1 11 U.S.C. § 1327: Overview.
4 See § 84.1 In General, § 84.2 Calculating Plan Payments to Cure Default on Mortgages before October 22, 1994 and § 84.3 Calculating Plan Payments to Cure Default on Mortgages after October 22, 1994 for discussion of calculating payments to cure defaults and maintain payments on a home mortgage. Of course, a real estate-secured debt that can be modified under § 1322(b)(2) might be provided for under the plan under § 1325(a)(5) just like the personal property-secured claim here described. The calculation of plan payments to satisfy § 1325(a)(5) is the same without regard to the kind of collateral.
5 See § 216.1 [ Timing of Hearing on Confirmation ] § 115.1 Timing of Hearing on Confirmation before BAPCPA.
6 See § 114.2 [ Accounting for Adequate Protection ] § 78.3 Accounting for Adequate Protection.
8 See § 67.3 [ Preconfirmation Valuation Disputes ] § 57.6 Preconfirmation Valuation Disputes.
9 541 U.S. __, 124 S. Ct. 1951, __ L. Ed. 2d __ (2004).
10 See § 112.1 [ Interest Rate Anarchy: Present Value Before Till ] § 77.2 Interest Rate Anarchy: Present Value before Till.
11 See § 112.2 [ Present Value After Till ] § 77.3 Present Value after Till.
12 See discussion of length of plan beginning at § 112.1 General Rule: Three Years, More or Less.
13 See §§ 104.2 [ Lien Retention ] § 74.12 Lien Retention before BAPCPA and 204.2 [ Order of Payments to Creditors ] § 113.7 Order of Payments to Creditors before BAPCPA.
14 See Apps. C and D.
15 See §§ 104.1 [ The Power to Modify ] § 74.11 The Power to Modify, 104.2 [ Lien Retention ] § 74.12 Lien Retention before BAPCPA and 202.1 [ Payment of Claims beyond Length of Plan ] § 112.5 Payment of Claims beyond Length of Plan.
16 See §§ 115.1 [ Curing Default, Waiving Default, Maintaining Payments and Combinations ] § 78.4 Curing Default, Waiving Default, Maintaining Payments and Combinations and 129.1 [ Overview: General Rules for Saving Debtor’s Home ] § 81.1 Overview: General Rules for Saving Debtor’s Home.
17 See § 115.1 [ Curing Default, Waiving Default, Maintaining Payments and Combinations ] § 78.4 Curing Default, Waiving Default, Maintaining Payments and Combinations.
18 See § 112.1 [ Interest Rate Anarchy: Present Value Before Till ] § 77.2 Interest Rate Anarchy: Present Value before Till.
19 See § 201.1 [ Cause for Extension beyond Three Years ] § 112.4 Cause for Extension beyond Three Years.
20 Including the value of the car as a variable simply changes the “present value” number entered into the calculator at the beginning of the example. Because some creditors are more “value sensitive” and others are more “interest rate sensitive,” the calculation of payments to secured claim holders in Chapter 13 cases often includes using all four variables within the same case.