Calculating Interest Rate for Secured Claims in Ch. 13 Plans

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By Diane Davis

The interest rate in a couple’s Chapter 13 plan for a secured creditor’s claim on their vehicles is the prime rate when their plan is approved, the U.S. Bankruptcy Court for the Southern District of Texas held ( In re Turcotte , Bankr. S.D. Tex., Case No. 16-36040 Chapter 13, 6/8/17 ).

In Till v. SCS Credit Corp., the U.S. Supreme Court addressed the proper interest rate that governs in this case, but courts in this district disagree on how to apply Till, Judge Jeff Bohm wrote June 8.

A Chapter 13 plan allows debtors to use future income to repay all or a portion of their debts over a three-to five-year period.

A debtor’s plan can be “crammed down” or enforced over a creditor’s objection if it pays the creditors claim through installment payments over time. Because the claim is paid over time, it must bear interest, the court said.

Prime Plus Rate Approach

Till requires a two-step analysis to determine the “prime plus” rate approach, the court said. First, the court must identify the national prime rate that reflects the financial market’s estimate of the amount a commercial bank should charge to compensate for the opportunity costs of a loan, the risk of inflation, and the slight default risk. Second, the court must adjust the prime rate upwards for the risk bankruptcy debtors pose.

While the Fifth Circuit has adopted this approach, one court in the Southern District of Texas has declined to apply the prime plus rate approach in a Chapter 13 case, the court said, citing I n re Vasquez.

Daniel Turcotte, a retired Walmart employee, and his wife Daisy, a school teacher, proposed paying the Brazos Valley School Credit Union its secured claims for a 2015 Toyota Sienna and a 2014 Toyota Tacoma in full over 58 months in their Chapter 13 plan at an interest rate of 1.99 percent per year. This was the rate when they purchased the vehicles.

The Credit Union, however, said that the appropriate interest rate is 5.25 percent, which is the sum of the prime rate as of the date the Chapter 13 bankruptcy petition was filed, plus a risk factor of 2 percent.

The prime plus approach will still apply when the contract rate is lower than the prime rate, as in this case, the court said. The court looked to the rate as of the effective date of the plan, which is the date the plan is approved by the court and becomes binding.

The court adjusted the prime rate for risk factors and determined that the Turcottes had a low risk of default. The current prime rate is 4 percent, and the risk adjustment is 1 percent. Thus, under the prime plus approach, the cramdown rate is 5 percent as of the effective date of the plan, the court said.

The Polnick Law Firm, PLLC, Houston, represented Daniel and Daisy Turcotte; Chapter 13 Trustee David G. Peake represented himself.

To contact the reporter on this story: Diane Davis in Washington at

To contact the editor responsible for this story: Jay Horowitz at

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