541 U.S. 465 (2004)
On October 2, 1998, petitioners Lee and Amy Till purchased a used truck from Instant Auto Finance for $6,395 plus $330.75 in fees and taxes.1 They made a $300 downpayment and financed the balance through a retail installment contract assigned to respondent SCS Credit Corporation, creating an initial indebtedness of $8,285.24 at 21% interest over 136 weeks secured by a purchase money security interest in the truck.2
On October 25, 1999, the Tills filed a joint Chapter 13 petition while in default on payments to SCS.3 At filing, SCS's outstanding claim was $4,894.89, but the parties agreed the truck was worth only $4,000, limiting the secured claim to that amount with the $894.89 balance treated as unsecured; the filing stayed collection activity by the IRS, respondent, three other holders of secured claims, and unidentified unsecured creditors while creating a bankruptcy estate that included the truck.4
The Tills proposed a three-year plan assigning $740 of monthly wages to the trustee for distribution in priority order to administrative costs, the IRS priority claim, secured claims, and unsecured claims, with 9.5% interest on SCS's secured claim calculated by adding a 1.5% risk adjustment to the national prime rate of approximately 8%.5 SCS objected and sought 21% interest, presenting expert testimony that it and other subprime lenders uniformly charged that rate on loans to borrowers with poor credit; petitioners countered with an economics professor's testimony that 9.5% was reasonable given court supervision and plan feasibility, and the bankruptcy trustee supported the formula rate as easily ascertainable and market-tied, leading the bankruptcy court to overrule the objection and confirm the plan.6
The District Court reversed under Seventh Circuit precedent requiring the rate the creditor could obtain by foreclosing, selling the collateral, and reinvesting in equivalent loans, setting the rate at 21%.7 The Seventh Circuit endorsed a presumptive contract rate approach using the 21% prebankruptcy rate as a starting point subject to rebuttal by either party and remanded for further proceedings.8 The Supreme Court granted certiorari.9
Whether the formula approach, beginning with the national prime rate and adding a risk adjustment, is the appropriate method for determining the interest rate required to ensure that the present value of property distributed to a secured creditor under a Chapter 13 cramdown plan equals the allowed amount of the claim?10
Under 11 U.S.C. § 1325(a)(5)(B)(ii), a Chapter 13 plan may be confirmed over a secured creditor's objection if the creditor retains its lien and receives property distributions with a present value not less than the allowed secured claim; when payments are deferred, an interest rate must be selected that compensates for the time value of money and risk of nonpayment, and the formula approach—starting with the prime rate and adding a risk adjustment based on the debtor's circumstances—best satisfies this requirement because it is objective, familiar, and minimizes evidentiary costs while treating similarly situated creditors alike.11
Yes. The formula approach satisfies the statutory command because it begins with the national prime rate, which reflects the financial market's estimate of opportunity costs, inflation, and slight default risk, and then adds a risk adjustment for the greater risk posed by bankrupt debtors, as determined at a hearing where the creditor bears the burden of proof.12 In this case, the Tills proposed a 9.5% rate by adding a 1.5% adjustment to the 8% prime rate, the bankruptcy court accepted this after hearing testimony from an economics professor that the rate was reasonable given court supervision, and the plan was confirmed over SCS's objection seeking the 21% contract rate.13 This approach avoids the defects of the coerced loan, presumptive contract rate, and cost of funds methods, which overcompensate creditors or impose excessive evidentiary burdens, and instead ensures an objective economic analysis compensates all similarly situated creditors for the time value of money and default risk without regard to the creditor's individual circumstances or prior dealings with the debtor.14
The formula approach is the appropriate method for calculating the cramdown interest rate under the Bankruptcy Code.15
Related opinions on this issue
Justice Thomas filed an opinion concurring in the judgment.16 He concluded that the statute requires only compensation for the time value of money and does not mandate any debtor-specific risk adjustment.17
The text of § 1325(a)(5)(B)(ii) requires valuation of the property to be distributed under the plan, not the plan itself or the promise to make payments.18 Because the statute contains no requirement that the interest rate reflect the risk of nonpayment, the risk-free rate suffices in most cases where the plan proposes a stream of cash payments.19
In this case the proposed 9.5% rate exceeded the risk-free rate, so Justice Thomas would reverse the judgment of the Court of Appeals.20
Whether the coerced loan approach, the presumptive contract rate approach, or the cost of funds approach should instead be used to calculate that cramdown interest rate?21
The Bankruptcy Code does not require the cramdown interest rate to replicate the rate the creditor could obtain in a new loan to a nonbankrupt debtor, the prebankruptcy contract rate, or the creditor's cost of funds; instead, those approaches are rejected because they focus on the creditor's subjective circumstances or prior dealings rather than an objective present value calculation.22
No. The coerced loan approach overcompensates creditors by including transaction costs and profits irrelevant to court-supervised loans and requires evidence about market rates for comparable loans far removed from the bankruptcy court's expertise.23 The presumptive contract rate approach improperly focuses on the creditor's potential use of foreclosure proceeds and produces disparate results for similarly situated creditors based on their prior dealings or efficiency.24 The cost of funds approach mistakenly focuses on the creditor's creditworthiness rather than the debtor's and imposes significant evidentiary burdens on the debtor.25 In this case, the District Court and Seventh Circuit endorsed variants of these approaches leading to the 21% rate, but the Supreme Court rejected them in favor of the formula method applied by the bankruptcy court to the Tills' plan.26
Neither the coerced loan approach, the presumptive contract rate approach, nor the cost of funds approach should be used to calculate the cramdown interest rate.27
Related opinions on this issue
Joined by Rehnquist, C. J., And O'connor And Kennedy, Jj.
Justice Scalia filed a dissenting opinion, in which Rehnquist, C. J., and O'Connor and Kennedy, JJ., joined.28 He would have adopted the contract rate as a presumption for the appropriate cramdown interest rate.29 He reasoned that subprime lending markets are competitive and therefore largely efficient.30 He also reasoned that the risk of default in Chapter 13 is normally no less than at the time of the original loan.31
The formula approach begins with a rate known to be too low and requires judges to estimate a risk premium in every case, producing systematic undercompensation for secured creditors.32 In this case the 1.5% risk premium approved by the bankruptcy court was far too low given the substantial probability of plan failure and the costs a creditor would incur upon default.33