Debtor May Pay Car Loan Outside Plan at 15% Interest Rate

Posted by NCBRC - May 20, 2020

The bankruptcy court did not abuse its discretion in confirming, over the trustee’s objection, a plan under which the chapter 13 debtor would pay her car loan outside the plan at the contractual interest rate of 15%. McDonald v. Chambers (In re Chambers), No. 19-10421 (E.D. Mich. Feb. 26, 2020).

The debtor had three loans with Dort Federal Credit Union (DFCU): a car loan, a credit card balance of approximately $1,500 and a cash loan of $1,000. She and DFCU compromised the two non-car loans to $2,000 which she proposed to pay through her plan. In addition, DFCU consented to her proposal to pay the car loan outside the plan at the 15% contractual interest rate. The trustee objected on the grounds that the interest rate exceeded the “prime plus” rate sanctioned in Till v. SCS Credit Corp., 541 U.S. 465 (2004), and would result in the car creditor receiving more than other unsecured creditors. The bankruptcy court confirmed the plan and the trustee appealed.

The Supreme Court in Till held that an interest rate on a loan being paid in installments through a bankruptcy plan should compensate the creditor for its risk while not dooming the bankruptcy plan to failure. The Court noted with approval that, to achieve these goals, lower courts typically set the interest rate at the national prime rate plus one to three percentage points to account for the risk of non-payment by the debtor.

Here, the trustee argued that the national prime rate was 6% which would make the 15% contract rate excessive even with the addition of a few interest rate points to account for risk. The district court disagreed. It found that, as a practical matter, the fact that the debtor was paying the loan outside the plan meant that the debt was not subject to the trustee’s statutory fee of 5.5% and, therefore, the reduction of funds available for unsecured creditors was not as significant as the trustee suggested. The court reasoned that, while the Till Court approved the 1 – 3% addition to the national prime rate, it left the ultimate rate up to the discretion of the bankruptcy court. The court concluded that “[t]he 15% contract rate, when compared to the prime-plus rate with the Trustee’s statutory fee, is not an eye-popping interest rate in this case.”

The court went on to note that section 1325(a) lists several bases for plan confirmation. The trustee relied on section 1325(a)(5)(B)(ii), which permits cram down of a loan over a creditor’s objection. But in this case, the creditor did not object, and, therefore, the court found that section 1325(a)(5)(B)(i), which allows a court to confirm treatment of a debt upon the creditor’s consent, applied.

The trustee has appealed to the Sixth Circuit, Case No. 20-1376.

Chambers ED Mich Feb 2020

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