Local practitioners have been advised by the Chapter 13 Bankruptcy Trustee for the Southern District of Mississippi that the three sitting Bankruptcy Judges in the State of Mississippi have adopted an informal policy under which the maximum interest rate allowed on secured claims in Chapter 13 bankruptcy cases will be 8% per annum. This policy was adopted after a review of the United States Supreme Court decision handed down May 17, 2004 in the case of Till et ux. v. SCS Credit Corporation, (Docket No. 02-1016, 124 Sup. Ct. 1951).
Mr. Till filed a Chapter 13 Bankruptcy Plan in which he proposed to pay to SCS Credit Corporation $4,000. 00 representing the value of the truck on which SCS had a perfected lien. In addition to the value of $4,000. 00, the Plan proposed to pay interest on the secured amount at the rate of 9. 5% per annum calculated using what is referred to as either the "prime-plus" or "formula rate". The finance company objected to the Plan contending that it was entitled to receive its contract rate of interest, which was 21% per annum. The Bankruptcy Court ruled in favor of the Debtor. On appeal, the District Court reversed ruling that the 21% "coerced loan rate" was the proper amount. At the Seventh Circuit level, the Court of Appeals held that the original Contract rate was the proper "presumptive rate" but that it could be challenged by evidence that a higher or lower rate should apply. In a 5-4 decision, the Supreme Court adopted the "formula rate" and rejected the other methods of calculation. The "formula rate" approach begins by looking to the national prime interest rate as reported daily in the press, and then adds a factor to reflect the risk of inflation and risk of default.
In an apparent effort to provide some degree of certainty and avoid unnecessary litigation, the three Bankruptcy Judges in Mississippi have adopted an informal policy under which the maximum rate of interest on a secured debt cram down in Chapter 13 is 8%. Exactly how this policy will be implemented, however, is not known. The policy is subject to challenge. In any event, the ramifications of the Till decision on lenders, and particularly on finance companies whose interest rates are traditionally high will be very significant.