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Creditor's Attempt To Gain More Interest In Chapter 13 Bankruptcy Fails

Posted By admin || 3-Jan-2011

Bank of America Tower in New York City.

In a recent Chapter 13 bankruptcy case in which a debtor proposed to pay their creditor's (Bank of America) claim in full over the term of their plan, was faced with a challenge by the creditor claiming that the debtor should pay 9.24% interest instead of only 5.25% interest.

Bank of America alleges that its status as an oversecured creditor entitles it to the protections of 11 U.S.C. § 506(b). According to Bank of America, the plan must bear interest at a rate of not less than the contract rate. The contract rate is 9.24% per annum. Section 506(b) provides that an over secured claim will be increased by the amount of post-petition contractual interest.

But the bankruptcy court pointed out that the creditor was attempting to twist the rules in a way they were never meant to operate.

Bank of America attempts to conflate the claim allowance requirement of § 506(b) with a confirmation requirement of § 1325. That reflects a misunderstanding of the function of these two sections of the Bankruptcy Code. Because Bank of America is oversecured, it will be allowed post-petition and pre-confirmation interest in the amount of $516.90. That amount is equal to interest at 9.24% per annum for the period between the petition date and the confirmation date. However, at confirmation, the rate is governed by § 1325(b). That rate will be 5.25%.

The debtor in this case saved a significant amount of money in their Chapter 13 bankruptcy case because the court and the bankruptcy attorney recognized the flaw in the creditor's argument. The 9.25 percent interest rain was only for the period between the bankruptcy petition date and the bankruptcy confirmation date.

Categories: Chapter 13 Bankruptcy
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