Fair and Equitable Treatment in Bankruptcy
In a Chapter 13 or Chapter 11 bankruptcy, the bankruptcy court is allowed to confirm a repayment plan over the objections of secured creditors who are subject to a cramdown as long as their treatment of the secured creditors is "fair and equitable." A cramdown is the reduction of interest or principal on a debt. How does the bankruptcy court define fair and equitable treatment? Let's took a look at the bankruptcy code's definition.
Fair and Equitable Bankruptcy Defined
"Fair and equitable" treatment of secured claims is defined as comprising of one of three options:
- That the holders of the liens retain those liens and receive plan payments totaling "at least the allowed amount of such claim, of a value, as of the effective date of the plan"
- For the sale of the secured collateral with the creditors' liens attaching to the proceeds of the sale
- For the realization of the creditors of the "indubitable equivalent" of their secured claims.
In other words, the secured creditors must be allowed to receive repayment of their allowed claims. An approved bankruptcy plan must repay the secured creditors what they are fairly owed. There may be some disputes about how much interest a debtor is required to repay post-confirmation and the bankruptcy court can make decisions which may not leave all secured creditors happy; but they cannot treat them in an unfair manner.
One of the most common disputes that debtors will face during bankruptcy is how much interest is allowed on their secure debt repayments. The secured creditors will try to get as much interest as possible but it is up to the bankruptcy court to make sure that the interest is fair and allows the debtor to still take advantage of the bankruptcy fresh start.
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