The Problem with Present-Value: How Local Bankruptcy Rules Impose Heavy Burdens on Chapter 13 Debtors

By McDonough, Jake | Emory Law Journal, January 1, 2019 | Go to article overview

The Problem with Present-Value: How Local Bankruptcy Rules Impose Heavy Burdens on Chapter 13 Debtors


McDonough, Jake, Emory Law Journal


INTRODUCTION

When Congress passed the Bankruptcy Reform Act of 1978, commonly referred to as the Bankruptcy Code, one of its primary goals was to create uniform laws to govern the bankruptcy process.1 While Congress was largely able to accomplish this goal, the Bankruptcy Code still contains several gaps that must be filled by the judicial system.2 One of these gaps concerns the Chapter 13 present-value analysis, which has led courts to create a variety of potential solutions in an attempt to bring clarity to the situation.3

When debtors file a Chapter 13 bankruptcy plan, they promise to pay back their creditors over a period of three to five years using their future income.4 The Bankruptcy Code requires that over the course of the debtor's plan, secured creditors should receive the present value of their claim and unsecured creditors should receive the present value of the amount each creditor would receive if its claim was liquidated in Chapter 7.5 This places a burden on debtors by requiring them to show that they can pay each of their creditors the amount they are owed in order to confirm their plan.6 This "present-value analysis" essentially requires bankruptcy courts to select a "discount rate," which accounts for factors such as inflation and opportunity cost, in order to determine whether the debtor's stream of future payments to creditors has a present value equal to the amounts to which the Bankruptcy Code entitles them.7

While the Bankruptcy Code places this burden on the debtor, it does not give guidance on how to calculate a discount rate that satisfies it.8 Over time, circuit courts developed four different methods to fill this gap in the Bankruptcy Code: the formula approach, the coerced loan approach, the presumptive contract approach, and the cost-of-funds method.9 These differing approaches resulted in vastly different discount rates, which forced similarly situated debtors to pay their creditors varying amounts and potentially affected their ability to repay their debts.10 Importantly, a failed Chapter 13 bankruptcy plan could lead a court to dismiss the case or convert it to a Chapter 7 case, in which the debtor's assets would be liquidated to satisfy creditor claims.11

In Till v. SCS Credit Corp. ,12 the Supreme Court attempted to solve this issue and bring clarity to the Chapter 13 present-value analysis.13 Unfortunately, it failed.14 The Justices split 4-4-1 on the issue, thus failing to come to a majority consensus on which method to adopt.15 Justice Thomas disagreed with the other eight Justices about whether it was appropriate to include a debtor-specific risk adjustment in the discount rate, and thus did not join either side.16 Although the Court ultimately used the formula approach to calculate the discount rate,17 its apparent failure to reach a majority decision meant that some bankruptcy courts did not treat it as binding precedent.18

Till has drawn criticism from commentators, many of whom believe that the Supreme Court spoiled "a marvelous opportunity to impose some much-needed order and predictability on these determinations" by failing to reach a majority decision.19 The Supreme Court seemingly did nothing to solve the present-value analysis problem, and many believed its only real accomplishment was that it eliminated two of the four methods that bankruptcy courts had previously applied to Till20

Since the Court was seemingly unable to conclusively decide the proper approach to conducting the present-value analysis, bankruptcy courts once again looked to fill in this gap in the Bankruptcy Code.21 Some courts have created local rules that govern how they will calculate the discount rate used in the Chapter 13 present-value analysis.22 While these rules generally follow the formula-approach framework laid out by the Till plurality, the problem is that the rules created a district-wide presumptive discount rate for all Chapter 13 cases that does not account for the individual debtor's financial situation. …

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