#7 - Treatment of Secured Creditors in Bankruptcy

Question 1

Claim Calculation

Answer 1

Step 1: for secured and unsecured creditors, determine pre-petition amount owed. 502b
- Pursuant to contract, include interest/fees and attorneys’ fees
- Based on jurisdiction, add post-petition attorneys’ fees

Step 2: for secured creditors, determine value of collateral, compare to 502b claim from Step 1
- If value of collateral greater&raquo_space; over-secured (go to Step 3)
- If value of collateral lesser&raquo_space; under-secured
NOTE: Value of collateral is where the FIGHT OCCURS!

Step 3: if over-secured, add post-petition interest/fees and attorneys’ fees (pursuant to K) until total claim equals value of collateral 506b. 506(b) entitles accrued interest + atty fees IF: 1) reasonable; 2) payment for fees/costs provided in agreement or state statute; 3) accrued value (such as interest) limited to total of collateral&raquo_space;example: $40 debt secured by $50 collateral. Accrued interest + fees can’t exceed the $10 oversecured value of colllateral

Question 2

Claims Process

Answer 2

Creditors file proofs of claims. The allowance process varies by chapter; generally, unless there is an objection, claims that are filed or scheduled are allowed. 502a

in other words…

The Claims Process
(1) file proof of claim.
describe debt and state that it remains outstanding.
If no objection, considered an “allowed claim.”
NOTE: in chapter 11 cases, if debtor schedules a debt in the correct amount and does not dispute it, the creditor does not need to file a proof of claim; it is automatically allowed.

Question 3

How is the Secured Creditor Paid?

Answer 3

Secured creditors look to collateral for payment.

Unsecured portion of claim is paid through bankruptcy case (if claim is bifurcated, the secured creditor is basically unsecured for that portion)

If trustee sells collateral (typically in Chp 7), secured creditor: 1) receives its claim amount from sale proceeds under 363(f) or 2) collateral is sold subject to its lien and creditor requests payment from buyer (or it forecloses on collateral).

Whether sale expenses will be deducted from secured creditors’ recovery depends on whether the creditor is over- or undersecured

If trustee abandons collateral (Chp 7), 554a, secured creditor forecloses on collateral

If debtor confirms plan (Chp 11 or 13), secured creditor is entitled to have the value of its secured claim paid over the course of the plan. Calculate using the time value of money: prime rate + risk adjustment.
-> To receive value of secured claim, the present value of all future payments under the plan must equal the amount of the secured claim
-> Payments must be discounted by an appropriate interest rate (called discount rate)
-> The Till Case sets that interest rate in chp 13 (and, for many courts, chp 11), at the prime rate plus a risk adjustment (typically 1-3%). It’s the prime rate (best rate being given to borrowers generally in the market now) then add anywhere from 1 to 3% depending on how financially shaky this debtor is. That little % accounts for possible failure of plan.
-> Result is that the sum of payments made under the plan will be greater than secured claim amount

Question 4

Unsecured Claims

Answer 4

Unsecured claims: amount due at the time of filing. Does not accrue interest; doing so favors larger unsecured debts. Bankruptcy is a collective proceeding and unsecured creditors share pro rata.

pre-petition accrued interest permissible.

Question 5

Bankruptcy Sales

Answer 5

Sale of Collateral Subject to a Security Interest:
trustee sells debtor’s equity in property subject to a security interest

Sale of Collateral Free and Clear of Liens
proceeds of the sale are free of liens

554(a) Abandonment of Estate Property
enables trustee to rid itself of property that is burdensome or where possess is a large expense for the estate.