TILL v. SCS CREDIT CORP.


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Opinion

LEE M. TILL, et ux., PETITIONERS v. SCS
CREDIT CORPORATION

on writ of certiorari to the united states court of appeals for the seventh circuit


[May 17, 2004]

Justice Stevens announced the judgment of the Court and delivered an opinion, in which Justice Souter , Justice Ginsburg , and Justice Breyer join.

To qualify for court approval under Chapter 13 of the Bankruptcy Code, an individual debtor’s proposed debt adjustment plan must accommodate each allowed, secured creditor in one of three ways: (1) by obtaining the creditor’s acceptance of the plan; (2) by surrendering the property securing the claim; or (3) by providing the creditor both a lien securing the claim and a promise of future property distributions (such as deferred cash payments) whose total “value, as of the effective date of the plan, … is not less than the allowed amount of such claim.” 1 The third alternative is commonly known as the “cram down option” because it may be enforced over a claim holder’s objection. 2 Associates Commercial Corp. v. Rash, 520 U. S. 953, 957 (1997) .

Plans that invoke the cram down power often provide for installment payments over a period of years rather than a single payment. 3 In such circumstances, the amount of each installment must be calibrated to ensure that, over time, the creditor receives disbursements whose total present value 4 equals or exceeds that of the allowed claim. The proceedings in this case that led to our grant of certiorari identified four different methods of determining the appropriate method with which to perform that calibration. Indeed, the Bankruptcy Judge, the District Court, the Court of Appeals majority, and the dissenting Judge each endorsed a different approach. We detail the underlying facts and describe each of those approaches before setting forth our judgment as to which approach best meets the purposes of the Bankruptcy Code.

I

On October 2, 1998, petitioners Lee and Amy Till, residents of Kokomo, Indiana, purchased a used truck from Instant Auto Finance for $6,395 plus $330.75 in fees and taxes. They made a $300 down payment and financed the balance of the purchase price by entering into a retail installment contract that Instant Auto immediately assigned to respondent, SCS Credit Corporation. Petitioners’ initial indebtedness amounted to $8,285.24—the $6,425.75 balance of the truck purchase plus a finance charge of 21% per year for 136 weeks, or $1,859.49. Under the contract, petitioners agreed to make 68 biweekly payments to cover this debt; Instant Auto—and subsequently respondent—retained a purchase money security interest that gave it the right to repossess the truck if petitioners defaulted under the contract.

On October 25, 1999, petitioners, by then in default on their payments to respondent, filed a joint petition for relief under Chapter 13 of the Bankruptcy Code. At the time of the filing, respondent’s outstanding claim amounted to $4,894.89, but the parties agreed that the truck securing the claim was worth only $4,000. App. 16–17. In accordance with the Bankruptcy Code, therefore, respondent’s secured claim was limited to $4,000, and the $894.89 balance was unsecured. 5 Petitioners’ filing automatically stayed debt-collection activity by their various creditors, including the Internal Revenue Service (IRS), respondent, three other holders of secured claims, and unidentified unsecured creditors. In addition, the filing created a bankruptcy estate, administered by a trustee, which consisted of petitioners’ property, including the truck. 6

Petitioners’ proposed debt adjustment plan called for them to submit their future earnings to the supervision and control of the Bankruptcy Court for three years, and to assign $740 of their wages to the trustee each month. 7 App. to Pet. for Cert. 76a–81a. The plan charged the trustee with distributing these monthly wage assignments to pay, in order of priority: (1) administrative costs; (2) the IRS’s priority tax claim; (3) secured creditors’ claims; and finally, (4) unsecured creditors’ claims. Id. , at 77a–79a.

The proposed plan also provided that petitioners would pay interest on the secured portion of respondent’s claim at a rate of 9.5% per year. Petitioners arrived at this “prime-plus” or “formula rate” by augmenting the national prime rate of approximately 8% (applied by banks when making low-risk loans) to account for the risk of nonpayment posed by borrowers in their financial position. Respondent objected to the proposed rate, contending that the company was “entitled to interest at the rate of 21%, which is the rate … it would obtain if it could foreclose on the vehicle and reinvest the proceeds in loans of equivalent duration and risk as the loan” originally made to petitioners. App. 19–20.

At the hearing on its objection, respondent presented expert testimony establishing that it uniformly charges 21% interest on so-called “subprime” loans, or loans to borrowers with poor credit ratings, and that other lenders in the subprime market also charge that rate. Petitioners countered with the testimony of an Indiana University-Purdue University Indianapolis economics professor, who acknowledged that he had only limited familiarity with the subprime auto lending market, but described the 9.5% formula rate as “very reasonable” given that Chapter 13 plans are “supposed to be financially feasible.” 8 Id ., at 43–44. Moreover, the professor noted that respondent’s exposure was “fairly limited because [petitioners] are under the supervision of the court.” Id. , at 43. The bankruptcy trustee also filed comments supporting the formula rate as, among other things, easily ascertainable, closely tied to the “condition of the financial market,” and independent of the financial circumstances of any particular lender. App. to Pet. for Cert. 41a–42a. Accepting petitioners’ evidence, the Bankruptcy Court overruled respondent’s objection and confirmed the proposed plan.

The District Court reversed. It understood Seventh Circuit precedent to require that bankruptcy courts set cram down interest rates at the level the creditor could have obtained if it had foreclosed on the loan, sold the collateral, and reinvested the proceeds in loans of equivalent duration and risk. Citing respondent’s unrebutted testimony about the market for subprime loans, the court concluded that 21% was the appropriate rate. Id ., at 38a.

On appeal, the Seventh Circuit endorsed a slightly modified version of the District Court’s “coerced” or “forced loan” approach. In re Till , 301 F. 3d 583, 591 (2002). Specifically, the majority agreed with the District Court that, in a cram down proceeding, the inquiry should focus on the interest rate “that the creditor in question would obtain in making a new loan in the same industry to a debtor who is similarly situated, although not in bankruptcy.” Id. , at 592. To approximate that new loan rate, the majority looked to the parties’ prebankruptcy contract rate (21%). The court recognized, however, that using the contract rate would not “duplicat[e] precisely … the present value of the collateral to the creditor” because loans to bankrupt, court-supervised debtors “involve some risks that would not be incurred in a new loan to a debtor not in default” and also produce “some economies.” Ibid. To correct for these inaccuracies, the majority held that the original contract rate should “serve as a presumptive [cram down] rate,” which either the creditor or the debtor could challenge with evidence that a higher or lower rate should apply. Ibid . Accordingly, the court remanded the case to the Bankruptcy Court to afford petitioners and respondent an opportunity to rebut the presumptive 21% rate. 9

Dissenting, Judge Rovner argued that the majority’s presumptive contract rate approach overcompensates secured creditors because it fails to account for costs a creditor would have to incur in issuing a new loan. Rather than focusing on the market for comparable loans, Judge Rovner advocated either the Bankruptcy Court’s formula approach or a “straightforward … cost of funds” approach that would simply ask “what it would cost the creditor to obtain the cash equivalent of the collateral from an alternative source.” Id ., at 595–596. Although Judge Rovner noted that the rates produced by either the formula or the cost of funds approach might be “piddling” relative to the coerced loan rate, she suggested courts should “consider the extent to which the creditor has already been compensated for … the risk that the debtor will be unable to discharge his obligations under the reorganization plan … in the rate of interest that it charged to the debtor in return for the original loan.” Id. , at 596. We granted certiorari and now reverse. 539 U. S. 925 (2003) .

II

The Bankruptcy Code provides little guidance as to which of the rates of interest advocated by the four opinions in this case—the formula rate, the coerced loan rate, the presumptive contract rate, or the cost of funds rate—Congress had in mind when it adopted the cram down provision. That provision, 11 U. S. C. §1325(a)(5)(B), does not mention the term “discount rate” or the word “interest.” Rather, it simply requires bankruptcy courts to ensure that the property to be distributed to a particular secured creditor over the life of a bankruptcy plan has a total “value, as of the effective date of the plan,” that equals or exceeds the value of the creditor’s allowed secured claim—in this case, $4,000. §1325(a)(5)(B)(ii).

That command is easily satisfied when the plan provides for a lump-sum payment to the creditor. Matters are not so simple, however, when the debt is to be discharged by a series of payments over time. A debtor’s promise of future payments is worth less than an immediate payment of the same total amount because the creditor cannot use the money right away, inflation may cause the value of the dollar to decline before the debtor pays, and there is always some risk of nonpayment. The challenge for bankruptcy courts reviewing such repayment schemes, therefore, is to choose an interest rate sufficient to compensate the creditor for these concerns.

Three important considerations govern that choice. First, the Bankruptcy Code includes numerous provisions that, like the cram down provision, require a court to “discoun[t] … [a] stream of deferred payments back to the[ir] present dollar value,” Rake v. Wade, 508 U. S. 464, 472, n. 8 (1993) , to ensure that a creditor receives at least the value of its claim. 10 We think it likely that Congress intended bankruptcy judges and trustees to follow essentially the same approach when choosing an appropriate interest rate under any of these provisions. Moreover, we think Congress would favor an approach that is familiar in the financial community and that minimizes the need for expensive evidentiary proceedings.

Second, Chapter 13 expressly authorizes a bankruptcy court to modify the rights of any creditor whose claim is secured by an interest in anything other than “real property that is the debtor’s principal residence.” 11 U. S. C. §1322(b)(2). 11 Thus, in cases like this involving secured interests in personal property, the court’s authority to modify the number, timing, or amount of the installment payments from those set forth in the debtor’s original contract is perfectly clear. Further, the potential need to modify the loan terms to account for intervening changes in circumstances is also clear: On the one hand, the fact of the bankruptcy establishes that the debtor is overextended and thus poses a significant risk of default; on the other hand, the postbankruptcy obligor is no longer the individual debtor but the court-supervised estate, and the risk of default is thus somewhat reduced. 12

Third, from the point of view of a creditor, the cram down provision mandates an objective rather than a subjective inquiry. 13 That is, although §1325(a)(5)(B) entitles the creditor to property whose present value objectively equals or exceeds the value of the collateral, it does not require that the terms of the cram down loan match the terms to which the debtor and creditor agreed prebankruptcy, nor does it require that the cram down terms make the creditor subjectively indifferent between present foreclosure and future payment. Indeed, the very idea of a “cram down” loan precludes the latter result: By definition, a creditor forced to accept such a loan would prefer instead to foreclose. 14 Thus, a court choosing a cram down interest rate need not consider the creditor’s individual circumstances, such as its prebankruptcy dealings with the debtor or the alternative loans it could make if permitted to foreclose. 15 Rather, the court should aim to treat similarly situated creditors similarly, 16 and to ensure that an objective economic analysis would suggest the debtor’s interest payments will adequately compensate all such creditors for the time value of their money and the risk of default.

III

These considerations lead us to reject the coerced loan, presumptive contract rate, and cost of funds approaches. Each of these approaches is complicated, imposes significant evidentiary costs, and aims to make each individual creditor whole rather than to ensure the debtor’s payments have the required present value. For example, the coerced loan approach requires bankruptcy courts to consider evidence about the market for comparable loans to similar (though nonbankrupt) debtors—an inquiry far removed from such courts’ usual task of evaluating debtors’ financial circumstances and the feasibility of their debt adjustment plans. In addition, the approach overcompensates creditors because the market lending rate must be high enough to cover factors, like lenders’ transaction costs and overall profits, that are no longer relevant in the context of court-administered and court-supervised cram down loans.

Like the coerced loan approach, the presumptive contract rate approach improperly focuses on the creditor’s potential use of the proceeds of a foreclosure sale. In addition, although the approach permits a debtor to introduce some evidence about each creditor, thereby enabling the court to tailor the interest rate more closely to the creditor’s financial circumstances and reducing the likelihood that the creditor will be substantially overcompensated, that right comes at a cost: The debtor must obtain information about the creditor’s costs of overhead, financial circumstances, and lending practices to rebut the presumptive contract rate. Also, the approach produces absurd results, entitling “inefficient, poorly managed lenders” with lower profit margins to obtain higher cram down rates than “well managed, better capitalized lenders.” 2 K. Lundin, Chapter 13 Bankruptcy §112.1, p. 112–8 (3d ed. 2000). Finally, because the approach relies heavily on a creditor’s prior dealings with the debtor, similarly situated creditors may end up with vastly different cram down rates. 17

The cost of funds approach, too, is improperly aimed. Although it rightly disregards the now-irrelevant terms of the parties’ original contract, it mistakenly focuses on the creditworthiness of the creditor rather than the debtor. In addition, the approach has many of the other flaws of the coerced loan and presumptive contract rate approaches. For example, like the presumptive contract rate approach, the cost of funds approach imposes a significant evidentiary burden, as a debtor seeking to rebut a creditor’s asserted cost of borrowing must introduce expert testimony about the creditor’s financial condition. Also, under this approach, a creditworthy lender with a low cost of borrowing may obtain a lower cram down rate than a financially unsound, fly-by-night lender.

IV

The formula approach has none of these defects. Taking its cue from ordinary lending practices, the approach begins by looking to the national prime rate, reported daily in the press, which reflects the financial market’s estimate of the amount a commercial bank should charge a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default. 18 Because bankrupt debtors typically pose a greater risk of nonpayment than solvent commercial borrowers, the approach then requires a bankruptcy court to adjust the prime rate accordingly. The appropriate size of that risk adjustment depends, of course, on such factors as the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan. The court must therefore hold a hearing at which the debtor and any creditors may present evidence about the appropriate risk adjustment. Some of this evidence will be included in the debtor’s bankruptcy filings, however, so the debtor and creditors may not incur significant additional expense. Moreover, starting from a concededly low estimate and adjusting upward places the evidentiary burden squarely on the creditors, who are likely to have readier access to any information absent from the debtor’s filing (such as evidence about the “liquidity of the collateral market,” post, at 9 ( Scalia, J ., dissenting)). Finally, many of the factors relevant to the adjustment fall squarely within the bankruptcy court’s area of expertise.

Thus, unlike the coerced loan, presumptive contract rate, and cost of funds approaches, the formula approach entails a straightforward, familiar, and objective inquiry, and minimizes the need for potentially costly additional evidentiary proceedings. Moreover, the resulting “prime-plus” rate of interest depends only on the state of financial markets, the circumstances of the bankruptcy estate, and the characteristics of the loan, not on the creditor’s circumstances or its prior interactions with the debtor. For these reasons, the prime-plus or formula rate best comports with the purposes of the Bankruptcy Code. 19

We do not decide the proper scale for the risk adjustment, as the issue is not before us. The Bankruptcy Court in this case approved a risk adjustment of 1.5%, App. to Pet. for Cert. 44a–73a, and other courts have generally approved adjustments of 1% to 3%, see In re Valenti , 105 F. 3d 55, 64 (CA2) (collecting cases), abrogated on other grounds by Associates Commercial Corp. v. Rash, 520 U. S. 953 (1997) . Respondent’s core argument is that a risk adjustment in this range is entirely inadequate to compensate a creditor for the real risk that the plan will fail. There is some dispute about the true scale of that risk—respondent claims that more than 60% of Chapter 13 plans fail, Brief for Respondent 25, but petitioners argue that the failure rate for approved Chapter 13 plans is much lower, Tr. of Oral Arg. 9. We need not resolve that dispute. It is sufficient for our purposes to note that, under 11 U. S. C. §1325(a)(6), a court may not approve a plan unless, after considering all creditors’ objections and receiving the advice of the trustee, the judge is persuaded that “the debtor will be able to make all payments under the plan and to comply with the plan.” Ibid . Together with the cram down provision, this requirement obligates the court to select a rate high enough to compensate the creditor for its risk but not so high as to doom the plan. If the court determines that the likelihood of default is so high as to necessitate an “eye-popping” interest rate, 301 F. 3d, at 593 (Rovner, J., dissenting), the plan probably should not be confirmed.

V

The dissent’s endorsement of the presumptive contract rate approach rests on two assumptions: (1) “subprime lending markets are competitive and therefore largely efficient”; and (2) the risk of default in Chapter 13 is normally no less than the risk of default at the time of the original loan. Post , at 2. Although the Bankruptcy Code provides little guidance on the question, we think it highly unlikely that Congress would endorse either premise.

First, the dissent assumes that subprime loans are negotiated between fully informed buyers and sellers in a classic free market. But there is no basis for concluding that Congress relied on this assumption when it enacted Chapter 13. Moreover, several considerations suggest that the subprime market is not, in fact, perfectly competitive. To begin with, used vehicles are regularly sold by means of tie-in transactions, in which the price of the vehicle is the subject of negotiation, while the terms of the financing are dictated by the seller. 20 In addition, there is extensive federal 21 and state 22 regulation of subprime lending, which not only itself distorts the market, but also evinces regulators’ belief that unregulated subprime lenders would exploit borrowers’ ignorance and charge rates above what a competitive market would allow. 23 Indeed, Congress enacted the Truth in Lending Act in part because it believed “consumers would individually benefit not only from the more informed use of credit, but also from heightened competition which would result from more knowledgeable credit shopping.” S. Rep. No. 96–368, p. 16 (1979). 24

Second, the dissent apparently believes that the debtor’s prebankruptcy default—on a loan made in a market in which creditors commonly charge the maximum rate of interest allowed by law, Brief for Respondent 16, and in which neither creditors nor debtors have the protections afforded by Chapter 13—translates into a high probability that the same debtor’s confirmed Chapter 13 plan will fail. In our view, however, Congress intended to create a program under which plans that qualify for confirmation have a high probability of success. Perhaps bankruptcy judges currently confirm too many risky plans, but the solution is to confirm fewer such plans, not to set default cram down rates at absurdly high levels, thereby increasing the risk of default.

Indeed, as Justice Thomas demonstrates, post , at 3 (opinion concurring in judgment), the text of §1325(a)(5)(B)(ii) may be read to support the conclusion that Congress did not intend the cram down rate to include any compensation for the risk of default. 25 That reading is consistent with a view that Congress believed Chapter 13’s protections to be so effective as to make the risk of default negligible. Because our decision in Rash assumes that cram down interest rates are adjusted to “offset,” to the extent possible, the risk of default, 520 U. S., at 962–963, and because so many judges who have considered the issue (including the authors of the four earlier opinions in this case) have rejected the risk-free approach, we think it too late in the day to endorse that approach now. Of course, if the text of the statute required such an approach, that would be the end of the matter. We think, however, that §1325(a)(5)(B)(ii)’s reference to “value, as of the effective date of the plan, of property to be distributed under the plan” is better read to incorporate all of the commonly understood components of “present value,” including any risk of nonpayment. Justice Thomas ’ reading does emphasize, though, that a presumption that bankruptcy plans will succeed is more consistent with Congress’ statutory scheme than the dissent’s more cynical focus on bankrupt debtors’ “financial instability and … proclivity to seek legal protection,” post , at 3.

Furthermore, the dissent’s two assumptions do not necessarily favor the presumptive contract rate approach. For one thing, the cram down provision applies not only to subprime loans but also to prime loans negotiated prior to the change in circumstance (job loss, for example) that rendered the debtor insolvent. Relatedly, the provision also applies in instances in which national or local economic conditions drastically improved or declined after the original loan was issued but before the debtor filed for bankruptcy. In either case, there is every reason to think that a properly risk-adjusted prime rate will provide a better estimate of the creditor’s current costs and exposure than a contract rate set in different times.

Even more important, if all relevant information about the debtor’s circumstances, the creditor’s circumstances, the nature of the collateral, and the market for comparable loans were equally available to both debtor and creditor, then in theory the formula and presumptive contract rate approaches would yield the same final interest rate. Thus, we principally differ with the dissent not over what final rate courts should adopt but over which party (creditor or debtor) should bear the burden of rebutting the presumptive rate (prime or contract, respectively).

Justice Scalia identifies four “relevant factors bearing on risk premium[:] (1) the probability of plan failure; (2) the rate of collateral depreciation; (3) the liquidity of the collateral market; and (4) the administrative expenses of enforcement.” Post , at 9. In our view, any information debtors have about any of these factors is likely to be included in their bankruptcy filings, while the remaining information will be far more accessible to creditors (who must collect information about their lending markets to remain competitive) than to individual debtors (whose only experience with those markets might be the single loan at issue in the case). Thus, the formula approach, which begins with a concededly low estimate of the appropriate interest rate and requires the creditor to present evidence supporting a higher rate, places the evidentiary burden on the more knowledgeable party, thereby facilitating more accurate calculation of the appropriate interest rate.

If the rather sketchy data uncovered by the dissent support an argument that Chapter 13 of the Bankruptcy Code should mandate application of the presumptive contract rate approach (rather than merely an argument that bankruptcy judges should exercise greater caution before approving debt adjustment plans), those data should be forwarded to Congress. We are not persuaded, however, that the data undermine our interpretation of the statutory scheme Congress has enacted.

The judgment of the Court of Appeals is reversed, and the case is remanded with instructions to remand the case to the Bankruptcy Court for further proceedings consistent with this opinion.

It is so ordered.


Notes

1 11 U. S. C. §1325(a)(5). The text of the statute reads as follows: “§1325. Confirmation of plan “(a) Except as provided in subsection (b), the court shall confirm a plan if— . . . . . “(5) with respect to each allowed secured claim provided for by the plan— “(A) the holder of such claim has accepted the plan; “(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and “(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or “(C) the debtor surrenders the property securing such claim to such holder . . . .”

2 As we noted in Associates Commercial Corp. v. Rash, 520 U. S. 953, 962 (1997) , a debtor may also avail himself of the second option (surrender of the collateral) despite the creditor’s objection.

3 See Rake v. Wade, 508 U. S. 464, n. 8 (1993) (noting that property distributions under §1325(a)(5)(B)(ii) may take the form of “a stream of future payments”).

4 In the remainder of the opinion, we use the term “present value” to refer to the value as of the effective date of the bankruptcy plan.

5 Title 11 U. S. C. §506(a) provides: “An allowed claim of a creditor secured by a lien on property in which the estate has an interest … is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, … and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.”

6 See §§541(a), 1306(a).

7 Petitioners submitted an initial plan that would have required them to assign $1,089 of their wages to the trustee every month. App. 9. Their amended plan, however, reduced this monthly payment to $740. App. to Pet. for Cert. 77a.

8 The requirement of financial feasibility derives from 11 U. S. C. §1325(a)(6), which provides that the bankruptcy court shall “confirm a plan if … the debtor will be able to make all payments under the plan and to comply with the plan.” See infra, at 14.

9 As 21% is the maximum interest rate creditors may charge for consumer loans under Indiana’s usury statute, Ind. Code §24–4.5–3–201 (1993), the remand presumably could not have benefited respondent.

10 See 11 U. S. C. §1129(a)(7)(A)(ii) (requiring payment of property whose “value, as of the effective date of the plan” equals or exceeds the value of the creditor’s claim); §§1129(a)(7)(B), 1129(a)(9)(B)(i), 1129(a)(9)(C), 1129(b)(2)(A)(ii), 1129(b)(2)(B)(i), 1129(b)(2)(C)(i), 1173(a)(2), 1225(a)(4), 1225(a)(5)(B)(ii), 1228(b)(2), 1325(a)(4), 1228(b)(2) (same).

11 Section 1322(b)(2) provides: “[T]he plan may … modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, … or leave unaffected the rights of holders of any class of claims.”

12 Several factors contribute to this reduction in risk. First, as noted below, infra, at 14, a court may only approve a cram down loan (and the debt adjustment plan of which the loan is a part) if it believes the debtor will be able to make all of the required payments. §1325(a)(6). Thus, such loans will only be approved for debtors that the court deems creditworthy. Second, Chapter 13 plans must “provide for the submission” to the trustee “of all or such portion of [the debtor’s] future … income … as is necessary for the execution of the plan,” §1322(a)(1), so the possibility of nonpayment is greatly reduced. Third, the Bankruptcy Code’s extensive disclosure requirements reduce the risk that the debtor has significant undisclosed obligations. Fourth, as a practical matter, the public nature of the bankruptcy proceeding is likely to reduce the debtor’s opportunities to take on additional debt. Cf.11 U. S. C. §525 (prohibiting certain Government grant and loan programs from discriminating against applicants who are or have been bankrupt).

13 We reached a similar conclusion in Associates Commercial Corp. v. Rash, 520 U. S. 953 (1997) , when we held that a creditor’s secured interest should be valued from the debtor’s, rather than the creditor’s, perspective. Id., at 963 (“[The debtor’s] actual use, rather than a foreclosure sale that will not take place, is the proper guide …”).

14 This fact helps to explain why there is no readily apparent Chapter 13 “cram down market rate of interest”: Because every cram down loan is imposed by a court over the objection of the secured creditor, there is no free market of willing cram down lenders. Interestingly, the same is not true in the Chapter 11 context, as numerous lenders advertise financing for Chapter 11 debtors in possession. See, e.g., Balmoral Financial Corporation, http://www.balmoral.com/bdip.htm (all Internet materials as visited Mar. 4, 2004, and available in Clerk of Court’s case file) (advertising debtor in possession lending); Debtor in Possession Financing: 1st National Assistance Finance Association DIP Division, http://www.loanmallusa.com/dip.htm (offering “to tailor a financing program … to your business’ needs and … to work closely with your bankruptcy counsel”). Thus, when picking a cram down rate in a Chapter 11 case, it might make sense to ask what rate an efficient market would produce. In the Chapter 13 context, by contrast, the absence of any such market obligates courts to look to first prin-ciples and ask only what rate will fairly compensate a creditor for its exposure.

15 See supra, at 5 (noting that the District Court’s coerced loan approach aims to set the cram down interest rate at the level the creditor could obtain from new loans of comparable duration and risk).

16 Cf. 11 U. S. C. §1322(a)(3) (“The plan shall … provide the same treatment for each claim within a particular class”).

17 For example, suppose a debtor purchases two identical used cars, buying the first at a low purchase price from a lender who charges high interest, and buying the second at a much higher purchase price from a lender who charges zero-percent or nominal interest. Prebankruptcy, these two loans might well produce identical income streams for the two lenders. Postbankruptcy, however, the presumptive contract rate approach would entitle the first lender to a considerably higher cram down interest rate, even though the two secured debts are objectively indistinguishable.

18 We note that, if the court could somehow be certain a debtor would complete his plan, the prime rate would be adequate to compensate any secured creditors forced to accept cram down loans.

19 The fact that Congress considered but rejected legislation that would endorse the Seventh Circuit’s presumptive contract rate approach, H. R. 1085, 98th Cong., 1st Sess., §19(2)(A) (1983); H. R. 1169, 98th Cong., 1st Sess., §19(2)(A) (1983); H. R. 4786, 97th Cong., 1st Sess., §19(2)(A) (1981), lends some support to our conclusion. It is perhaps also relevant that our conclusion is endorsed by the Executive Branch of the Government and by the National Association of Chapter Thirteen Trustees. Brief for United States as Amicus Curiae; Brief for National Association of Chapter Thirteen Trustees as Amicus Curiae. If we have misinterpreted Congress’ intended meaning of “value, as of the date of the plan,” we are confident it will enact appropriate remedial legislation.

20 The dissent notes that “[t]ie-ins do not alone make financing markets noncompetitive; they only cause prices and interest rates to be considered in tandem rather than separately.” Post, at 4–5. This statement, while true, is nonresponsive. If a market prices the cost of goods and the cost of financing together, then even if that market is perfectly competitive, all we can know is that the combined price of the goods and the financing is competitive and efficient. We have no way of determining whether the allocation of that price between goods and financing would be the same if the two components were separately negotiated. But the only issue before us is the cram down interest rate (the cost of financing); the value of respondent’s truck (the cost of the goods) is fixed. See Rash, 520 U. S., at 960 (setting the value of collateral in Chapter 13 proceedings at the “price a willing buyer in the debtor’s trade, business, or situation would pay to obtain like property from a willing seller”). The competitiveness of the market for cost-cum-financing is thus irrelevant to our analysis.

21 For example, the Truth in Lending Act regulates credit transactions and credit advertising. 15 U. S. C. §§1604–1649, 1661–1665b.

22 Usury laws provide the most obvious examples of state regulation of the subprime market. See, e.g., Colo. Rev. Stat. §5–2–201 (2003); Fla. Stat. Ann. §537.011 (Supp. 2004); Ind. Code §24–4.5–3–201 (1993); Md. Com. Law Code Ann. §12–404(d) (2000).

23 Lending practices in Mississippi, “where there currently is no legal usury rate,” support this conclusion: in that State, subprime lenders charge rates “as high as 30 to 40%”—well above the rates that apparently suffice to support the industry in States like Indiana. Norberg, Consumer Bankruptcy’s New Clothes: An Empirical Study of Discharge and Debt Collection in Chapter 13, 7 Am. Bankr. Inst. L. Rev. 415, 438–439 (1999).

24 See also H. R. Rep. No. 1040, 90th Cong., 1st Sess., 17 (1967) (“The basic premise of the application of disclosure standards to credit advertising rests in the belief that a substantial portion of consumer purchases are induced by such advertising and that if full disclosure is not made in such advertising, the consumer will be deprived of the opportunity to effectively comparison shop for credit”).

25 The United States, too, notes that “[t]he text of Section 1325 is consistent with the view that the appropriate discount rate should reflect only the time value of money and not any risk premium.” Brief for United States as Amicus Curiae 11, n. 4. The remainder of the United States’ brief, however, advocates the formula approach. See, e.g., id., at 19–28.


TOP

Opinion

LEE M. TILL, et ux., PETITIONERS v. SCS
CREDIT CORPORATION

on writ of certiorari to the united states court of appeals for the seventh circuit


[May 17, 2004]

Justice Stevens announced the judgment of the Court and delivered an opinion, in which Justice Souter , Justice Ginsburg , and Justice Breyer join.

To qualify for court approval under Chapter 13 of the Bankruptcy Code, an individual debtor’s proposed debt adjustment plan must accommodate each allowed, secured creditor in one of three ways: (1) by obtaining the creditor’s acceptance of the plan; (2) by surrendering the property securing the claim; or (3) by providing the creditor both a lien securing the claim and a promise of future property distributions (such as deferred cash payments) whose total “value, as of the effective date of the plan, … is not less than the allowed amount of such claim.” 1 The third alternative is commonly known as the “cram down option” because it may be enforced over a claim holder’s objection. 2 Associates Commercial Corp. v. Rash, 520 U. S. 953, 957 (1997) .

Plans that invoke the cram down power often provide for installment payments over a period of years rather than a single payment. 3 In such circumstances, the amount of each installment must be calibrated to ensure that, over time, the creditor receives disbursements whose total present value 4 equals or exceeds that of the allowed claim. The proceedings in this case that led to our grant of certiorari identified four different methods of determining the appropriate method with which to perform that calibration. Indeed, the Bankruptcy Judge, the District Court, the Court of Appeals majority, and the dissenting Judge each endorsed a different approach. We detail the underlying facts and describe each of those approaches before setting forth our judgment as to which approach best meets the purposes of the Bankruptcy Code.

I

On October 2, 1998, petitioners Lee and Amy Till, residents of Kokomo, Indiana, purchased a used truck from Instant Auto Finance for $6,395 plus $330.75 in fees and taxes. They made a $300 down payment and financed the balance of the purchase price by entering into a retail installment contract that Instant Auto immediately assigned to respondent, SCS Credit Corporation. Petitioners’ initial indebtedness amounted to $8,285.24—the $6,425.75 balance of the truck purchase plus a finance charge of 21% per year for 136 weeks, or $1,859.49. Under the contract, petitioners agreed to make 68 biweekly payments to cover this debt; Instant Auto—and subsequently respondent—retained a purchase money security interest that gave it the right to repossess the truck if petitioners defaulted under the contract.

On October 25, 1999, petitioners, by then in default on their payments to respondent, filed a joint petition for relief under Chapter 13 of the Bankruptcy Code. At the time of the filing, respondent’s outstanding claim amounted to $4,894.89, but the parties agreed that the truck securing the claim was worth only $4,000. App. 16–17. In accordance with the Bankruptcy Code, therefore, respondent’s secured claim was limited to $4,000, and the $894.89 balance was unsecured. 5 Petitioners’ filing automatically stayed debt-collection activity by their various creditors, including the Internal Revenue Service (IRS), respondent, three other holders of secured claims, and unidentified unsecured creditors. In addition, the filing created a bankruptcy estate, administered by a trustee, which consisted of petitioners’ property, including the truck. 6

Petitioners’ proposed debt adjustment plan called for them to submit their future earnings to the supervision and control of the Bankruptcy Court for three years, and to assign $740 of their wages to the trustee each month. 7 App. to Pet. for Cert. 76a–81a. The plan charged the trustee with distributing these monthly wage assignments to pay, in order of priority: (1) administrative costs; (2) the IRS’s priority tax claim; (3) secured creditors’ claims; and finally, (4) unsecured creditors’ claims. Id. , at 77a–79a.

The proposed plan also provided that petitioners would pay interest on the secured portion of respondent’s claim at a rate of 9.5% per year. Petitioners arrived at this “prime-plus” or “formula rate” by augmenting the national prime rate of approximately 8% (applied by banks when making low-risk loans) to account for the risk of nonpayment posed by borrowers in their financial position. Respondent objected to the proposed rate, contending that the company was “entitled to interest at the rate of 21%, which is the rate … it would obtain if it could foreclose on the vehicle and reinvest the proceeds in loans of equivalent duration and risk as the loan” originally made to petitioners. App. 19–20.

At the hearing on its objection, respondent presented expert testimony establishing that it uniformly charges 21% interest on so-called “subprime” loans, or loans to borrowers with poor credit ratings, and that other lenders in the subprime market also charge that rate. Petitioners countered with the testimony of an Indiana University-Purdue University Indianapolis economics professor, who acknowledged that he had only limited familiarity with the subprime auto lending market, but described the 9.5% formula rate as “very reasonable” given that Chapter 13 plans are “supposed to be financially feasible.” 8 Id ., at 43–44. Moreover, the professor noted that respondent’s exposure was “fairly limited because [petitioners] are under the supervision of the court.” Id. , at 43. The bankruptcy trustee also filed comments supporting the formula rate as, among other things, easily ascertainable, closely tied to the “condition of the financial market,” and independent of the financial circumstances of any particular lender. App. to Pet. for Cert. 41a–42a. Accepting petitioners’ evidence, the Bankruptcy Court overruled respondent’s objection and confirmed the proposed plan.

The District Court reversed. It understood Seventh Circuit precedent to require that bankruptcy courts set cram down interest rates at the level the creditor could have obtained if it had foreclosed on the loan, sold the collateral, and reinvested the proceeds in loans of equivalent duration and risk. Citing respondent’s unrebutted testimony about the market for subprime loans, the court concluded that 21% was the appropriate rate. Id ., at 38a.

On appeal, the Seventh Circuit endorsed a slightly modified version of the District Court’s “coerced” or “forced loan” approach. In re Till , 301 F. 3d 583, 591 (2002). Specifically, the majority agreed with the District Court that, in a cram down proceeding, the inquiry should focus on the interest rate “that the creditor in question would obtain in making a new loan in the same industry to a debtor who is similarly situated, although not in bankruptcy.” Id. , at 592. To approximate that new loan rate, the majority looked to the parties’ prebankruptcy contract rate (21%). The court recognized, however, that using the contract rate would not “duplicat[e] precisely … the present value of the collateral to the creditor” because loans to bankrupt, court-supervised debtors “involve some risks that would not be incurred in a new loan to a debtor not in default” and also produce “some economies.” Ibid. To correct for these inaccuracies, the majority held that the original contract rate should “serve as a presumptive [cram down] rate,” which either the creditor or the debtor could challenge with evidence that a higher or lower rate should apply. Ibid . Accordingly, the court remanded the case to the Bankruptcy Court to afford petitioners and respondent an opportunity to rebut the presumptive 21% rate. 9

Dissenting, Judge Rovner argued that the majority’s presumptive contract rate approach overcompensates secured creditors because it fails to account for costs a creditor would have to incur in issuing a new loan. Rather than focusing on the market for comparable loans, Judge Rovner advocated either the Bankruptcy Court’s formula approach or a “straightforward … cost of funds” approach that would simply ask “what it would cost the creditor to obtain the cash equivalent of the collateral from an alternative source.” Id ., at 595–596. Although Judge Rovner noted that the rates produced by either the formula or the cost of funds approach might be “piddling” relative to the coerced loan rate, she suggested courts should “consider the extent to which the creditor has already been compensated for … the risk that the debtor will be unable to discharge his obligations under the reorganization plan … in the rate of interest that it charged to the debtor in return for the original loan.” Id. , at 596. We granted certiorari and now reverse. 539 U. S. 925 (2003) .

II

The Bankruptcy Code provides little guidance as to which of the rates of interest advocated by the four opinions in this case—the formula rate, the coerced loan rate, the presumptive contract rate, or the cost of funds rate—Congress had in mind when it adopted the cram down provision. That provision, 11 U. S. C. §1325(a)(5)(B), does not mention the term “discount rate” or the word “interest.” Rather, it simply requires bankruptcy courts to ensure that the property to be distributed to a particular secured creditor over the life of a bankruptcy plan has a total “value, as of the effective date of the plan,” that equals or exceeds the value of the creditor’s allowed secured claim—in this case, $4,000. §1325(a)(5)(B)(ii).

That command is easily satisfied when the plan provides for a lump-sum payment to the creditor. Matters are not so simple, however, when the debt is to be discharged by a series of payments over time. A debtor’s promise of future payments is worth less than an immediate payment of the same total amount because the creditor cannot use the money right away, inflation may cause the value of the dollar to decline before the debtor pays, and there is always some risk of nonpayment. The challenge for bankruptcy courts reviewing such repayment schemes, therefore, is to choose an interest rate sufficient to compensate the creditor for these concerns.

Three important considerations govern that choice. First, the Bankruptcy Code includes numerous provisions that, like the cram down provision, require a court to “discoun[t] … [a] stream of deferred payments back to the[ir] present dollar value,” Rake v. Wade, 508 U. S. 464, 472, n. 8 (1993) , to ensure that a creditor receives at least the value of its claim. 10 We think it likely that Congress intended bankruptcy judges and trustees to follow essentially the same approach when choosing an appropriate interest rate under any of these provisions. Moreover, we think Congress would favor an approach that is familiar in the financial community and that minimizes the need for expensive evidentiary proceedings.

Second, Chapter 13 expressly authorizes a bankruptcy court to modify the rights of any creditor whose claim is secured by an interest in anything other than “real property that is the debtor’s principal residence.” 11 U. S. C. §1322(b)(2). 11 Thus, in cases like this involving secured interests in personal property, the court’s authority to modify the number, timing, or amount of the installment payments from those set forth in the debtor’s original contract is perfectly clear. Further, the potential need to modify the loan terms to account for intervening changes in circumstances is also clear: On the one hand, the fact of the bankruptcy establishes that the debtor is overextended and thus poses a significant risk of default; on the other hand, the postbankruptcy obligor is no longer the individual debtor but the court-supervised estate, and the risk of default is thus somewhat reduced. 12

Third, from the point of view of a creditor, the cram down provision mandates an objective rather than a subjective inquiry. 13 That is, although §1325(a)(5)(B) entitles the creditor to property whose present value objectively equals or exceeds the value of the collateral, it does not require that the terms of the cram down loan match the terms to which the debtor and creditor agreed prebankruptcy, nor does it require that the cram down terms make the creditor subjectively indifferent between present foreclosure and future payment. Indeed, the very idea of a “cram down” loan precludes the latter result: By definition, a creditor forced to accept such a loan would prefer instead to foreclose. 14 Thus, a court choosing a cram down interest rate need not consider the creditor’s individual circumstances, such as its prebankruptcy dealings with the debtor or the alternative loans it could make if permitted to foreclose. 15 Rather, the court should aim to treat similarly situated creditors similarly, 16 and to ensure that an objective economic analysis would suggest the debtor’s interest payments will adequately compensate all such creditors for the time value of their money and the risk of default.

III

These considerations lead us to reject the coerced loan, presumptive contract rate, and cost of funds approaches. Each of these approaches is complicated, imposes significant evidentiary costs, and aims to make each individual creditor whole rather than to ensure the debtor’s payments have the required present value. For example, the coerced loan approach requires bankruptcy courts to consider evidence about the market for comparable loans to similar (though nonbankrupt) debtors—an inquiry far removed from such courts’ usual task of evaluating debtors’ financial circumstances and the feasibility of their debt adjustment plans. In addition, the approach overcompensates creditors because the market lending rate must be high enough to cover factors, like lenders’ transaction costs and overall profits, that are no longer relevant in the context of court-administered and court-supervised cram down loans.

Like the coerced loan approach, the presumptive contract rate approach improperly focuses on the creditor’s potential use of the proceeds of a foreclosure sale. In addition, although the approach permits a debtor to introduce some evidence about each creditor, thereby enabling the court to tailor the interest rate more closely to the creditor’s financial circumstances and reducing the likelihood that the creditor will be substantially overcompensated, that right comes at a cost: The debtor must obtain information about the creditor’s costs of overhead, financial circumstances, and lending practices to rebut the presumptive contract rate. Also, the approach produces absurd results, entitling “inefficient, poorly managed lenders” with lower profit margins to obtain higher cram down rates than “well managed, better capitalized lenders.” 2 K. Lundin, Chapter 13 Bankruptcy §112.1, p. 112–8 (3d ed. 2000). Finally, because the approach relies heavily on a creditor’s prior dealings with the debtor, similarly situated creditors may end up with vastly different cram down rates. 17

The cost of funds approach, too, is improperly aimed. Although it rightly disregards the now-irrelevant terms of the parties’ original contract, it mistakenly focuses on the creditworthiness of the creditor rather than the debtor. In addition, the approach has many of the other flaws of the coerced loan and presumptive contract rate approaches. For example, like the presumptive contract rate approach, the cost of funds approach imposes a significant evidentiary burden, as a debtor seeking to rebut a creditor’s asserted cost of borrowing must introduce expert testimony about the creditor’s financial condition. Also, under this approach, a creditworthy lender with a low cost of borrowing may obtain a lower cram down rate than a financially unsound, fly-by-night lender.

IV

The formula approach has none of these defects. Taking its cue from ordinary lending practices, the approach begins by looking to the national prime rate, reported daily in the press, which reflects the financial market’s estimate of the amount a commercial bank should charge a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default. 18 Because bankrupt debtors typically pose a greater risk of nonpayment than solvent commercial borrowers, the approach then requires a bankruptcy court to adjust the prime rate accordingly. The appropriate size of that risk adjustment depends, of course, on such factors as the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan. The court must therefore hold a hearing at which the debtor and any creditors may present evidence about the appropriate risk adjustment. Some of this evidence will be included in the debtor’s bankruptcy filings, however, so the debtor and creditors may not incur significant additional expense. Moreover, starting from a concededly low estimate and adjusting upward places the evidentiary burden squarely on the creditors, who are likely to have readier access to any information absent from the debtor’s filing (such as evidence about the “liquidity of the collateral market,” post, at 9 ( Scalia, J ., dissenting)). Finally, many of the factors relevant to the adjustment fall squarely within the bankruptcy court’s area of expertise.

Thus, unlike the coerced loan, presumptive contract rate, and cost of funds approaches, the formula approach entails a straightforward, familiar, and objective inquiry, and minimizes the need for potentially costly additional evidentiary proceedings. Moreover, the resulting “prime-plus” rate of interest depends only on the state of financial markets, the circumstances of the bankruptcy estate, and the characteristics of the loan, not on the creditor’s circumstances or its prior interactions with the debtor. For these reasons, the prime-plus or formula rate best comports with the purposes of the Bankruptcy Code. 19

We do not decide the proper scale for the risk adjustment, as the issue is not before us. The Bankruptcy Court in this case approved a risk adjustment of 1.5%, App. to Pet. for Cert. 44a–73a, and other courts have generally approved adjustments of 1% to 3%, see In re Valenti , 105 F. 3d 55, 64 (CA2) (collecting cases), abrogated on other grounds by Associates Commercial Corp. v. Rash, 520 U. S. 953 (1997) . Respondent’s core argument is that a risk adjustment in this range is entirely inadequate to compensate a creditor for the real risk that the plan will fail. There is some dispute about the true scale of that risk—respondent claims that more than 60% of Chapter 13 plans fail, Brief for Respondent 25, but petitioners argue that the failure rate for approved Chapter 13 plans is much lower, Tr. of Oral Arg. 9. We need not resolve that dispute. It is sufficient for our purposes to note that, under 11 U. S. C. §1325(a)(6), a court may not approve a plan unless, after considering all creditors’ objections and receiving the advice of the trustee, the judge is persuaded that “the debtor will be able to make all payments under the plan and to comply with the plan.” Ibid . Together with the cram down provision, this requirement obligates the court to select a rate high enough to compensate the creditor for its risk but not so high as to doom the plan. If the court determines that the likelihood of default is so high as to necessitate an “eye-popping” interest rate, 301 F. 3d, at 593 (Rovner, J., dissenting), the plan probably should not be confirmed.

V

The dissent’s endorsement of the presumptive contract rate approach rests on two assumptions: (1) “subprime lending markets are competitive and therefore largely efficient”; and (2) the risk of default in Chapter 13 is normally no less than the risk of default at the time of the original loan. Post , at 2. Although the Bankruptcy Code provides little guidance on the question, we think it highly unlikely that Congress would endorse either premise.

First, the dissent assumes that subprime loans are negotiated between fully informed buyers and sellers in a classic free market. But there is no basis for concluding that Congress relied on this assumption when it enacted Chapter 13. Moreover, several considerations suggest that the subprime market is not, in fact, perfectly competitive. To begin with, used vehicles are regularly sold by means of tie-in transactions, in which the price of the vehicle is the subject of negotiation, while the terms of the financing are dictated by the seller. 20 In addition, there is extensive federal 21 and state 22 regulation of subprime lending, which not only itself distorts the market, but also evinces regulators’ belief that unregulated subprime lenders would exploit borrowers’ ignorance and charge rates above what a competitive market would allow. 23 Indeed, Congress enacted the Truth in Lending Act in part because it believed “consumers would individually benefit not only from the more informed use of credit, but also from heightened competition which would result from more knowledgeable credit shopping.” S. Rep. No. 96–368, p. 16 (1979). 24

Second, the dissent apparently believes that the debtor’s prebankruptcy default—on a loan made in a market in which creditors commonly charge the maximum rate of interest allowed by law, Brief for Respondent 16, and in which neither creditors nor debtors have the protections afforded by Chapter 13—translates into a high probability that the same debtor’s confirmed Chapter 13 plan will fail. In our view, however, Congress intended to create a program under which plans that qualify for confirmation have a high probability of success. Perhaps bankruptcy judges currently confirm too many risky plans, but the solution is to confirm fewer such plans, not to set default cram down rates at absurdly high levels, thereby increasing the risk of default.

Indeed, as Justice Thomas demonstrates, post , at 3 (opinion concurring in judgment), the text of §1325(a)(5)(B)(ii) may be read to support the conclusion that Congress did not intend the cram down rate to include any compensation for the risk of default. 25 That reading is consistent with a view that Congress believed Chapter 13’s protections to be so effective as to make the risk of default negligible. Because our decision in Rash assumes that cram down interest rates are adjusted to “offset,” to the extent possible, the risk of default, 520 U. S., at 962–963, and because so many judges who have considered the issue (including the authors of the four earlier opinions in this case) have rejected the risk-free approach, we think it too late in the day to endorse that approach now. Of course, if the text of the statute required such an approach, that would be the end of the matter. We think, however, that §1325(a)(5)(B)(ii)’s reference to “value, as of the effective date of the plan, of property to be distributed under the plan” is better read to incorporate all of the commonly understood components of “present value,” including any risk of nonpayment. Justice Thomas ’ reading does emphasize, though, that a presumption that bankruptcy plans will succeed is more consistent with Congress’ statutory scheme than the dissent’s more cynical focus on bankrupt debtors’ “financial instability and … proclivity to seek legal protection,” post , at 3.

Furthermore, the dissent’s two assumptions do not necessarily favor the presumptive contract rate approach. For one thing, the cram down provision applies not only to subprime loans but also to prime loans negotiated prior to the change in circumstance (job loss, for example) that rendered the debtor insolvent. Relatedly, the provision also applies in instances in which national or local economic conditions drastically improved or declined after the original loan was issued but before the debtor filed for bankruptcy. In either case, there is every reason to think that a properly risk-adjusted prime rate will provide a better estimate of the creditor’s current costs and exposure than a contract rate set in different times.

Even more important, if all relevant information about the debtor’s circumstances, the creditor’s circumstances, the nature of the collateral, and the market for comparable loans were equally available to both debtor and creditor, then in theory the formula and presumptive contract rate approaches would yield the same final interest rate. Thus, we principally differ with the dissent not over what final rate courts should adopt but over which party (creditor or debtor) should bear the burden of rebutting the presumptive rate (prime or contract, respectively).

Justice Scalia identifies four “relevant factors bearing on risk premium[:] (1) the probability of plan failure; (2) the rate of collateral depreciation; (3) the liquidity of the collateral market; and (4) the administrative expenses of enforcement.” Post , at 9. In our view, any information debtors have about any of these factors is likely to be included in their bankruptcy filings, while the remaining information will be far more accessible to creditors (who must collect information about their lending markets to remain competitive) than to individual debtors (whose only experience with those markets might be the single loan at issue in the case). Thus, the formula approach, which begins with a concededly low estimate of the appropriate interest rate and requires the creditor to present evidence supporting a higher rate, places the evidentiary burden on the more knowledgeable party, thereby facilitating more accurate calculation of the appropriate interest rate.

If the rather sketchy data uncovered by the dissent support an argument that Chapter 13 of the Bankruptcy Code should mandate application of the presumptive contract rate approach (rather than merely an argument that bankruptcy judges should exercise greater caution before approving debt adjustment plans), those data should be forwarded to Congress. We are not persuaded, however, that the data undermine our interpretation of the statutory scheme Congress has enacted.

The judgment of the Court of Appeals is reversed, and the case is remanded with instructions to remand the case to the Bankruptcy Court for further proceedings consistent with this opinion.

It is so ordered.


Notes

1 11 U. S. C. §1325(a)(5). The text of the statute reads as follows: “§1325. Confirmation of plan “(a) Except as provided in subsection (b), the court shall confirm a plan if— . . . . . “(5) with respect to each allowed secured claim provided for by the plan— “(A) the holder of such claim has accepted the plan; “(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and “(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or “(C) the debtor surrenders the property securing such claim to such holder . . . .”

2 As we noted in Associates Commercial Corp. v. Rash, 520 U. S. 953, 962 (1997) , a debtor may also avail himself of the second option (surrender of the collateral) despite the creditor’s objection.

3 See Rake v. Wade, 508 U. S. 464, n. 8 (1993) (noting that property distributions under §1325(a)(5)(B)(ii) may take the form of “a stream of future payments”).

4 In the remainder of the opinion, we use the term “present value” to refer to the value as of the effective date of the bankruptcy plan.

5 Title 11 U. S. C. §506(a) provides: “An allowed claim of a creditor secured by a lien on property in which the estate has an interest … is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, … and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.”

6 See §§541(a), 1306(a).

7 Petitioners submitted an initial plan that would have required them to assign $1,089 of their wages to the trustee every month. App. 9. Their amended plan, however, reduced this monthly payment to $740. App. to Pet. for Cert. 77a.

8 The requirement of financial feasibility derives from 11 U. S. C. §1325(a)(6), which provides that the bankruptcy court shall “confirm a plan if … the debtor will be able to make all payments under the plan and to comply with the plan.” See infra, at 14.

9 As 21% is the maximum interest rate creditors may charge for consumer loans under Indiana’s usury statute, Ind. Code §24–4.5–3–201 (1993), the remand presumably could not have benefited respondent.

10 See 11 U. S. C. §1129(a)(7)(A)(ii) (requiring payment of property whose “value, as of the effective date of the plan” equals or exceeds the value of the creditor’s claim); §§1129(a)(7)(B), 1129(a)(9)(B)(i), 1129(a)(9)(C), 1129(b)(2)(A)(ii), 1129(b)(2)(B)(i), 1129(b)(2)(C)(i), 1173(a)(2), 1225(a)(4), 1225(a)(5)(B)(ii), 1228(b)(2), 1325(a)(4), 1228(b)(2) (same).

11 Section 1322(b)(2) provides: “[T]he plan may … modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, … or leave unaffected the rights of holders of any class of claims.”

12 Several factors contribute to this reduction in risk. First, as noted below, infra, at 14, a court may only approve a cram down loan (and the debt adjustment plan of which the loan is a part) if it believes the debtor will be able to make all of the required payments. §1325(a)(6). Thus, such loans will only be approved for debtors that the court deems creditworthy. Second, Chapter 13 plans must “provide for the submission” to the trustee “of all or such portion of [the debtor’s] future … income … as is necessary for the execution of the plan,” §1322(a)(1), so the possibility of nonpayment is greatly reduced. Third, the Bankruptcy Code’s extensive disclosure requirements reduce the risk that the debtor has significant undisclosed obligations. Fourth, as a practical matter, the public nature of the bankruptcy proceeding is likely to reduce the debtor’s opportunities to take on additional debt. Cf.11 U. S. C. §525 (prohibiting certain Government grant and loan programs from discriminating against applicants who are or have been bankrupt).

13 We reached a similar conclusion in Associates Commercial Corp. v. Rash, 520 U. S. 953 (1997) , when we held that a creditor’s secured interest should be valued from the debtor’s, rather than the creditor’s, perspective. Id., at 963 (“[The debtor’s] actual use, rather than a foreclosure sale that will not take place, is the proper guide …”).

14 This fact helps to explain why there is no readily apparent Chapter 13 “cram down market rate of interest”: Because every cram down loan is imposed by a court over the objection of the secured creditor, there is no free market of willing cram down lenders. Interestingly, the same is not true in the Chapter 11 context, as numerous lenders advertise financing for Chapter 11 debtors in possession. See, e.g., Balmoral Financial Corporation, http://www.balmoral.com/bdip.htm (all Internet materials as visited Mar. 4, 2004, and available in Clerk of Court’s case file) (advertising debtor in possession lending); Debtor in Possession Financing: 1st National Assistance Finance Association DIP Division, http://www.loanmallusa.com/dip.htm (offering “to tailor a financing program … to your business’ needs and … to work closely with your bankruptcy counsel”). Thus, when picking a cram down rate in a Chapter 11 case, it might make sense to ask what rate an efficient market would produce. In the Chapter 13 context, by contrast, the absence of any such market obligates courts to look to first prin-ciples and ask only what rate will fairly compensate a creditor for its exposure.

15 See supra, at 5 (noting that the District Court’s coerced loan approach aims to set the cram down interest rate at the level the creditor could obtain from new loans of comparable duration and risk).

16 Cf. 11 U. S. C. §1322(a)(3) (“The plan shall … provide the same treatment for each claim within a particular class”).

17 For example, suppose a debtor purchases two identical used cars, buying the first at a low purchase price from a lender who charges high interest, and buying the second at a much higher purchase price from a lender who charges zero-percent or nominal interest. Prebankruptcy, these two loans might well produce identical income streams for the two lenders. Postbankruptcy, however, the presumptive contract rate approach would entitle the first lender to a considerably higher cram down interest rate, even though the two secured debts are objectively indistinguishable.

18 We note that, if the court could somehow be certain a debtor would complete his plan, the prime rate would be adequate to compensate any secured creditors forced to accept cram down loans.

19 The fact that Congress considered but rejected legislation that would endorse the Seventh Circuit’s presumptive contract rate approach, H. R. 1085, 98th Cong., 1st Sess., §19(2)(A) (1983); H. R. 1169, 98th Cong., 1st Sess., §19(2)(A) (1983); H. R. 4786, 97th Cong., 1st Sess., §19(2)(A) (1981), lends some support to our conclusion. It is perhaps also relevant that our conclusion is endorsed by the Executive Branch of the Government and by the National Association of Chapter Thirteen Trustees. Brief for United States as Amicus Curiae; Brief for National Association of Chapter Thirteen Trustees as Amicus Curiae. If we have misinterpreted Congress’ intended meaning of “value, as of the date of the plan,” we are confident it will enact appropriate remedial legislation.

20 The dissent notes that “[t]ie-ins do not alone make financing markets noncompetitive; they only cause prices and interest rates to be considered in tandem rather than separately.” Post, at 4–5. This statement, while true, is nonresponsive. If a market prices the cost of goods and the cost of financing together, then even if that market is perfectly competitive, all we can know is that the combined price of the goods and the financing is competitive and efficient. We have no way of determining whether the allocation of that price between goods and financing would be the same if the two components were separately negotiated. But the only issue before us is the cram down interest rate (the cost of financing); the value of respondent’s truck (the cost of the goods) is fixed. See Rash, 520 U. S., at 960 (setting the value of collateral in Chapter 13 proceedings at the “price a willing buyer in the debtor’s trade, business, or situation would pay to obtain like property from a willing seller”). The competitiveness of the market for cost-cum-financing is thus irrelevant to our analysis.

21 For example, the Truth in Lending Act regulates credit transactions and credit advertising. 15 U. S. C. §§1604–1649, 1661–1665b.

22 Usury laws provide the most obvious examples of state regulation of the subprime market. See, e.g., Colo. Rev. Stat. §5–2–201 (2003); Fla. Stat. Ann. §537.011 (Supp. 2004); Ind. Code §24–4.5–3–201 (1993); Md. Com. Law Code Ann. §12–404(d) (2000).

23 Lending practices in Mississippi, “where there currently is no legal usury rate,” support this conclusion: in that State, subprime lenders charge rates “as high as 30 to 40%”—well above the rates that apparently suffice to support the industry in States like Indiana. Norberg, Consumer Bankruptcy’s New Clothes: An Empirical Study of Discharge and Debt Collection in Chapter 13, 7 Am. Bankr. Inst. L. Rev. 415, 438–439 (1999).

24 See also H. R. Rep. No. 1040, 90th Cong., 1st Sess., 17 (1967) (“The basic premise of the application of disclosure standards to credit advertising rests in the belief that a substantial portion of consumer purchases are induced by such advertising and that if full disclosure is not made in such advertising, the consumer will be deprived of the opportunity to effectively comparison shop for credit”).

25 The United States, too, notes that “[t]he text of Section 1325 is consistent with the view that the appropriate discount rate should reflect only the time value of money and not any risk premium.” Brief for United States as Amicus Curiae 11, n. 4. The remainder of the United States’ brief, however, advocates the formula approach. See, e.g., id., at 19–28.


TOP

Opinion

LEE M. TILL, et ux., PETITIONERS v. SCS
CREDIT CORPORATION

on writ of certiorari to the united states court of appeals for the seventh circuit


[May 17, 2004]

Justice Stevens announced the judgment of the Court and delivered an opinion, in which Justice Souter , Justice Ginsburg , and Justice Breyer join.

To qualify for court approval under Chapter 13 of the Bankruptcy Code, an individual debtor’s proposed debt adjustment plan must accommodate each allowed, secured creditor in one of three ways: (1) by obtaining the creditor’s acceptance of the plan; (2) by surrendering the property securing the claim; or (3) by providing the creditor both a lien securing the claim and a promise of future property distributions (such as deferred cash payments) whose total “value, as of the effective date of the plan, … is not less than the allowed amount of such claim.” 1 The third alternative is commonly known as the “cram down option” because it may be enforced over a claim holder’s objection. 2 Associates Commercial Corp. v. Rash, 520 U. S. 953, 957 (1997) .

Plans that invoke the cram down power often provide for installment payments over a period of years rather than a single payment. 3 In such circumstances, the amount of each installment must be calibrated to ensure that, over time, the creditor receives disbursements whose total present value 4 equals or exceeds that of the allowed claim. The proceedings in this case that led to our grant of certiorari identified four different methods of determining the appropriate method with which to perform that calibration. Indeed, the Bankruptcy Judge, the District Court, the Court of Appeals majority, and the dissenting Judge each endorsed a different approach. We detail the underlying facts and describe each of those approaches before setting forth our judgment as to which approach best meets the purposes of the Bankruptcy Code.

I

On October 2, 1998, petitioners Lee and Amy Till, residents of Kokomo, Indiana, purchased a used truck from Instant Auto Finance for $6,395 plus $330.75 in fees and taxes. They made a $300 down payment and financed the balance of the purchase price by entering into a retail installment contract that Instant Auto immediately assigned to respondent, SCS Credit Corporation. Petitioners’ initial indebtedness amounted to $8,285.24—the $6,425.75 balance of the truck purchase plus a finance charge of 21% per year for 136 weeks, or $1,859.49. Under the contract, petitioners agreed to make 68 biweekly payments to cover this debt; Instant Auto—and subsequently respondent—retained a purchase money security interest that gave it the right to repossess the truck if petitioners defaulted under the contract.

On October 25, 1999, petitioners, by then in default on their payments to respondent, filed a joint petition for relief under Chapter 13 of the Bankruptcy Code. At the time of the filing, respondent’s outstanding claim amounted to $4,894.89, but the parties agreed that the truck securing the claim was worth only $4,000. App. 16–17. In accordance with the Bankruptcy Code, therefore, respondent’s secured claim was limited to $4,000, and the $894.89 balance was unsecured. 5 Petitioners’ filing automatically stayed debt-collection activity by their various creditors, including the Internal Revenue Service (IRS), respondent, three other holders of secured claims, and unidentified unsecured creditors. In addition, the filing created a bankruptcy estate, administered by a trustee, which consisted of petitioners’ property, including the truck. 6

Petitioners’ proposed debt adjustment plan called for them to submit their future earnings to the supervision and control of the Bankruptcy Court for three years, and to assign $740 of their wages to the trustee each month. 7 App. to Pet. for Cert. 76a–81a. The plan charged the trustee with distributing these monthly wage assignments to pay, in order of priority: (1) administrative costs; (2) the IRS’s priority tax claim; (3) secured creditors’ claims; and finally, (4) unsecured creditors’ claims. Id. , at 77a–79a.

The proposed plan also provided that petitioners would pay interest on the secured portion of respondent’s claim at a rate of 9.5% per year. Petitioners arrived at this “prime-plus” or “formula rate” by augmenting the national prime rate of approximately 8% (applied by banks when making low-risk loans) to account for the risk of nonpayment posed by borrowers in their financial position. Respondent objected to the proposed rate, contending that the company was “entitled to interest at the rate of 21%, which is the rate … it would obtain if it could foreclose on the vehicle and reinvest the proceeds in loans of equivalent duration and risk as the loan” originally made to petitioners. App. 19–20.

At the hearing on its objection, respondent presented expert testimony establishing that it uniformly charges 21% interest on so-called “subprime” loans, or loans to borrowers with poor credit ratings, and that other lenders in the subprime market also charge that rate. Petitioners countered with the testimony of an Indiana University-Purdue University Indianapolis economics professor, who acknowledged that he had only limited familiarity with the subprime auto lending market, but described the 9.5% formula rate as “very reasonable” given that Chapter 13 plans are “supposed to be financially feasible.” 8 Id ., at 43–44. Moreover, the professor noted that respondent’s exposure was “fairly limited because [petitioners] are under the supervision of the court.” Id. , at 43. The bankruptcy trustee also filed comments supporting the formula rate as, among other things, easily ascertainable, closely tied to the “condition of the financial market,” and independent of the financial circumstances of any particular lender. App. to Pet. for Cert. 41a–42a. Accepting petitioners’ evidence, the Bankruptcy Court overruled respondent’s objection and confirmed the proposed plan.

The District Court reversed. It understood Seventh Circuit precedent to require that bankruptcy courts set cram down interest rates at the level the creditor could have obtained if it had foreclosed on the loan, sold the collateral, and reinvested the proceeds in loans of equivalent duration and risk. Citing respondent’s unrebutted testimony about the market for subprime loans, the court concluded that 21% was the appropriate rate. Id ., at 38a.

On appeal, the Seventh Circuit endorsed a slightly modified version of the District Court’s “coerced” or “forced loan” approach. In re Till , 301 F. 3d 583, 591 (2002). Specifically, the majority agreed with the District Court that, in a cram down proceeding, the inquiry should focus on the interest rate “that the creditor in question would obtain in making a new loan in the same industry to a debtor who is similarly situated, although not in bankruptcy.” Id. , at 592. To approximate that new loan rate, the majority looked to the parties’ prebankruptcy contract rate (21%). The court recognized, however, that using the contract rate would not “duplicat[e] precisely … the present value of the collateral to the creditor” because loans to bankrupt, court-supervised debtors “involve some risks that would not be incurred in a new loan to a debtor not in default” and also produce “some economies.” Ibid. To correct for these inaccuracies, the majority held that the original contract rate should “serve as a presumptive [cram down] rate,” which either the creditor or the debtor could challenge with evidence that a higher or lower rate should apply. Ibid . Accordingly, the court remanded the case to the Bankruptcy Court to afford petitioners and respondent an opportunity to rebut the presumptive 21% rate. 9

Dissenting, Judge Rovner argued that the majority’s presumptive contract rate approach overcompensates secured creditors because it fails to account for costs a creditor would have to incur in issuing a new loan. Rather than focusing on the market for comparable loans, Judge Rovner advocated either the Bankruptcy Court’s formula approach or a “straightforward … cost of funds” approach that would simply ask “what it would cost the creditor to obtain the cash equivalent of the collateral from an alternative source.” Id ., at 595–596. Although Judge Rovner noted that the rates produced by either the formula or the cost of funds approach might be “piddling” relative to the coerced loan rate, she suggested courts should “consider the extent to which the creditor has already been compensated for … the risk that the debtor will be unable to discharge his obligations under the reorganization plan … in the rate of interest that it charged to the debtor in return for the original loan.” Id. , at 596. We granted certiorari and now reverse. 539 U. S. 925 (2003) .

II

The Bankruptcy Code provides little guidance as to which of the rates of interest advocated by the four opinions in this case—the formula rate, the coerced loan rate, the presumptive contract rate, or the cost of funds rate—Congress had in mind when it adopted the cram down provision. That provision, 11 U. S. C. §1325(a)(5)(B), does not mention the term “discount rate” or the word “interest.” Rather, it simply requires bankruptcy courts to ensure that the property to be distributed to a particular secured creditor over the life of a bankruptcy plan has a total “value, as of the effective date of the plan,” that equals or exceeds the value of the creditor’s allowed secured claim—in this case, $4,000. §1325(a)(5)(B)(ii).

That command is easily satisfied when the plan provides for a lump-sum payment to the creditor. Matters are not so simple, however, when the debt is to be discharged by a series of payments over time. A debtor’s promise of future payments is worth less than an immediate payment of the same total amount because the creditor cannot use the money right away, inflation may cause the value of the dollar to decline before the debtor pays, and there is always some risk of nonpayment. The challenge for bankruptcy courts reviewing such repayment schemes, therefore, is to choose an interest rate sufficient to compensate the creditor for these concerns.

Three important considerations govern that choice. First, the Bankruptcy Code includes numerous provisions that, like the cram down provision, require a court to “discoun[t] … [a] stream of deferred payments back to the[ir] present dollar value,” Rake v. Wade, 508 U. S. 464, 472, n. 8 (1993) , to ensure that a creditor receives at least the value of its claim. 10 We think it likely that Congress intended bankruptcy judges and trustees to follow essentially the same approach when choosing an appropriate interest rate under any of these provisions. Moreover, we think Congress would favor an approach that is familiar in the financial community and that minimizes the need for expensive evidentiary proceedings.

Second, Chapter 13 expressly authorizes a bankruptcy court to modify the rights of any creditor whose claim is secured by an interest in anything other than “real property that is the debtor’s principal residence.” 11 U. S. C. §1322(b)(2). 11 Thus, in cases like this involving secured interests in personal property, the court’s authority to modify the number, timing, or amount of the installment payments from those set forth in the debtor’s original contract is perfectly clear. Further, the potential need to modify the loan terms to account for intervening changes in circumstances is also clear: On the one hand, the fact of the bankruptcy establishes that the debtor is overextended and thus poses a significant risk of default; on the other hand, the postbankruptcy obligor is no longer the individual debtor but the court-supervised estate, and the risk of default is thus somewhat reduced. 12

Third, from the point of view of a creditor, the cram down provision mandates an objective rather than a subjective inquiry. 13 That is, although §1325(a)(5)(B) entitles the creditor to property whose present value objectively equals or exceeds the value of the collateral, it does not require that the terms of the cram down loan match the terms to which the debtor and creditor agreed prebankruptcy, nor does it require that the cram down terms make the creditor subjectively indifferent between present foreclosure and future payment. Indeed, the very idea of a “cram down” loan precludes the latter result: By definition, a creditor forced to accept such a loan would prefer instead to foreclose. 14 Thus, a court choosing a cram down interest rate need not consider the creditor’s individual circumstances, such as its prebankruptcy dealings with the debtor or the alternative loans it could make if permitted to foreclose. 15 Rather, the court should aim to treat similarly situated creditors similarly, 16 and to ensure that an objective economic analysis would suggest the debtor’s interest payments will adequately compensate all such creditors for the time value of their money and the risk of default.

III

These considerations lead us to reject the coerced loan, presumptive contract rate, and cost of funds approaches. Each of these approaches is complicated, imposes significant evidentiary costs, and aims to make each individual creditor whole rather than to ensure the debtor’s payments have the required present value. For example, the coerced loan approach requires bankruptcy courts to consider evidence about the market for comparable loans to similar (though nonbankrupt) debtors—an inquiry far removed from such courts’ usual task of evaluating debtors’ financial circumstances and the feasibility of their debt adjustment plans. In addition, the approach overcompensates creditors because the market lending rate must be high enough to cover factors, like lenders’ transaction costs and overall profits, that are no longer relevant in the context of court-administered and court-supervised cram down loans.

Like the coerced loan approach, the presumptive contract rate approach improperly focuses on the creditor’s potential use of the proceeds of a foreclosure sale. In addition, although the approach permits a debtor to introduce some evidence about each creditor, thereby enabling the court to tailor the interest rate more closely to the creditor’s financial circumstances and reducing the likelihood that the creditor will be substantially overcompensated, that right comes at a cost: The debtor must obtain information about the creditor’s costs of overhead, financial circumstances, and lending practices to rebut the presumptive contract rate. Also, the approach produces absurd results, entitling “inefficient, poorly managed lenders” with lower profit margins to obtain higher cram down rates than “well managed, better capitalized lenders.” 2 K. Lundin, Chapter 13 Bankruptcy §112.1, p. 112–8 (3d ed. 2000). Finally, because the approach relies heavily on a creditor’s prior dealings with the debtor, similarly situated creditors may end up with vastly different cram down rates. 17

The cost of funds approach, too, is improperly aimed. Although it rightly disregards the now-irrelevant terms of the parties’ original contract, it mistakenly focuses on the creditworthiness of the creditor rather than the debtor. In addition, the approach has many of the other flaws of the coerced loan and presumptive contract rate approaches. For example, like the presumptive contract rate approach, the cost of funds approach imposes a significant evidentiary burden, as a debtor seeking to rebut a creditor’s asserted cost of borrowing must introduce expert testimony about the creditor’s financial condition. Also, under this approach, a creditworthy lender with a low cost of borrowing may obtain a lower cram down rate than a financially unsound, fly-by-night lender.

IV

The formula approach has none of these defects. Taking its cue from ordinary lending practices, the approach begins by looking to the national prime rate, reported daily in the press, which reflects the financial market’s estimate of the amount a commercial bank should charge a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default. 18 Because bankrupt debtors typically pose a greater risk of nonpayment than solvent commercial borrowers, the approach then requires a bankruptcy court to adjust the prime rate accordingly. The appropriate size of that risk adjustment depends, of course, on such factors as the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan. The court must therefore hold a hearing at which the debtor and any creditors may present evidence about the appropriate risk adjustment. Some of this evidence will be included in the debtor’s bankruptcy filings, however, so the debtor and creditors may not incur significant additional expense. Moreover, starting from a concededly low estimate and adjusting upward places the evidentiary burden squarely on the creditors, who are likely to have readier access to any information absent from the debtor’s filing (such as evidence about the “liquidity of the collateral market,” post, at 9 ( Scalia, J ., dissenting)). Finally, many of the factors relevant to the adjustment fall squarely within the bankruptcy court’s area of expertise.

Thus, unlike the coerced loan, presumptive contract rate, and cost of funds approaches, the formula approach entails a straightforward, familiar, and objective inquiry, and minimizes the need for potentially costly additional evidentiary proceedings. Moreover, the resulting “prime-plus” rate of interest depends only on the state of financial markets, the circumstances of the bankruptcy estate, and the characteristics of the loan, not on the creditor’s circumstances or its prior interactions with the debtor. For these reasons, the prime-plus or formula rate best comports with the purposes of the Bankruptcy Code. 19

We do not decide the proper scale for the risk adjustment, as the issue is not before us. The Bankruptcy Court in this case approved a risk adjustment of 1.5%, App. to Pet. for Cert. 44a–73a, and other courts have generally approved adjustments of 1% to 3%, see In re Valenti , 105 F. 3d 55, 64 (CA2) (collecting cases), abrogated on other grounds by Associates Commercial Corp. v. Rash, 520 U. S. 953 (1997) . Respondent’s core argument is that a risk adjustment in this range is entirely inadequate to compensate a creditor for the real risk that the plan will fail. There is some dispute about the true scale of that risk—respondent claims that more than 60% of Chapter 13 plans fail, Brief for Respondent 25, but petitioners argue that the failure rate for approved Chapter 13 plans is much lower, Tr. of Oral Arg. 9. We need not resolve that dispute. It is sufficient for our purposes to note that, under 11 U. S. C. §1325(a)(6), a court may not approve a plan unless, after considering all creditors’ objections and receiving the advice of the trustee, the judge is persuaded that “the debtor will be able to make all payments under the plan and to comply with the plan.” Ibid . Together with the cram down provision, this requirement obligates the court to select a rate high enough to compensate the creditor for its risk but not so high as to doom the plan. If the court determines that the likelihood of default is so high as to necessitate an “eye-popping” interest rate, 301 F. 3d, at 593 (Rovner, J., dissenting), the plan probably should not be confirmed.

V

The dissent’s endorsement of the presumptive contract rate approach rests on two assumptions: (1) “subprime lending markets are competitive and therefore largely efficient”; and (2) the risk of default in Chapter 13 is normally no less than the risk of default at the time of the original loan. Post , at 2. Although the Bankruptcy Code provides little guidance on the question, we think it highly unlikely that Congress would endorse either premise.

First, the dissent assumes that subprime loans are negotiated between fully informed buyers and sellers in a classic free market. But there is no basis for concluding that Congress relied on this assumption when it enacted Chapter 13. Moreover, several considerations suggest that the subprime market is not, in fact, perfectly competitive. To begin with, used vehicles are regularly sold by means of tie-in transactions, in which the price of the vehicle is the subject of negotiation, while the terms of the financing are dictated by the seller. 20 In addition, there is extensive federal 21 and state 22 regulation of subprime lending, which not only itself distorts the market, but also evinces regulators’ belief that unregulated subprime lenders would exploit borrowers’ ignorance and charge rates above what a competitive market would allow. 23 Indeed, Congress enacted the Truth in Lending Act in part because it believed “consumers would individually benefit not only from the more informed use of credit, but also from heightened competition which would result from more knowledgeable credit shopping.” S. Rep. No. 96–368, p. 16 (1979). 24

Second, the dissent apparently believes that the debtor’s prebankruptcy default—on a loan made in a market in which creditors commonly charge the maximum rate of interest allowed by law, Brief for Respondent 16, and in which neither creditors nor debtors have the protections afforded by Chapter 13—translates into a high probability that the same debtor’s confirmed Chapter 13 plan will fail. In our view, however, Congress intended to create a program under which plans that qualify for confirmation have a high probability of success. Perhaps bankruptcy judges currently confirm too many risky plans, but the solution is to confirm fewer such plans, not to set default cram down rates at absurdly high levels, thereby increasing the risk of default.

Indeed, as Justice Thomas demonstrates, post , at 3 (opinion concurring in judgment), the text of §1325(a)(5)(B)(ii) may be read to support the conclusion that Congress did not intend the cram down rate to include any compensation for the risk of default. 25 That reading is consistent with a view that Congress believed Chapter 13’s protections to be so effective as to make the risk of default negligible. Because our decision in Rash assumes that cram down interest rates are adjusted to “offset,” to the extent possible, the risk of default, 520 U. S., at 962–963, and because so many judges who have considered the issue (including the authors of the four earlier opinions in this case) have rejected the risk-free approach, we think it too late in the day to endorse that approach now. Of course, if the text of the statute required such an approach, that would be the end of the matter. We think, however, that §1325(a)(5)(B)(ii)’s reference to “value, as of the effective date of the plan, of property to be distributed under the plan” is better read to incorporate all of the commonly understood components of “present value,” including any risk of nonpayment. Justice Thomas ’ reading does emphasize, though, that a presumption that bankruptcy plans will succeed is more consistent with Congress’ statutory scheme than the dissent’s more cynical focus on bankrupt debtors’ “financial instability and … proclivity to seek legal protection,” post , at 3.

Furthermore, the dissent’s two assumptions do not necessarily favor the presumptive contract rate approach. For one thing, the cram down provision applies not only to subprime loans but also to prime loans negotiated prior to the change in circumstance (job loss, for example) that rendered the debtor insolvent. Relatedly, the provision also applies in instances in which national or local economic conditions drastically improved or declined after the original loan was issued but before the debtor filed for bankruptcy. In either case, there is every reason to think that a properly risk-adjusted prime rate will provide a better estimate of the creditor’s current costs and exposure than a contract rate set in different times.

Even more important, if all relevant information about the debtor’s circumstances, the creditor’s circumstances, the nature of the collateral, and the market for comparable loans were equally available to both debtor and creditor, then in theory the formula and presumptive contract rate approaches would yield the same final interest rate. Thus, we principally differ with the dissent not over what final rate courts should adopt but over which party (creditor or debtor) should bear the burden of rebutting the presumptive rate (prime or contract, respectively).

Justice Scalia identifies four “relevant factors bearing on risk premium[:] (1) the probability of plan failure; (2) the rate of collateral depreciation; (3) the liquidity of the collateral market; and (4) the administrative expenses of enforcement.” Post , at 9. In our view, any information debtors have about any of these factors is likely to be included in their bankruptcy filings, while the remaining information will be far more accessible to creditors (who must collect information about their lending markets to remain competitive) than to individual debtors (whose only experience with those markets might be the single loan at issue in the case). Thus, the formula approach, which begins with a concededly low estimate of the appropriate interest rate and requires the creditor to present evidence supporting a higher rate, places the evidentiary burden on the more knowledgeable party, thereby facilitating more accurate calculation of the appropriate interest rate.

If the rather sketchy data uncovered by the dissent support an argument that Chapter 13 of the Bankruptcy Code should mandate application of the presumptive contract rate approach (rather than merely an argument that bankruptcy judges should exercise greater caution before approving debt adjustment plans), those data should be forwarded to Congress. We are not persuaded, however, that the data undermine our interpretation of the statutory scheme Congress has enacted.

The judgment of the Court of Appeals is reversed, and the case is remanded with instructions to remand the case to the Bankruptcy Court for further proceedings consistent with this opinion.

It is so ordered.


Notes

1 11 U. S. C. §1325(a)(5). The text of the statute reads as follows: “§1325. Confirmation of plan “(a) Except as provided in subsection (b), the court shall confirm a plan if— . . . . . “(5) with respect to each allowed secured claim provided for by the plan— “(A) the holder of such claim has accepted the plan; “(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and “(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or “(C) the debtor surrenders the property securing such claim to such holder . . . .”

2 As we noted in Associates Commercial Corp. v. Rash, 520 U. S. 953, 962 (1997) , a debtor may also avail himself of the second option (surrender of the collateral) despite the creditor’s objection.

3 See Rake v. Wade, 508 U. S. 464, n. 8 (1993) (noting that property distributions under §1325(a)(5)(B)(ii) may take the form of “a stream of future payments”).

4 In the remainder of the opinion, we use the term “present value” to refer to the value as of the effective date of the bankruptcy plan.

5 Title 11 U. S. C. §506(a) provides: “An allowed claim of a creditor secured by a lien on property in which the estate has an interest … is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, … and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.”

6 See §§541(a), 1306(a).

7 Petitioners submitted an initial plan that would have required them to assign $1,089 of their wages to the trustee every month. App. 9. Their amended plan, however, reduced this monthly payment to $740. App. to Pet. for Cert. 77a.

8 The requirement of financial feasibility derives from 11 U. S. C. §1325(a)(6), which provides that the bankruptcy court shall “confirm a plan if … the debtor will be able to make all payments under the plan and to comply with the plan.” See infra, at 14.

9 As 21% is the maximum interest rate creditors may charge for consumer loans under Indiana’s usury statute, Ind. Code §24–4.5–3–201 (1993), the remand presumably could not have benefited respondent.

10 See 11 U. S. C. §1129(a)(7)(A)(ii) (requiring payment of property whose “value, as of the effective date of the plan” equals or exceeds the value of the creditor’s claim); §§1129(a)(7)(B), 1129(a)(9)(B)(i), 1129(a)(9)(C), 1129(b)(2)(A)(ii), 1129(b)(2)(B)(i), 1129(b)(2)(C)(i), 1173(a)(2), 1225(a)(4), 1225(a)(5)(B)(ii), 1228(b)(2), 1325(a)(4), 1228(b)(2) (same).

11 Section 1322(b)(2) provides: “[T]he plan may … modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, … or leave unaffected the rights of holders of any class of claims.”

12 Several factors contribute to this reduction in risk. First, as noted below, infra, at 14, a court may only approve a cram down loan (and the debt adjustment plan of which the loan is a part) if it believes the debtor will be able to make all of the required payments. §1325(a)(6). Thus, such loans will only be approved for debtors that the court deems creditworthy. Second, Chapter 13 plans must “provide for the submission” to the trustee “of all or such portion of [the debtor’s] future … income … as is necessary for the execution of the plan,” §1322(a)(1), so the possibility of nonpayment is greatly reduced. Third, the Bankruptcy Code’s extensive disclosure requirements reduce the risk that the debtor has significant undisclosed obligations. Fourth, as a practical matter, the public nature of the bankruptcy proceeding is likely to reduce the debtor’s opportunities to take on additional debt. Cf.11 U. S. C. §525 (prohibiting certain Government grant and loan programs from discriminating against applicants who are or have been bankrupt).

13 We reached a similar conclusion in Associates Commercial Corp. v. Rash, 520 U. S. 953 (1997) , when we held that a creditor’s secured interest should be valued from the debtor’s, rather than the creditor’s, perspective. Id., at 963 (“[The debtor’s] actual use, rather than a foreclosure sale that will not take place, is the proper guide …”).

14 This fact helps to explain why there is no readily apparent Chapter 13 “cram down market rate of interest”: Because every cram down loan is imposed by a court over the objection of the secured creditor, there is no free market of willing cram down lenders. Interestingly, the same is not true in the Chapter 11 context, as numerous lenders advertise financing for Chapter 11 debtors in possession. See, e.g., Balmoral Financial Corporation, http://www.balmoral.com/bdip.htm (all Internet materials as visited Mar. 4, 2004, and available in Clerk of Court’s case file) (advertising debtor in possession lending); Debtor in Possession Financing: 1st National Assistance Finance Association DIP Division, http://www.loanmallusa.com/dip.htm (offering “to tailor a financing program … to your business’ needs and … to work closely with your bankruptcy counsel”). Thus, when picking a cram down rate in a Chapter 11 case, it might make sense to ask what rate an efficient market would produce. In the Chapter 13 context, by contrast, the absence of any such market obligates courts to look to first prin-ciples and ask only what rate will fairly compensate a creditor for its exposure.

15 See supra, at 5 (noting that the District Court’s coerced loan approach aims to set the cram down interest rate at the level the creditor could obtain from new loans of comparable duration and risk).

16 Cf. 11 U. S. C. §1322(a)(3) (“The plan shall … provide the same treatment for each claim within a particular class”).

17 For example, suppose a debtor purchases two identical used cars, buying the first at a low purchase price from a lender who charges high interest, and buying the second at a much higher purchase price from a lender who charges zero-percent or nominal interest. Prebankruptcy, these two loans might well produce identical income streams for the two lenders. Postbankruptcy, however, the presumptive contract rate approach would entitle the first lender to a considerably higher cram down interest rate, even though the two secured debts are objectively indistinguishable.

18 We note that, if the court could somehow be certain a debtor would complete his plan, the prime rate would be adequate to compensate any secured creditors forced to accept cram down loans.

19 The fact that Congress considered but rejected legislation that would endorse the Seventh Circuit’s presumptive contract rate approach, H. R. 1085, 98th Cong., 1st Sess., §19(2)(A) (1983); H. R. 1169, 98th Cong., 1st Sess., §19(2)(A) (1983); H. R. 4786, 97th Cong., 1st Sess., §19(2)(A) (1981), lends some support to our conclusion. It is perhaps also relevant that our conclusion is endorsed by the Executive Branch of the Government and by the National Association of Chapter Thirteen Trustees. Brief for United States as Amicus Curiae; Brief for National Association of Chapter Thirteen Trustees as Amicus Curiae. If we have misinterpreted Congress’ intended meaning of “value, as of the date of the plan,” we are confident it will enact appropriate remedial legislation.

20 The dissent notes that “[t]ie-ins do not alone make financing markets noncompetitive; they only cause prices and interest rates to be considered in tandem rather than separately.” Post, at 4–5. This statement, while true, is nonresponsive. If a market prices the cost of goods and the cost of financing together, then even if that market is perfectly competitive, all we can know is that the combined price of the goods and the financing is competitive and efficient. We have no way of determining whether the allocation of that price between goods and financing would be the same if the two components were separately negotiated. But the only issue before us is the cram down interest rate (the cost of financing); the value of respondent’s truck (the cost of the goods) is fixed. See Rash, 520 U. S., at 960 (setting the value of collateral in Chapter 13 proceedings at the “price a willing buyer in the debtor’s trade, business, or situation would pay to obtain like property from a willing seller”). The competitiveness of the market for cost-cum-financing is thus irrelevant to our analysis.

21 For example, the Truth in Lending Act regulates credit transactions and credit advertising. 15 U. S. C. §§1604–1649, 1661–1665b.

22 Usury laws provide the most obvious examples of state regulation of the subprime market. See, e.g., Colo. Rev. Stat. §5–2–201 (2003); Fla. Stat. Ann. §537.011 (Supp. 2004); Ind. Code §24–4.5–3–201 (1993); Md. Com. Law Code Ann. §12–404(d) (2000).

23 Lending practices in Mississippi, “where there currently is no legal usury rate,” support this conclusion: in that State, subprime lenders charge rates “as high as 30 to 40%”—well above the rates that apparently suffice to support the industry in States like Indiana. Norberg, Consumer Bankruptcy’s New Clothes: An Empirical Study of Discharge and Debt Collection in Chapter 13, 7 Am. Bankr. Inst. L. Rev. 415, 438–439 (1999).

24 See also H. R. Rep. No. 1040, 90th Cong., 1st Sess., 17 (1967) (“The basic premise of the application of disclosure standards to credit advertising rests in the belief that a substantial portion of consumer purchases are induced by such advertising and that if full disclosure is not made in such advertising, the consumer will be deprived of the opportunity to effectively comparison shop for credit”).

25 The United States, too, notes that “[t]he text of Section 1325 is consistent with the view that the appropriate discount rate should reflect only the time value of money and not any risk premium.” Brief for United States as Amicus Curiae 11, n. 4. The remainder of the United States’ brief, however, advocates the formula approach. See, e.g., id., at 19–28.


TOP

Opinion

LEE M. TILL, et ux., PETITIONERS v. SCS
CREDIT CORPORATION

on writ of certiorari to the united states court of appeals for the seventh circuit


[May 17, 2004]

Justice Stevens announced the judgment of the Court and delivered an opinion, in which Justice Souter , Justice Ginsburg , and Justice Breyer join.

To qualify for court approval under Chapter 13 of the Bankruptcy Code, an individual debtor’s proposed debt adjustment plan must accommodate each allowed, secured creditor in one of three ways: (1) by obtaining the creditor’s acceptance of the plan; (2) by surrendering the property securing the claim; or (3) by providing the creditor both a lien securing the claim and a promise of future property distributions (such as deferred cash payments) whose total “value, as of the effective date of the plan, … is not less than the allowed amount of such claim.” 1 The third alternative is commonly known as the “cram down option” because it may be enforced over a claim holder’s objection. 2 Associates Commercial Corp. v. Rash, 520 U. S. 953, 957 (1997) .

Plans that invoke the cram down power often provide for installment payments over a period of years rather than a single payment. 3 In such circumstances, the amount of each installment must be calibrated to ensure that, over time, the creditor receives disbursements whose total present value 4 equals or exceeds that of the allowed claim. The proceedings in this case that led to our grant of certiorari identified four different methods of determining the appropriate method with which to perform that calibration. Indeed, the Bankruptcy Judge, the District Court, the Court of Appeals majority, and the dissenting Judge each endorsed a different approach. We detail the underlying facts and describe each of those approaches before setting forth our judgment as to which approach best meets the purposes of the Bankruptcy Code.

I

On October 2, 1998, petitioners Lee and Amy Till, residents of Kokomo, Indiana, purchased a used truck from Instant Auto Finance for $6,395 plus $330.75 in fees and taxes. They made a $300 down payment and financed the balance of the purchase price by entering into a retail installment contract that Instant Auto immediately assigned to respondent, SCS Credit Corporation. Petitioners’ initial indebtedness amounted to $8,285.24—the $6,425.75 balance of the truck purchase plus a finance charge of 21% per year for 136 weeks, or $1,859.49. Under the contract, petitioners agreed to make 68 biweekly payments to cover this debt; Instant Auto—and subsequently respondent—retained a purchase money security interest that gave it the right to repossess the truck if petitioners defaulted under the contract.

On October 25, 1999, petitioners, by then in default on their payments to respondent, filed a joint petition for relief under Chapter 13 of the Bankruptcy Code. At the time of the filing, respondent’s outstanding claim amounted to $4,894.89, but the parties agreed that the truck securing the claim was worth only $4,000. App. 16–17. In accordance with the Bankruptcy Code, therefore, respondent’s secured claim was limited to $4,000, and the $894.89 balance was unsecured. 5 Petitioners’ filing automatically stayed debt-collection activity by their various creditors, including the Internal Revenue Service (IRS), respondent, three other holders of secured claims, and unidentified unsecured creditors. In addition, the filing created a bankruptcy estate, administered by a trustee, which consisted of petitioners’ property, including the truck. 6

Petitioners’ proposed debt adjustment plan called for them to submit their future earnings to the supervision and control of the Bankruptcy Court for three years, and to assign $740 of their wages to the trustee each month. 7 App. to Pet. for Cert. 76a–81a. The plan charged the trustee with distributing these monthly wage assignments to pay, in order of priority: (1) administrative costs; (2) the IRS’s priority tax claim; (3) secured creditors’ claims; and finally, (4) unsecured creditors’ claims. Id. , at 77a–79a.

The proposed plan also provided that petitioners would pay interest on the secured portion of respondent’s claim at a rate of 9.5% per year. Petitioners arrived at this “prime-plus” or “formula rate” by augmenting the national prime rate of approximately 8% (applied by banks when making low-risk loans) to account for the risk of nonpayment posed by borrowers in their financial position. Respondent objected to the proposed rate, contending that the company was “entitled to interest at the rate of 21%, which is the rate … it would obtain if it could foreclose on the vehicle and reinvest the proceeds in loans of equivalent duration and risk as the loan” originally made to petitioners. App. 19–20.

At the hearing on its objection, respondent presented expert testimony establishing that it uniformly charges 21% interest on so-called “subprime” loans, or loans to borrowers with poor credit ratings, and that other lenders in the subprime market also charge that rate. Petitioners countered with the testimony of an Indiana University-Purdue University Indianapolis economics professor, who acknowledged that he had only limited familiarity with the subprime auto lending market, but described the 9.5% formula rate as “very reasonable” given that Chapter 13 plans are “supposed to be financially feasible.” 8 Id ., at 43–44. Moreover, the professor noted that respondent’s exposure was “fairly limited because [petitioners] are under the supervision of the court.” Id. , at 43. The bankruptcy trustee also filed comments supporting the formula rate as, among other things, easily ascertainable, closely tied to the “condition of the financial market,” and independent of the financial circumstances of any particular lender. App. to Pet. for Cert. 41a–42a. Accepting petitioners’ evidence, the Bankruptcy Court overruled respondent’s objection and confirmed the proposed plan.

The District Court reversed. It understood Seventh Circuit precedent to require that bankruptcy courts set cram down interest rates at the level the creditor could have obtained if it had foreclosed on the loan, sold the collateral, and reinvested the proceeds in loans of equivalent duration and risk. Citing respondent’s unrebutted testimony about the market for subprime loans, the court concluded that 21% was the appropriate rate. Id ., at 38a.

On appeal, the Seventh Circuit endorsed a slightly modified version of the District Court’s “coerced” or “forced loan” approach. In re Till , 301 F. 3d 583, 591 (2002). Specifically, the majority agreed with the District Court that, in a cram down proceeding, the inquiry should focus on the interest rate “that the creditor in question would obtain in making a new loan in the same industry to a debtor who is similarly situated, although not in bankruptcy.” Id. , at 592. To approximate that new loan rate, the majority looked to the parties’ prebankruptcy contract rate (21%). The court recognized, however, that using the contract rate would not “duplicat[e] precisely … the present value of the collateral to the creditor” because loans to bankrupt, court-supervised debtors “involve some risks that would not be incurred in a new loan to a debtor not in default” and also produce “some economies.” Ibid. To correct for these inaccuracies, the majority held that the original contract rate should “serve as a presumptive [cram down] rate,” which either the creditor or the debtor could challenge with evidence that a higher or lower rate should apply. Ibid . Accordingly, the court remanded the case to the Bankruptcy Court to afford petitioners and respondent an opportunity to rebut the presumptive 21% rate. 9

Dissenting, Judge Rovner argued that the majority’s presumptive contract rate approach overcompensates secured creditors because it fails to account for costs a creditor would have to incur in issuing a new loan. Rather than focusing on the market for comparable loans, Judge Rovner advocated either the Bankruptcy Court’s formula approach or a “straightforward … cost of funds” approach that would simply ask “what it would cost the creditor to obtain the cash equivalent of the collateral from an alternative source.” Id ., at 595–596. Although Judge Rovner noted that the rates produced by either the formula or the cost of funds approach might be “piddling” relative to the coerced loan rate, she suggested courts should “consider the extent to which the creditor has already been compensated for … the risk that the debtor will be unable to discharge his obligations under the reorganization plan … in the rate of interest that it charged to the debtor in return for the original loan.” Id. , at 596. We granted certiorari and now reverse. 539 U. S. 925 (2003) .

II

The Bankruptcy Code provides little guidance as to which of the rates of interest advocated by the four opinions in this case—the formula rate, the coerced loan rate, the presumptive contract rate, or the cost of funds rate—Congress had in mind when it adopted the cram down provision. That provision, 11 U. S. C. §1325(a)(5)(B), does not mention the term “discount rate” or the word “interest.” Rather, it simply requires bankruptcy courts to ensure that the property to be distributed to a particular secured creditor over the life of a bankruptcy plan has a total “value, as of the effective date of the plan,” that equals or exceeds the value of the creditor’s allowed secured claim—in this case, $4,000. §1325(a)(5)(B)(ii).

That command is easily satisfied when the plan provides for a lump-sum payment to the creditor. Matters are not so simple, however, when the debt is to be discharged by a series of payments over time. A debtor’s promise of future payments is worth less than an immediate payment of the same total amount because the creditor cannot use the money right away, inflation may cause the value of the dollar to decline before the debtor pays, and there is always some risk of nonpayment. The challenge for bankruptcy courts reviewing such repayment schemes, therefore, is to choose an interest rate sufficient to compensate the creditor for these concerns.

Three important considerations govern that choice. First, the Bankruptcy Code includes numerous provisions that, like the cram down provision, require a court to “discoun[t] … [a] stream of deferred payments back to the[ir] present dollar value,” Rake v. Wade, 508 U. S. 464, 472, n. 8 (1993) , to ensure that a creditor receives at least the value of its claim. 10 We think it likely that Congress intended bankruptcy judges and trustees to follow essentially the same approach when choosing an appropriate interest rate under any of these provisions. Moreover, we think Congress would favor an approach that is familiar in the financial community and that minimizes the need for expensive evidentiary proceedings.

Second, Chapter 13 expressly authorizes a bankruptcy court to modify the rights of any creditor whose claim is secured by an interest in anything other than “real property that is the debtor’s principal residence.” 11 U. S. C. §1322(b)(2). 11 Thus, in cases like this involving secured interests in personal property, the court’s authority to modify the number, timing, or amount of the installment payments from those set forth in the debtor’s original contract is perfectly clear. Further, the potential need to modify the loan terms to account for intervening changes in circumstances is also clear: On the one hand, the fact of the bankruptcy establishes that the debtor is overextended and thus poses a significant risk of default; on the other hand, the postbankruptcy obligor is no longer the individual debtor but the court-supervised estate, and the risk of default is thus somewhat reduced. 12

Third, from the point of view of a creditor, the cram down provision mandates an objective rather than a subjective inquiry. 13 That is, although §1325(a)(5)(B) entitles the creditor to property whose present value objectively equals or exceeds the value of the collateral, it does not require that the terms of the cram down loan match the terms to which the debtor and creditor agreed prebankruptcy, nor does it require that the cram down terms make the creditor subjectively indifferent between present foreclosure and future payment. Indeed, the very idea of a “cram down” loan precludes the latter result: By definition, a creditor forced to accept such a loan would prefer instead to foreclose. 14 Thus, a court choosing a cram down interest rate need not consider the creditor’s individual circumstances, such as its prebankruptcy dealings with the debtor or the alternative loans it could make if permitted to foreclose. 15 Rather, the court should aim to treat similarly situated creditors similarly, 16 and to ensure that an objective economic analysis would suggest the debtor’s interest payments will adequately compensate all such creditors for the time value of their money and the risk of default.

III

These considerations lead us to reject the coerced loan, presumptive contract rate, and cost of funds approaches. Each of these approaches is complicated, imposes significant evidentiary costs, and aims to make each individual creditor whole rather than to ensure the debtor’s payments have the required present value. For example, the coerced loan approach requires bankruptcy courts to consider evidence about the market for comparable loans to similar (though nonbankrupt) debtors—an inquiry far removed from such courts’ usual task of evaluating debtors’ financial circumstances and the feasibility of their debt adjustment plans. In addition, the approach overcompensates creditors because the market lending rate must be high enough to cover factors, like lenders’ transaction costs and overall profits, that are no longer relevant in the context of court-administered and court-supervised cram down loans.

Like the coerced loan approach, the presumptive contract rate approach improperly focuses on the creditor’s potential use of the proceeds of a foreclosure sale. In addition, although the approach permits a debtor to introduce some evidence about each creditor, thereby enabling the court to tailor the interest rate more closely to the creditor’s financial circumstances and reducing the likelihood that the creditor will be substantially overcompensated, that right comes at a cost: The debtor must obtain information about the creditor’s costs of overhead, financial circumstances, and lending practices to rebut the presumptive contract rate. Also, the approach produces absurd results, entitling “inefficient, poorly managed lenders” with lower profit margins to obtain higher cram down rates than “well managed, better capitalized lenders.” 2 K. Lundin, Chapter 13 Bankruptcy §112.1, p. 112–8 (3d ed. 2000). Finally, because the approach relies heavily on a creditor’s prior dealings with the debtor, similarly situated creditors may end up with vastly different cram down rates. 17

The cost of funds approach, too, is improperly aimed. Although it rightly disregards the now-irrelevant terms of the parties’ original contract, it mistakenly focuses on the creditworthiness of the creditor rather than the debtor. In addition, the approach has many of the other flaws of the coerced loan and presumptive contract rate approaches. For example, like the presumptive contract rate approach, the cost of funds approach imposes a significant evidentiary burden, as a debtor seeking to rebut a creditor’s asserted cost of borrowing must introduce expert testimony about the creditor’s financial condition. Also, under this approach, a creditworthy lender with a low cost of borrowing may obtain a lower cram down rate than a financially unsound, fly-by-night lender.

IV

The formula approach has none of these defects. Taking its cue from ordinary lending practices, the approach begins by looking to the national prime rate, reported daily in the press, which reflects the financial market’s estimate of the amount a commercial bank should charge a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default. 18 Because bankrupt debtors typically pose a greater risk of nonpayment than solvent commercial borrowers, the approach then requires a bankruptcy court to adjust the prime rate accordingly. The appropriate size of that risk adjustment depends, of course, on such factors as the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan. The court must therefore hold a hearing at which the debtor and any creditors may present evidence about the appropriate risk adjustment. Some of this evidence will be included in the debtor’s bankruptcy filings, however, so the debtor and creditors may not incur significant additional expense. Moreover, starting from a concededly low estimate and adjusting upward places the evidentiary burden squarely on the creditors, who are likely to have readier access to any information absent from the debtor’s filing (such as evidence about the “liquidity of the collateral market,” post, at 9 ( Scalia, J ., dissenting)). Finally, many of the factors relevant to the adjustment fall squarely within the bankruptcy court’s area of expertise.

Thus, unlike the coerced loan, presumptive contract rate, and cost of funds approaches, the formula approach entails a straightforward, familiar, and objective inquiry, and minimizes the need for potentially costly additional evidentiary proceedings. Moreover, the resulting “prime-plus” rate of interest depends only on the state of financial markets, the circumstances of the bankruptcy estate, and the characteristics of the loan, not on the creditor’s circumstances or its prior interactions with the debtor. For these reasons, the prime-plus or formula rate best comports with the purposes of the Bankruptcy Code. 19

We do not decide the proper scale for the risk adjustment, as the issue is not before us. The Bankruptcy Court in this case approved a risk adjustment of 1.5%, App. to Pet. for Cert. 44a–73a, and other courts have generally approved adjustments of 1% to 3%, see In re Valenti , 105 F. 3d 55, 64 (CA2) (collecting cases), abrogated on other grounds by Associates Commercial Corp. v. Rash, 520 U. S. 953 (1997) . Respondent’s core argument is that a risk adjustment in this range is entirely inadequate to compensate a creditor for the real risk that the plan will fail. There is some dispute about the true scale of that risk—respondent claims that more than 60% of Chapter 13 plans fail, Brief for Respondent 25, but petitioners argue that the failure rate for approved Chapter 13 plans is much lower, Tr. of Oral Arg. 9. We need not resolve that dispute. It is sufficient for our purposes to note that, under 11 U. S. C. §1325(a)(6), a court may not approve a plan unless, after considering all creditors’ objections and receiving the advice of the trustee, the judge is persuaded that “the debtor will be able to make all payments under the plan and to comply with the plan.” Ibid . Together with the cram down provision, this requirement obligates the court to select a rate high enough to compensate the creditor for its risk but not so high as to doom the plan. If the court determines that the likelihood of default is so high as to necessitate an “eye-popping” interest rate, 301 F. 3d, at 593 (Rovner, J., dissenting), the plan probably should not be confirmed.

V

The dissent’s endorsement of the presumptive contract rate approach rests on two assumptions: (1) “subprime lending markets are competitive and therefore largely efficient”; and (2) the risk of default in Chapter 13 is normally no less than the risk of default at the time of the original loan. Post , at 2. Although the Bankruptcy Code provides little guidance on the question, we think it highly unlikely that Congress would endorse either premise.

First, the dissent assumes that subprime loans are negotiated between fully informed buyers and sellers in a classic free market. But there is no basis for concluding that Congress relied on this assumption when it enacted Chapter 13. Moreover, several considerations suggest that the subprime market is not, in fact, perfectly competitive. To begin with, used vehicles are regularly sold by means of tie-in transactions, in which the price of the vehicle is the subject of negotiation, while the terms of the financing are dictated by the seller. 20 In addition, there is extensive federal 21 and state 22 regulation of subprime lending, which not only itself distorts the market, but also evinces regulators’ belief that unregulated subprime lenders would exploit borrowers’ ignorance and charge rates above what a competitive market would allow. 23 Indeed, Congress enacted the Truth in Lending Act in part because it believed “consumers would individually benefit not only from the more informed use of credit, but also from heightened competition which would result from more knowledgeable credit shopping.” S. Rep. No. 96–368, p. 16 (1979). 24

Second, the dissent apparently believes that the debtor’s prebankruptcy default—on a loan made in a market in which creditors commonly charge the maximum rate of interest allowed by law, Brief for Respondent 16, and in which neither creditors nor debtors have the protections afforded by Chapter 13—translates into a high probability that the same debtor’s confirmed Chapter 13 plan will fail. In our view, however, Congress intended to create a program under which plans that qualify for confirmation have a high probability of success. Perhaps bankruptcy judges currently confirm too many risky plans, but the solution is to confirm fewer such plans, not to set default cram down rates at absurdly high levels, thereby increasing the risk of default.

Indeed, as Justice Thomas demonstrates, post , at 3 (opinion concurring in judgment), the text of §1325(a)(5)(B)(ii) may be read to support the conclusion that Congress did not intend the cram down rate to include any compensation for the risk of default. 25 That reading is consistent with a view that Congress believed Chapter 13’s protections to be so effective as to make the risk of default negligible. Because our decision in Rash assumes that cram down interest rates are adjusted to “offset,” to the extent possible, the risk of default, 520 U. S., at 962–963, and because so many judges who have considered the issue (including the authors of the four earlier opinions in this case) have rejected the risk-free approach, we think it too late in the day to endorse that approach now. Of course, if the text of the statute required such an approach, that would be the end of the matter. We think, however, that §1325(a)(5)(B)(ii)’s reference to “value, as of the effective date of the plan, of property to be distributed under the plan” is better read to incorporate all of the commonly understood components of “present value,” including any risk of nonpayment. Justice Thomas ’ reading does emphasize, though, that a presumption that bankruptcy plans will succeed is more consistent with Congress’ statutory scheme than the dissent’s more cynical focus on bankrupt debtors’ “financial instability and … proclivity to seek legal protection,” post , at 3.

Furthermore, the dissent’s two assumptions do not necessarily favor the presumptive contract rate approach. For one thing, the cram down provision applies not only to subprime loans but also to prime loans negotiated prior to the change in circumstance (job loss, for example) that rendered the debtor insolvent. Relatedly, the provision also applies in instances in which national or local economic conditions drastically improved or declined after the original loan was issued but before the debtor filed for bankruptcy. In either case, there is every reason to think that a properly risk-adjusted prime rate will provide a better estimate of the creditor’s current costs and exposure than a contract rate set in different times.

Even more important, if all relevant information about the debtor’s circumstances, the creditor’s circumstances, the nature of the collateral, and the market for comparable loans were equally available to both debtor and creditor, then in theory the formula and presumptive contract rate approaches would yield the same final interest rate. Thus, we principally differ with the dissent not over what final rate courts should adopt but over which party (creditor or debtor) should bear the burden of rebutting the presumptive rate (prime or contract, respectively).

Justice Scalia identifies four “relevant factors bearing on risk premium[:] (1) the probability of plan failure; (2) the rate of collateral depreciation; (3) the liquidity of the collateral market; and (4) the administrative expenses of enforcement.” Post , at 9. In our view, any information debtors have about any of these factors is likely to be included in their bankruptcy filings, while the remaining information will be far more accessible to creditors (who must collect information about their lending markets to remain competitive) than to individual debtors (whose only experience with those markets might be the single loan at issue in the case). Thus, the formula approach, which begins with a concededly low estimate of the appropriate interest rate and requires the creditor to present evidence supporting a higher rate, places the evidentiary burden on the more knowledgeable party, thereby facilitating more accurate calculation of the appropriate interest rate.

If the rather sketchy data uncovered by the dissent support an argument that Chapter 13 of the Bankruptcy Code should mandate application of the presumptive contract rate approach (rather than merely an argument that bankruptcy judges should exercise greater caution before approving debt adjustment plans), those data should be forwarded to Congress. We are not persuaded, however, that the data undermine our interpretation of the statutory scheme Congress has enacted.

The judgment of the Court of Appeals is reversed, and the case is remanded with instructions to remand the case to the Bankruptcy Court for further proceedings consistent with this opinion.

It is so ordered.


Notes

1 11 U. S. C. §1325(a)(5). The text of the statute reads as follows: “§1325. Confirmation of plan “(a) Except as provided in subsection (b), the court shall confirm a plan if— . . . . . “(5) with respect to each allowed secured claim provided for by the plan— “(A) the holder of such claim has accepted the plan; “(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and “(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or “(C) the debtor surrenders the property securing such claim to such holder . . . .”

2 As we noted in Associates Commercial Corp. v. Rash, 520 U. S. 953, 962 (1997) , a debtor may also avail himself of the second option (surrender of the collateral) despite the creditor’s objection.

3 See Rake v. Wade, 508 U. S. 464, n. 8 (1993) (noting that property distributions under §1325(a)(5)(B)(ii) may take the form of “a stream of future payments”).

4 In the remainder of the opinion, we use the term “present value” to refer to the value as of the effective date of the bankruptcy plan.

5 Title 11 U. S. C. §506(a) provides: “An allowed claim of a creditor secured by a lien on property in which the estate has an interest … is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, … and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.”

6 See §§541(a), 1306(a).

7 Petitioners submitted an initial plan that would have required them to assign $1,089 of their wages to the trustee every month. App. 9. Their amended plan, however, reduced this monthly payment to $740. App. to Pet. for Cert. 77a.

8 The requirement of financial feasibility derives from 11 U. S. C. §1325(a)(6), which provides that the bankruptcy court shall “confirm a plan if … the debtor will be able to make all payments under the plan and to comply with the plan.” See infra, at 14.

9 As 21% is the maximum interest rate creditors may charge for consumer loans under Indiana’s usury statute, Ind. Code §24–4.5–3–201 (1993), the remand presumably could not have benefited respondent.

10 See 11 U. S. C. §1129(a)(7)(A)(ii) (requiring payment of property whose “value, as of the effective date of the plan” equals or exceeds the value of the creditor’s claim); §§1129(a)(7)(B), 1129(a)(9)(B)(i), 1129(a)(9)(C), 1129(b)(2)(A)(ii), 1129(b)(2)(B)(i), 1129(b)(2)(C)(i), 1173(a)(2), 1225(a)(4), 1225(a)(5)(B)(ii), 1228(b)(2), 1325(a)(4), 1228(b)(2) (same).

11 Section 1322(b)(2) provides: “[T]he plan may … modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, … or leave unaffected the rights of holders of any class of claims.”

12 Several factors contribute to this reduction in risk. First, as noted below, infra, at 14, a court may only approve a cram down loan (and the debt adjustment plan of which the loan is a part) if it believes the debtor will be able to make all of the required payments. §1325(a)(6). Thus, such loans will only be approved for debtors that the court deems creditworthy. Second, Chapter 13 plans must “provide for the submission” to the trustee “of all or such portion of [the debtor’s] future … income … as is necessary for the execution of the plan,” §1322(a)(1), so the possibility of nonpayment is greatly reduced. Third, the Bankruptcy Code’s extensive disclosure requirements reduce the risk that the debtor has significant undisclosed obligations. Fourth, as a practical matter, the public nature of the bankruptcy proceeding is likely to reduce the debtor’s opportunities to take on additional debt. Cf.11 U. S. C. §525 (prohibiting certain Government grant and loan programs from discriminating against applicants who are or have been bankrupt).

13 We reached a similar conclusion in Associates Commercial Corp. v. Rash, 520 U. S. 953 (1997) , when we held that a creditor’s secured interest should be valued from the debtor’s, rather than the creditor’s, perspective. Id., at 963 (“[The debtor’s] actual use, rather than a foreclosure sale that will not take place, is the proper guide …”).

14 This fact helps to explain why there is no readily apparent Chapter 13 “cram down market rate of interest”: Because every cram down loan is imposed by a court over the objection of the secured creditor, there is no free market of willing cram down lenders. Interestingly, the same is not true in the Chapter 11 context, as numerous lenders advertise financing for Chapter 11 debtors in possession. See, e.g., Balmoral Financial Corporation, http://www.balmoral.com/bdip.htm (all Internet materials as visited Mar. 4, 2004, and available in Clerk of Court’s case file) (advertising debtor in possession lending); Debtor in Possession Financing: 1st National Assistance Finance Association DIP Division, http://www.loanmallusa.com/dip.htm (offering “to tailor a financing program … to your business’ needs and … to work closely with your bankruptcy counsel”). Thus, when picking a cram down rate in a Chapter 11 case, it might make sense to ask what rate an efficient market would produce. In the Chapter 13 context, by contrast, the absence of any such market obligates courts to look to first prin-ciples and ask only what rate will fairly compensate a creditor for its exposure.

15 See supra, at 5 (noting that the District Court’s coerced loan approach aims to set the cram down interest rate at the level the creditor could obtain from new loans of comparable duration and risk).

16 Cf. 11 U. S. C. §1322(a)(3) (“The plan shall … provide the same treatment for each claim within a particular class”).

17 For example, suppose a debtor purchases two identical used cars, buying the first at a low purchase price from a lender who charges high interest, and buying the second at a much higher purchase price from a lender who charges zero-percent or nominal interest. Prebankruptcy, these two loans might well produce identical income streams for the two lenders. Postbankruptcy, however, the presumptive contract rate approach would entitle the first lender to a considerably higher cram down interest rate, even though the two secured debts are objectively indistinguishable.

18 We note that, if the court could somehow be certain a debtor would complete his plan, the prime rate would be adequate to compensate any secured creditors forced to accept cram down loans.

19 The fact that Congress considered but rejected legislation that would endorse the Seventh Circuit’s presumptive contract rate approach, H. R. 1085, 98th Cong., 1st Sess., §19(2)(A) (1983); H. R. 1169, 98th Cong., 1st Sess., §19(2)(A) (1983); H. R. 4786, 97th Cong., 1st Sess., §19(2)(A) (1981), lends some support to our conclusion. It is perhaps also relevant that our conclusion is endorsed by the Executive Branch of the Government and by the National Association of Chapter Thirteen Trustees. Brief for United States as Amicus Curiae; Brief for National Association of Chapter Thirteen Trustees as Amicus Curiae. If we have misinterpreted Congress’ intended meaning of “value, as of the date of the plan,” we are confident it will enact appropriate remedial legislation.

20 The dissent notes that “[t]ie-ins do not alone make financing markets noncompetitive; they only cause prices and interest rates to be considered in tandem rather than separately.” Post, at 4–5. This statement, while true, is nonresponsive. If a market prices the cost of goods and the cost of financing together, then even if that market is perfectly competitive, all we can know is that the combined price of the goods and the financing is competitive and efficient. We have no way of determining whether the allocation of that price between goods and financing would be the same if the two components were separately negotiated. But the only issue before us is the cram down interest rate (the cost of financing); the value of respondent’s truck (the cost of the goods) is fixed. See Rash, 520 U. S., at 960 (setting the value of collateral in Chapter 13 proceedings at the “price a willing buyer in the debtor’s trade, business, or situation would pay to obtain like property from a willing seller”). The competitiveness of the market for cost-cum-financing is thus irrelevant to our analysis.

21 For example, the Truth in Lending Act regulates credit transactions and credit advertising. 15 U. S. C. §§1604–1649, 1661–1665b.

22 Usury laws provide the most obvious examples of state regulation of the subprime market. See, e.g., Colo. Rev. Stat. §5–2–201 (2003); Fla. Stat. Ann. §537.011 (Supp. 2004); Ind. Code §24–4.5–3–201 (1993); Md. Com. Law Code Ann. §12–404(d) (2000).

23 Lending practices in Mississippi, “where there currently is no legal usury rate,” support this conclusion: in that State, subprime lenders charge rates “as high as 30 to 40%”—well above the rates that apparently suffice to support the industry in States like Indiana. Norberg, Consumer Bankruptcy’s New Clothes: An Empirical Study of Discharge and Debt Collection in Chapter 13, 7 Am. Bankr. Inst. L. Rev. 415, 438–439 (1999).

24 See also H. R. Rep. No. 1040, 90th Cong., 1st Sess., 17 (1967) (“The basic premise of the application of disclosure standards to credit advertising rests in the belief that a substantial portion of consumer purchases are induced by such advertising and that if full disclosure is not made in such advertising, the consumer will be deprived of the opportunity to effectively comparison shop for credit”).

25 The United States, too, notes that “[t]he text of Section 1325 is consistent with the view that the appropriate discount rate should reflect only the time value of money and not any risk premium.” Brief for United States as Amicus Curiae 11, n. 4. The remainder of the United States’ brief, however, advocates the formula approach. See, e.g., id., at 19–28.


TOP

Opinion

LEE M. TILL, et ux., PETITIONERS v. SCS
CREDIT CORPORATION

on writ of certiorari to the united states court of appeals for the seventh circuit


[May 17, 2004]

Justice Stevens announced the judgment of the Court and delivered an opinion, in which Justice Souter , Justice Ginsburg , and Justice Breyer join.

To qualify for court approval under Chapter 13 of the Bankruptcy Code, an individual debtor’s proposed debt adjustment plan must accommodate each allowed, secured creditor in one of three ways: (1) by obtaining the creditor’s acceptance of the plan; (2) by surrendering the property securing the claim; or (3) by providing the creditor both a lien securing the claim and a promise of future property distributions (such as deferred cash payments) whose total “value, as of the effective date of the plan, … is not less than the allowed amount of such claim.” 1 The third alternative is commonly known as the “cram down option” because it may be enforced over a claim holder’s objection. 2 Associates Commercial Corp. v. Rash, 520 U. S. 953, 957 (1997) .

Plans that invoke the cram down power often provide for installment payments over a period of years rather than a single payment. 3 In such circumstances, the amount of each installment must be calibrated to ensure that, over time, the creditor receives disbursements whose total present value 4 equals or exceeds that of the allowed claim. The proceedings in this case that led to our grant of certiorari identified four different methods of determining the appropriate method with which to perform that calibration. Indeed, the Bankruptcy Judge, the District Court, the Court of Appeals majority, and the dissenting Judge each endorsed a different approach. We detail the underlying facts and describe each of those approaches before setting forth our judgment as to which approach best meets the purposes of the Bankruptcy Code.

I

On October 2, 1998, petitioners Lee and Amy Till, residents of Kokomo, Indiana, purchased a used truck from Instant Auto Finance for $6,395 plus $330.75 in fees and taxes. They made a $300 down payment and financed the balance of the purchase price by entering into a retail installment contract that Instant Auto immediately assigned to respondent, SCS Credit Corporation. Petitioners’ initial indebtedness amounted to $8,285.24—the $6,425.75 balance of the truck purchase plus a finance charge of 21% per year for 136 weeks, or $1,859.49. Under the contract, petitioners agreed to make 68 biweekly payments to cover this debt; Instant Auto—and subsequently respondent—retained a purchase money security interest that gave it the right to repossess the truck if petitioners defaulted under the contract.

On October 25, 1999, petitioners, by then in default on their payments to respondent, filed a joint petition for relief under Chapter 13 of the Bankruptcy Code. At the time of the filing, respondent’s outstanding claim amounted to $4,894.89, but the parties agreed that the truck securing the claim was worth only $4,000. App. 16–17. In accordance with the Bankruptcy Code, therefore, respondent’s secured claim was limited to $4,000, and the $894.89 balance was unsecured. 5 Petitioners’ filing automatically stayed debt-collection activity by their various creditors, including the Internal Revenue Service (IRS), respondent, three other holders of secured claims, and unidentified unsecured creditors. In addition, the filing created a bankruptcy estate, administered by a trustee, which consisted of petitioners’ property, including the truck. 6

Petitioners’ proposed debt adjustment plan called for them to submit their future earnings to the supervision and control of the Bankruptcy Court for three years, and to assign $740 of their wages to the trustee each month. 7 App. to Pet. for Cert. 76a–81a. The plan charged the trustee with distributing these monthly wage assignments to pay, in order of priority: (1) administrative costs; (2) the IRS’s priority tax claim; (3) secured creditors’ claims; and finally, (4) unsecured creditors’ claims. Id. , at 77a–79a.

The proposed plan also provided that petitioners would pay interest on the secured portion of respondent’s claim at a rate of 9.5% per year. Petitioners arrived at this “prime-plus” or “formula rate” by augmenting the national prime rate of approximately 8% (applied by banks when making low-risk loans) to account for the risk of nonpayment posed by borrowers in their financial position. Respondent objected to the proposed rate, contending that the company was “entitled to interest at the rate of 21%, which is the rate … it would obtain if it could foreclose on the vehicle and reinvest the proceeds in loans of equivalent duration and risk as the loan” originally made to petitioners. App. 19–20.

At the hearing on its objection, respondent presented expert testimony establishing that it uniformly charges 21% interest on so-called “subprime” loans, or loans to borrowers with poor credit ratings, and that other lenders in the subprime market also charge that rate. Petitioners countered with the testimony of an Indiana University-Purdue University Indianapolis economics professor, who acknowledged that he had only limited familiarity with the subprime auto lending market, but described the 9.5% formula rate as “very reasonable” given that Chapter 13 plans are “supposed to be financially feasible.” 8 Id ., at 43–44. Moreover, the professor noted that respondent’s exposure was “fairly limited because [petitioners] are under the supervision of the court.” Id. , at 43. The bankruptcy trustee also filed comments supporting the formula rate as, among other things, easily ascertainable, closely tied to the “condition of the financial market,” and independent of the financial circumstances of any particular lender. App. to Pet. for Cert. 41a–42a. Accepting petitioners’ evidence, the Bankruptcy Court overruled respondent’s objection and confirmed the proposed plan.

The District Court reversed. It understood Seventh Circuit precedent to require that bankruptcy courts set cram down interest rates at the level the creditor could have obtained if it had foreclosed on the loan, sold the collateral, and reinvested the proceeds in loans of equivalent duration and risk. Citing respondent’s unrebutted testimony about the market for subprime loans, the court concluded that 21% was the appropriate rate. Id ., at 38a.

On appeal, the Seventh Circuit endorsed a slightly modified version of the District Court’s “coerced” or “forced loan” approach. In re Till , 301 F. 3d 583, 591 (2002). Specifically, the majority agreed with the District Court that, in a cram down proceeding, the inquiry should focus on the interest rate “that the creditor in question would obtain in making a new loan in the same industry to a debtor who is similarly situated, although not in bankruptcy.” Id. , at 592. To approximate that new loan rate, the majority looked to the parties’ prebankruptcy contract rate (21%). The court recognized, however, that using the contract rate would not “duplicat[e] precisely … the present value of the collateral to the creditor” because loans to bankrupt, court-supervised debtors “involve some risks that would not be incurred in a new loan to a debtor not in default” and also produce “some economies.” Ibid. To correct for these inaccuracies, the majority held that the original contract rate should “serve as a presumptive [cram down] rate,” which either the creditor or the debtor could challenge with evidence that a higher or lower rate should apply. Ibid . Accordingly, the court remanded the case to the Bankruptcy Court to afford petitioners and respondent an opportunity to rebut the presumptive 21% rate. 9

Dissenting, Judge Rovner argued that the majority’s presumptive contract rate approach overcompensates secured creditors because it fails to account for costs a creditor would have to incur in issuing a new loan. Rather than focusing on the market for comparable loans, Judge Rovner advocated either the Bankruptcy Court’s formula approach or a “straightforward … cost of funds” approach that would simply ask “what it would cost the creditor to obtain the cash equivalent of the collateral from an alternative source.” Id ., at 595–596. Although Judge Rovner noted that the rates produced by either the formula or the cost of funds approach might be “piddling” relative to the coerced loan rate, she suggested courts should “consider the extent to which the creditor has already been compensated for … the risk that the debtor will be unable to discharge his obligations under the reorganization plan … in the rate of interest that it charged to the debtor in return for the original loan.” Id. , at 596. We granted certiorari and now reverse. 539 U. S. 925 (2003) .

II

The Bankruptcy Code provides little guidance as to which of the rates of interest advocated by the four opinions in this case—the formula rate, the coerced loan rate, the presumptive contract rate, or the cost of funds rate—Congress had in mind when it adopted the cram down provision. That provision, 11 U. S. C. §1325(a)(5)(B), does not mention the term “discount rate” or the word “interest.” Rather, it simply requires bankruptcy courts to ensure that the property to be distributed to a particular secured creditor over the life of a bankruptcy plan has a total “value, as of the effective date of the plan,” that equals or exceeds the value of the creditor’s allowed secured claim—in this case, $4,000. §1325(a)(5)(B)(ii).

That command is easily satisfied when the plan provides for a lump-sum payment to the creditor. Matters are not so simple, however, when the debt is to be discharged by a series of payments over time. A debtor’s promise of future payments is worth less than an immediate payment of the same total amount because the creditor cannot use the money right away, inflation may cause the value of the dollar to decline before the debtor pays, and there is always some risk of nonpayment. The challenge for bankruptcy courts reviewing such repayment schemes, therefore, is to choose an interest rate sufficient to compensate the creditor for these concerns.

Three important considerations govern that choice. First, the Bankruptcy Code includes numerous provisions that, like the cram down provision, require a court to “discoun[t] … [a] stream of deferred payments back to the[ir] present dollar value,” Rake v. Wade, 508 U. S. 464, 472, n. 8 (1993) , to ensure that a creditor receives at least the value of its claim. 10 We think it likely that Congress intended bankruptcy judges and trustees to follow essentially the same approach when choosing an appropriate interest rate under any of these provisions. Moreover, we think Congress would favor an approach that is familiar in the financial community and that minimizes the need for expensive evidentiary proceedings.

Second, Chapter 13 expressly authorizes a bankruptcy court to modify the rights of any creditor whose claim is secured by an interest in anything other than “real property that is the debtor’s principal residence.” 11 U. S. C. §1322(b)(2). 11 Thus, in cases like this involving secured interests in personal property, the court’s authority to modify the number, timing, or amount of the installment payments from those set forth in the debtor’s original contract is perfectly clear. Further, the potential need to modify the loan terms to account for intervening changes in circumstances is also clear: On the one hand, the fact of the bankruptcy establishes that the debtor is overextended and thus poses a significant risk of default; on the other hand, the postbankruptcy obligor is no longer the individual debtor but the court-supervised estate, and the risk of default is thus somewhat reduced. 12

Third, from the point of view of a creditor, the cram down provision mandates an objective rather than a subjective inquiry. 13 That is, although §1325(a)(5)(B) entitles the creditor to property whose present value objectively equals or exceeds the value of the collateral, it does not require that the terms of the cram down loan match the terms to which the debtor and creditor agreed prebankruptcy, nor does it require that the cram down terms make the creditor subjectively indifferent between present foreclosure and future payment. Indeed, the very idea of a “cram down” loan precludes the latter result: By definition, a creditor forced to accept such a loan would prefer instead to foreclose. 14 Thus, a court choosing a cram down interest rate need not consider the creditor’s individual circumstances, such as its prebankruptcy dealings with the debtor or the alternative loans it could make if permitted to foreclose. 15 Rather, the court should aim to treat similarly situated creditors similarly, 16 and to ensure that an objective economic analysis would suggest the debtor’s interest payments will adequately compensate all such creditors for the time value of their money and the risk of default.

III

These considerations lead us to reject the coerced loan, presumptive contract rate, and cost of funds approaches. Each of these approaches is complicated, imposes significant evidentiary costs, and aims to make each individual creditor whole rather than to ensure the debtor’s payments have the required present value. For example, the coerced loan approach requires bankruptcy courts to consider evidence about the market for comparable loans to similar (though nonbankrupt) debtors—an inquiry far removed from such courts’ usual task of evaluating debtors’ financial circumstances and the feasibility of their debt adjustment plans. In addition, the approach overcompensates creditors because the market lending rate must be high enough to cover factors, like lenders’ transaction costs and overall profits, that are no longer relevant in the context of court-administered and court-supervised cram down loans.

Like the coerced loan approach, the presumptive contract rate approach improperly focuses on the creditor’s potential use of the proceeds of a foreclosure sale. In addition, although the approach permits a debtor to introduce some evidence about each creditor, thereby enabling the court to tailor the interest rate more closely to the creditor’s financial circumstances and reducing the likelihood that the creditor will be substantially overcompensated, that right comes at a cost: The debtor must obtain information about the creditor’s costs of overhead, financial circumstances, and lending practices to rebut the presumptive contract rate. Also, the approach produces absurd results, entitling “inefficient, poorly managed lenders” with lower profit margins to obtain higher cram down rates than “well managed, better capitalized lenders.” 2 K. Lundin, Chapter 13 Bankruptcy §112.1, p. 112–8 (3d ed. 2000). Finally, because the approach relies heavily on a creditor’s prior dealings with the debtor, similarly situated creditors may end up with vastly different cram down rates. 17

The cost of funds approach, too, is improperly aimed. Although it rightly disregards the now-irrelevant terms of the parties’ original contract, it mistakenly focuses on the creditworthiness of the creditor rather than the debtor. In addition, the approach has many of the other flaws of the coerced loan and presumptive contract rate approaches. For example, like the presumptive contract rate approach, the cost of funds approach imposes a significant evidentiary burden, as a debtor seeking to rebut a creditor’s asserted cost of borrowing must introduce expert testimony about the creditor’s financial condition. Also, under this approach, a creditworthy lender with a low cost of borrowing may obtain a lower cram down rate than a financially unsound, fly-by-night lender.

IV

The formula approach has none of these defects. Taking its cue from ordinary lending practices, the approach begins by looking to the national prime rate, reported daily in the press, which reflects the financial market’s estimate of the amount a commercial bank should charge a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default. 18 Because bankrupt debtors typically pose a greater risk of nonpayment than solvent commercial borrowers, the approach then requires a bankruptcy court to adjust the prime rate accordingly. The appropriate size of that risk adjustment depends, of course, on such factors as the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan. The court must therefore hold a hearing at which the debtor and any creditors may present evidence about the appropriate risk adjustment. Some of this evidence will be included in the debtor’s bankruptcy filings, however, so the debtor and creditors may not incur significant additional expense. Moreover, starting from a concededly low estimate and adjusting upward places the evidentiary burden squarely on the creditors, who are likely to have readier access to any information absent from the debtor’s filing (such as evidence about the “liquidity of the collateral market,” post, at 9 ( Scalia, J ., dissenting)). Finally, many of the factors relevant to the adjustment fall squarely within the bankruptcy court’s area of expertise.

Thus, unlike the coerced loan, presumptive contract rate, and cost of funds approaches, the formula approach entails a straightforward, familiar, and objective inquiry, and minimizes the need for potentially costly additional evidentiary proceedings. Moreover, the resulting “prime-plus” rate of interest depends only on the state of financial markets, the circumstances of the bankruptcy estate, and the characteristics of the loan, not on the creditor’s circumstances or its prior interactions with the debtor. For these reasons, the prime-plus or formula rate best comports with the purposes of the Bankruptcy Code. 19

We do not decide the proper scale for the risk adjustment, as the issue is not before us. The Bankruptcy Court in this case approved a risk adjustment of 1.5%, App. to Pet. for Cert. 44a–73a, and other courts have generally approved adjustments of 1% to 3%, see In re Valenti , 105 F. 3d 55, 64 (CA2) (collecting cases), abrogated on other grounds by Associates Commercial Corp. v. Rash, 520 U. S. 953 (1997) . Respondent’s core argument is that a risk adjustment in this range is entirely inadequate to compensate a creditor for the real risk that the plan will fail. There is some dispute about the true scale of that risk—respondent claims that more than 60% of Chapter 13 plans fail, Brief for Respondent 25, but petitioners argue that the failure rate for approved Chapter 13 plans is much lower, Tr. of Oral Arg. 9. We need not resolve that dispute. It is sufficient for our purposes to note that, under 11 U. S. C. §1325(a)(6), a court may not approve a plan unless, after considering all creditors’ objections and receiving the advice of the trustee, the judge is persuaded that “the debtor will be able to make all payments under the plan and to comply with the plan.” Ibid . Together with the cram down provision, this requirement obligates the court to select a rate high enough to compensate the creditor for its risk but not so high as to doom the plan. If the court determines that the likelihood of default is so high as to necessitate an “eye-popping” interest rate, 301 F. 3d, at 593 (Rovner, J., dissenting), the plan probably should not be confirmed.

V

The dissent’s endorsement of the presumptive contract rate approach rests on two assumptions: (1) “subprime lending markets are competitive and therefore largely efficient”; and (2) the risk of default in Chapter 13 is normally no less than the risk of default at the time of the original loan. Post , at 2. Although the Bankruptcy Code provides little guidance on the question, we think it highly unlikely that Congress would endorse either premise.

First, the dissent assumes that subprime loans are negotiated between fully informed buyers and sellers in a classic free market. But there is no basis for concluding that Congress relied on this assumption when it enacted Chapter 13. Moreover, several considerations suggest that the subprime market is not, in fact, perfectly competitive. To begin with, used vehicles are regularly sold by means of tie-in transactions, in which the price of the vehicle is the subject of negotiation, while the terms of the financing are dictated by the seller. 20 In addition, there is extensive federal 21 and state 22 regulation of subprime lending, which not only itself distorts the market, but also evinces regulators’ belief that unregulated subprime lenders would exploit borrowers’ ignorance and charge rates above what a competitive market would allow. 23 Indeed, Congress enacted the Truth in Lending Act in part because it believed “consumers would individually benefit not only from the more informed use of credit, but also from heightened competition which would result from more knowledgeable credit shopping.” S. Rep. No. 96–368, p. 16 (1979). 24

Second, the dissent apparently believes that the debtor’s prebankruptcy default—on a loan made in a market in which creditors commonly charge the maximum rate of interest allowed by law, Brief for Respondent 16, and in which neither creditors nor debtors have the protections afforded by Chapter 13—translates into a high probability that the same debtor’s confirmed Chapter 13 plan will fail. In our view, however, Congress intended to create a program under which plans that qualify for confirmation have a high probability of success. Perhaps bankruptcy judges currently confirm too many risky plans, but the solution is to confirm fewer such plans, not to set default cram down rates at absurdly high levels, thereby increasing the risk of default.

Indeed, as Justice Thomas demonstrates, post , at 3 (opinion concurring in judgment), the text of §1325(a)(5)(B)(ii) may be read to support the conclusion that Congress did not intend the cram down rate to include any compensation for the risk of default. 25 That reading is consistent with a view that Congress believed Chapter 13’s protections to be so effective as to make the risk of default negligible. Because our decision in Rash assumes that cram down interest rates are adjusted to “offset,” to the extent possible, the risk of default, 520 U. S., at 962–963, and because so many judges who have considered the issue (including the authors of the four earlier opinions in this case) have rejected the risk-free approach, we think it too late in the day to endorse that approach now. Of course, if the text of the statute required such an approach, that would be the end of the matter. We think, however, that §1325(a)(5)(B)(ii)’s reference to “value, as of the effective date of the plan, of property to be distributed under the plan” is better read to incorporate all of the commonly understood components of “present value,” including any risk of nonpayment. Justice Thomas ’ reading does emphasize, though, that a presumption that bankruptcy plans will succeed is more consistent with Congress’ statutory scheme than the dissent’s more cynical focus on bankrupt debtors’ “financial instability and … proclivity to seek legal protection,” post , at 3.

Furthermore, the dissent’s two assumptions do not necessarily favor the presumptive contract rate approach. For one thing, the cram down provision applies not only to subprime loans but also to prime loans negotiated prior to the change in circumstance (job loss, for example) that rendered the debtor insolvent. Relatedly, the provision also applies in instances in which national or local economic conditions drastically improved or declined after the original loan was issued but before the debtor filed for bankruptcy. In either case, there is every reason to think that a properly risk-adjusted prime rate will provide a better estimate of the creditor’s current costs and exposure than a contract rate set in different times.

Even more important, if all relevant information about the debtor’s circumstances, the creditor’s circumstances, the nature of the collateral, and the market for comparable loans were equally available to both debtor and creditor, then in theory the formula and presumptive contract rate approaches would yield the same final interest rate. Thus, we principally differ with the dissent not over what final rate courts should adopt but over which party (creditor or debtor) should bear the burden of rebutting the presumptive rate (prime or contract, respectively).

Justice Scalia identifies four “relevant factors bearing on risk premium[:] (1) the probability of plan failure; (2) the rate of collateral depreciation; (3) the liquidity of the collateral market; and (4) the administrative expenses of enforcement.” Post , at 9. In our view, any information debtors have about any of these factors is likely to be included in their bankruptcy filings, while the remaining information will be far more accessible to creditors (who must collect information about their lending markets to remain competitive) than to individual debtors (whose only experience with those markets might be the single loan at issue in the case). Thus, the formula approach, which begins with a concededly low estimate of the appropriate interest rate and requires the creditor to present evidence supporting a higher rate, places the evidentiary burden on the more knowledgeable party, thereby facilitating more accurate calculation of the appropriate interest rate.

If the rather sketchy data uncovered by the dissent support an argument that Chapter 13 of the Bankruptcy Code should mandate application of the presumptive contract rate approach (rather than merely an argument that bankruptcy judges should exercise greater caution before approving debt adjustment plans), those data should be forwarded to Congress. We are not persuaded, however, that the data undermine our interpretation of the statutory scheme Congress has enacted.

The judgment of the Court of Appeals is reversed, and the case is remanded with instructions to remand the case to the Bankruptcy Court for further proceedings consistent with this opinion.

It is so ordered.


Notes

1 11 U. S. C. §1325(a)(5). The text of the statute reads as follows: “§1325. Confirmation of plan “(a) Except as provided in subsection (b), the court shall confirm a plan if— . . . . . “(5) with respect to each allowed secured claim provided for by the plan— “(A) the holder of such claim has accepted the plan; “(B)(i) the plan provides that the holder of such claim retain the lien securing such claim; and “(ii) the value, as of the effective date of the plan, of property to be distributed under the plan on account of such claim is not less than the allowed amount of such claim; or “(C) the debtor surrenders the property securing such claim to such holder . . . .”

2 As we noted in Associates Commercial Corp. v. Rash, 520 U. S. 953, 962 (1997) , a debtor may also avail himself of the second option (surrender of the collateral) despite the creditor’s objection.

3 See Rake v. Wade, 508 U. S. 464, n. 8 (1993) (noting that property distributions under §1325(a)(5)(B)(ii) may take the form of “a stream of future payments”).

4 In the remainder of the opinion, we use the term “present value” to refer to the value as of the effective date of the bankruptcy plan.

5 Title 11 U. S. C. §506(a) provides: “An allowed claim of a creditor secured by a lien on property in which the estate has an interest … is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, … and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.”

6 See §§541(a), 1306(a).

7 Petitioners submitted an initial plan that would have required them to assign $1,089 of their wages to the trustee every month. App. 9. Their amended plan, however, reduced this monthly payment to $740. App. to Pet. for Cert. 77a.

8 The requirement of financial feasibility derives from 11 U. S. C. §1325(a)(6), which provides that the bankruptcy court shall “confirm a plan if … the debtor will be able to make all payments under the plan and to comply with the plan.” See infra, at 14.

9 As 21% is the maximum interest rate creditors may charge for consumer loans under Indiana’s usury statute, Ind. Code §24–4.5–3–201 (1993), the remand presumably could not have benefited respondent.

10 See 11 U. S. C. §1129(a)(7)(A)(ii) (requiring payment of property whose “value, as of the effective date of the plan” equals or exceeds the value of the creditor’s claim); §§1129(a)(7)(B), 1129(a)(9)(B)(i), 1129(a)(9)(C), 1129(b)(2)(A)(ii), 1129(b)(2)(B)(i), 1129(b)(2)(C)(i), 1173(a)(2), 1225(a)(4), 1225(a)(5)(B)(ii), 1228(b)(2), 1325(a)(4), 1228(b)(2) (same).

11 Section 1322(b)(2) provides: “[T]he plan may … modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, … or leave unaffected the rights of holders of any class of claims.”

12 Several factors contribute to this reduction in risk. First, as noted below, infra, at 14, a court may only approve a cram down loan (and the debt adjustment plan of which the loan is a part) if it believes the debtor will be able to make all of the required payments. §1325(a)(6). Thus, such loans will only be approved for debtors that the court deems creditworthy. Second, Chapter 13 plans must “provide for the submission” to the trustee “of all or such portion of [the debtor’s] future … income … as is necessary for the execution of the plan,” §1322(a)(1), so the possibility of nonpayment is greatly reduced. Third, the Bankruptcy Code’s extensive disclosure requirements reduce the risk that the debtor has significant undisclosed obligations. Fourth, as a practical matter, the public nature of the bankruptcy proceeding is likely to reduce the debtor’s opportunities to take on additional debt. Cf.11 U. S. C. §525 (prohibiting certain Government grant and loan programs from discriminating against applicants who are or have been bankrupt).

13 We reached a similar conclusion in Associates Commercial Corp. v. Rash, 520 U. S. 953 (1997) , when we held that a creditor’s secured interest should be valued from the debtor’s, rather than the creditor’s, perspective. Id., at 963 (“[The debtor’s] actual use, rather than a foreclosure sale that will not take place, is the proper guide …”).

14 This fact helps to explain why there is no readily apparent Chapter 13 “cram down market rate of interest”: Because every cram down loan is imposed by a court over the objection of the secured creditor, there is no free market of willing cram down lenders. Interestingly, the same is not true in the Chapter 11 context, as numerous lenders advertise financing for Chapter 11 debtors in possession. See, e.g., Balmoral Financial Corporation, http://www.balmoral.com/bdip.htm (all Internet materials as visited Mar. 4, 2004, and available in Clerk of Court’s case file) (advertising debtor in possession lending); Debtor in Possession Financing: 1st National Assistance Finance Association DIP Division, http://www.loanmallusa.com/dip.htm (offering “to tailor a financing program … to your business’ needs and … to work closely with your bankruptcy counsel”). Thus, when picking a cram down rate in a Chapter 11 case, it might make sense to ask what rate an efficient market would produce. In the Chapter 13 context, by contrast, the absence of any such market obligates courts to look to first prin-ciples and ask only what rate will fairly compensate a creditor for its exposure.

15 See supra, at 5 (noting that the District Court’s coerced loan approach aims to set the cram down interest rate at the level the creditor could obtain from new loans of comparable duration and risk).

16 Cf. 11 U. S. C. §1322(a)(3) (“The plan shall … provide the same treatment for each claim within a particular class”).

17 For example, suppose a debtor purchases two identical used cars, buying the first at a low purchase price from a lender who charges high interest, and buying the second at a much higher purchase price from a lender who charges zero-percent or nominal interest. Prebankruptcy, these two loans might well produce identical income streams for the two lenders. Postbankruptcy, however, the presumptive contract rate approach would entitle the first lender to a considerably higher cram down interest rate, even though the two secured debts are objectively indistinguishable.

18 We note that, if the court could somehow be certain a debtor would complete his plan, the prime rate would be adequate to compensate any secured creditors forced to accept cram down loans.

19 The fact that Congress considered but rejected legislation that would endorse the Seventh Circuit’s presumptive contract rate approach, H. R. 1085, 98th Cong., 1st Sess., §19(2)(A) (1983); H. R. 1169, 98th Cong., 1st Sess., §19(2)(A) (1983); H. R. 4786, 97th Cong., 1st Sess., §19(2)(A) (1981), lends some support to our conclusion. It is perhaps also relevant that our conclusion is endorsed by the Executive Branch of the Government and by the National Association of Chapter Thirteen Trustees. Brief for United States as Amicus Curiae; Brief for National Association of Chapter Thirteen Trustees as Amicus Curiae. If we have misinterpreted Congress’ intended meaning of “value, as of the date of the plan,” we are confident it will enact appropriate remedial legislation.

20 The dissent notes that “[t]ie-ins do not alone make financing markets noncompetitive; they only cause prices and interest rates to be considered in tandem rather than separately.” Post, at 4–5. This statement, while true, is nonresponsive. If a market prices the cost of goods and the cost of financing together, then even if that market is perfectly competitive, all we can know is that the combined price of the goods and the financing is competitive and efficient. We have no way of determining whether the allocation of that price between goods and financing would be the same if the two components were separately negotiated. But the only issue before us is the cram down interest rate (the cost of financing); the value of respondent’s truck (the cost of the goods) is fixed. See Rash, 520 U. S., at 960 (setting the value of collateral in Chapter 13 proceedings at the “price a willing buyer in the debtor’s trade, business, or situation would pay to obtain like property from a willing seller”). The competitiveness of the market for cost-cum-financing is thus irrelevant to our analysis.

21 For example, the Truth in Lending Act regulates credit transactions and credit advertising. 15 U. S. C. §§1604–1649, 1661–1665b.

22 Usury laws provide the most obvious examples of state regulation of the subprime market. See, e.g., Colo. Rev. Stat. §5–2–201 (2003); Fla. Stat. Ann. §537.011 (Supp. 2004); Ind. Code §24–4.5–3–201 (1993); Md. Com. Law Code Ann. §12–404(d) (2000).

23 Lending practices in Mississippi, “where there currently is no legal usury rate,” support this conclusion: in that State, subprime lenders charge rates “as high as 30 to 40%”—well above the rates that apparently suffice to support the industry in States like Indiana. Norberg, Consumer Bankruptcy’s New Clothes: An Empirical Study of Discharge and Debt Collection in Chapter 13, 7 Am. Bankr. Inst. L. Rev. 415, 438–439 (1999).

24 See also H. R. Rep. No. 1040, 90th Cong., 1st Sess., 17 (1967) (“The basic premise of the application of disclosure standards to credit advertising rests in the belief that a substantial portion of consumer purchases are induced by such advertising and that if full disclosure is not made in such advertising, the consumer will be deprived of the opportunity to effectively comparison shop for credit”).

25 The United States, too, notes that “[t]he text of Section 1325 is consistent with the view that the appropriate discount rate should reflect only the time value of money and not any risk premium.” Brief for United States as Amicus Curiae 11, n. 4. The remainder of the United States’ brief, however, advocates the formula approach. See, e.g., id., at 19–28.