A recent case (September 2003) from a bankruptcy court in the 11^th circuit’s , In re Wesley 300 B.R. 96; 2003 Bankr. LEXIS 1446 (S.D. Ga. 2003) addressed the issue of zero-percent financing. The debtor want to pay no interest and the creditor objected. In this case the financing contract provided for a purchase price of the vehicle for $31,145.00 for 0.00% interest and (59) monthly payments of $547.35. The debtor listed the value of the collateral in the plan as $19,000.00. The parties later privately agreed that the creditor had a secured claim of $20,000 and an unsecured claim $6820.30. The only issue was the rate of interest to be paid by the debtor in the plan.

The Georgia Bankruptcy Court adopted a "present value approach" citing 11 U.S.C. 1325(a)(5)(B)(ii). The court stated "The purpose of the present value requirement is to place the holder of an allowed secured claim in the same position economically as if the debtor exercised the option of surrendering the collateral on the date of filing." Id at 1447. Thus, the court’s methodology assumes that the creditor converts the collateral to cash and then lends the proceeds to a borrower similarly situated to the debtor and seeking a similar type of loan. The present value test used by this Bankruptcy court appears be similar to the "cost of funds test" used by other courts. No appellate court has adopted this test.

The debtor argued that that the contractually agreed rate of 0.00% should apply and cited In re Corley 83 B.R. 848,(S.D. Ga 1998), a prior case decided by the same bankruptcy judge. In that case the same Judge had adopted a rule applying the "lesser of the contract rate or prevailing market rate" Id at 853. The Honorable John S. Davis rejected the debtor’s argument. In that case (In re Corley) the same Judge held that the contract rate "[had] a direct bearing in determining value only if the date of the underlying transaction is within a close proximity to the effective date of the plan." (ie: a few months vs. 2yrs in the case). Id at 856. The judge held that the creditor was entitled to interest because the (1) value of the contract had been crammed down; (2) the creditor would receive no interest on the unsecured portion of the claim; and (3) the debtor’s plan only provided a pro-rata distribution to unsecured creditors.

The court adopted the default rate of interest of 12% as defined under the court’s local bankruptcy rules, because the debtor failed to submit any evidence as to the appropriate rate of interest. It is noteworthy that in Georgia, the statutory rate of interest is 7% prejudgment and 12% post-judgment. Thus, the creditor achieved an excellent result.

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Revised: February 16, 2004