In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 00-4167

IN RE:

LEE M. TILL and AMY M. TILL,

Debtors-Appellants.

____________

Appeal from the United States District Court

for the Southern District of Indiana, Indianapolis Division.

No. 00 C 1102—Larry J. McKinney, Chief Judge.

____________

ARGUED APRIL 10, 2002—DECIDED AUGUST 21, 2002

____________

Before RIPPLE, MANION and ROVNER, Circuit Judges.

RIPPLE, Circuit Judge. Lee and Amy Till filed for bankruptcy protection under Chapter 13. SCS Credit Corporation, a secured creditor, objected to confirmation of the

Tills’ Chapter 13 plan on the ground that the interest rate

SCS would be paid under Chapter 13’s “cramdown”

provision, see 11 U.S.C. § 1325(a)(5)(A)(ii), was insufficient.

The bankruptcy court confirmed the plan over SCS’ objection; it held that the proper interest rate was the prime

rate plus a risk adjustment of 1.5%. SCS appealed. The

district court reversed the bankruptcy court’s decision;

it concluded that the “coerced loan” theory applied, and,

consequently, that the interest rate should be based on

what SCS would receive for a loan of similar risk and dur-
2 No. 00-4167

ation. The district court stayed remand of its order pending

the Tills’ further appeal to this court. For the reasons set

forth in the following opinion, we vacate the judgment

of the district court and remand the case for further proceedings with instructions.

I

BACKGROUND

Lee and Amy Till jointly filed for bankruptcy protection

under Chapter 13. SCS Credit Corporation was the only

creditor to object to confirmation of the Tills’ amended

Chapter 13 plan. SCS is a secured creditor and holds a

security interest in an automobile. The vehicle was valued

at $4,500. SCS is a sub-prime lender, which means that it

services borrowers with credit histories too poor to qualify

for prime-rate auto loans. The Tills are such borrowers.

The interest rate on the Tills’ loan was 21%. The Tills’ plan

invoked the “cramdown” provision of Chapter 13.

Under Chapter 13’s cramdown provision, a bankruptcy

plan will be confirmed over the objection of a secured

creditor if the creditor retains its lien on the collateral, and the creditor receives cash payments over the

course of the plan that are equivalent to the value of the

collateral on the plan’s effective date. See 11 U.S.C.

§ 1325(a)(5)(B). To achieve this statutory requirement,

the bankruptcy court must determine the value of the

collateral, and the debtor must pay interest to account for

the time value of money. Under the Tills’ reorganization plan, the interest rate on SCS’ secured claim would

be 9.5%. SCS contended that this rate would not provide SCS with the present value of its collateral, as required by the cramdown provision. SCS submitted that

the rate should be 21%, the interest rate it would have
No. 00-4167 3

earned if SCS had foreclosed on the vehicle, sold it and

then reinvested the proceeds in another sub-prime auto

loan.

The bankruptcy court conducted a hearing to consider

SCS’ objection. The Tills presented the testimony of a

finance professor who testified that an interest rate of 9.5%,

which he based on the prime rate plus a risk premium

of 1.5%, would be sufficient. He admitted, however, that

he had no experience working for a creditor and only a

limited understanding of the sub-prime auto lending

market. SCS presented the testimony of its general manager, Neil Bird, and the sales manager of Instant Auto

Finance, which had written the loan to the Tills and then

had assigned it to SCS. Both witnesses testified that SCS

had received 21% interest on all of its loans because borrowers like the Tills are poor credit risks. Bird also testified

that SCS usually did not get paid the full amount under

Chapter 13 plans because the debtors often cannot fulfill

their obligations under the plan.

The bankruptcy court interpreted our decision in

Koopmans v. Farm Credit Services of Mid-America, 102 F.3d

874 (7th Cir. 1996), to endorse a prime rate plus a risk

premium method of calculating the proper cramdown

interest rate. The court rejected the “coerced loan” theory

of the cramdown provision advocated by SCS. Following

what it believed to be the holding of Koopmans, the bankruptcy court confirmed the Tills’ plan with an interest rate

of 9.5% applied to SCS’ claim.

SCS then appealed to the United States District Court

for the Southern District of Indiana. SCS reasserted its

argument that it was entitled to 21%, the rate it would

earn on a loan if it had foreclosed on the collateral and

then had used the proceeds to issue a new loan. The district court agreed. The court held that the bankruptcy

court had misread Koopmans and that Koopmans required
4 No. 00-4167

1 The statute provides:

Except as provided in subsection (b), the court shall confirm

a plan if—

(continued...)

that SCS receive the interest rate it would have earned on

a new loan financed by the proceeds from the sale of

its collateral. Based on the record in the bankruptcy court,

the district court concluded that 21% was the proper rate

and accordingly reversed the bankruptcy court’s decision.

The Tills now appeal that decision to this court.

II

DISCUSSION

A.

The issue before us—the appropriate approach to determine the applicable interest rate under Chapter 13’s

cramdown provision—first presents us with a question of

statutory interpretation. We review this question de novo.

The application of that method to the particular facts of

this case is reviewed for clear error. See In re Smithwick, 121

F.3d 211, 215 (5th Cir. 1997).

The Tills submit that we should reverse the district court

and reinstate the bankruptcy court’s decision. In their view,

a “market formula” method, such as the one adopted by

the bankruptcy court in this case, appropriately implements the statutory mandate. SCS, however, contends

that the “coerced loan” method, adopted by several Courts

of Appeals and by the district court in this case, more

accurately reflects the statutory intent.

When a petition is filed under Chapter 13 of the Bankruptcy Code, a bankruptcy court confirms the plan if several conditions are met. See 11 U.S.C. §§ 1325(a)(1)-(6).1

 For
No. 00-4167 5

1 (...continued)

(1) the plan complies with the provisions of this chapter

and with the other applicable provisions of this title;

(2) any fee, charge, or amount required under chapter

123 title 28, or by the plan, to be paid before confirmation, has been paid;

(3) the plan has been proposed in good faith and not

by any means forbidden by law;

(4) the value, as of the effective date of the plan, of

property to be distributed under the plan on account

of each allowed unsecured claim is not less than the

amount that would be paid on such claim if the estate

of the debtor were liquidated under chapter 7 of this

title on such date;

(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; and

(6) the debtor will be able to make all payments under the plan and to comply with the plan.

11 U.S.C. § 1325(a).

secured creditors, this provision offers three possible

prerequisites to confirmation, one of which must be satisfied before a Chapter 13 plan can be confirmed. If the

secured creditor consents, see 11 U.S.C. § 1325(a)(5)(A), or

the debtor surrenders the collateral, see id. § 1325(a)(5)(C),
6 No. 00-4167

2 The allowed amount of a secured creditor’s claim is the value

of the collateral. The Code divides a secured creditor’s claim

into two portions, a secured portion and an unsecured portion. The secured portion is equal to the value of the collateral

(for undersecured creditors) on the plan’s effective date, the

unsecured portion is the amount of the debt still owed to the

creditor over and above the value of the collateral. See United

States v. Ron Pair Enters., 489 U.S. 235, 239 (1989). With respect

to this excess amount, the secured creditor is treated like an

unsecured creditor. See id.

3 See, e.g., Koopmans v. Farm Credit Servs. of Mid-America, ACA,

102 F.3d 874, 875 (7th Cir. 1996) (citing cases interpreting Chapter 13’s cramdown provision in a Chapter 12 case); In re

Smithwick, 121 F.3d 211, 213 (5th Cir. 1997) (describing the

cramdown provisions of Chapter 11 and Chapter 12 as analogous and citing to Chapter 11 cramdown cases in Chapter 12

(continued...)

or if the plan invokes 11 U.S.C. § 1325(a)(5)(B), known

colloquially as Chapter 13’s “cramdown” provision, a

Chapter 13 plan will be confirmed, as long as the other

conditions of confirmation are met. See Todd J. Zywicki,

Cramdown and the Code, 19 T. Marshall L. Rev. 241, 242-43

(1994). The cramdown provision permits a bankruptcy

court to confirm a debtor’s Chapter 13 plan over a secured creditor’s objection if “the plan provides that the

holder of such claim retain the lien securing such claim;

and 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.” 11 U.S.C. § 1325(a)(5)(B).2

 Both Chapter 11, see 11

U.S.C. § 1129(b)(2)(A)(i)(II), and Chapter 12, see 11 U.S.C.

§ 1225(a)(5)(B)(ii), contain analogous cramdown provisions. Courts have considered all three provisions to be

similar and have analyzed them interchangeably.3
No. 00-4167 7

3 (...continued)

case); In re Fowler, 903 F.2d 694, 697 (9th Cir. 1990) (finding that

analysis in Chapter 11 cramdown cases also applied to Chapter 12 case); United States v. Arnold, 878 F.2d 925, 928 (6th

Cir. 1989) (finding cramdown provisions of Chapter 12 and Chapter 13 to be identical).

Before a plan invoking the cramdown provision can

be confirmed, a bankruptcy court must make two determinations. First, it must determine the value of the collateral

as of the effective date of the plan. See Assocs. Commercial

Corp. v. Rash, 520 U.S. 953, 960-62 (1997). Once that value

is determined, the bankruptcy court must then decide upon a stream of payments over the course of the plan that

will provide the creditor with “value . . . not less than the

allowed amount of such claim.” 11 U.S.C. § 1325(a)(5)(B)(ii).

To compensate a secured creditor for its delay in receiving the value of the collateral, the creditor must receive

interest to account for the time value of money. See John K.

Pearson, et al., Ending the Judicial Snipe Hunt: The Search

for the Cramdown Interest Rate, 4 Am. Bankr. Inst. L. Rev. 35,

36-38 (1996). Thus, the second determination a bankruptcy court must make is the rate of interest to be charged.

This issue has caused significant disagreement among

the courts of appeals, bankruptcy courts and commentators. See Monica Hartman, Comment, Selecting the Correct

Cramdown Interest Rate in Chapter 11 and Chapter 13 Bankruptcies, 47 U.C.L.A. L. Rev. 521, 532-44 (1999) (discussing

the dominant approaches and the criticism each has received); David G. Epstein, Don’t Go and Do Something Rash

About Cram Down Interest Rates, 49 Ala. L. Rev. 435, 443-59

(1998) (discussing the divisions among courts of appeal);

Matthew Y. Harris, Comment, Chapter 13 Cram Down Interest Rates, 67 Miss. L.J. 567, 569-80 (1997) (discussing the current approaches and their critics).
8 No. 00-4167

4 In the case of an ambiguity in the statute, we sometimes

find helpful, as long as it is read with prudence and caution,

the legislative history of the provision. Although we have no

need to resort to this device here, we note in passing that it is

not very helpful to the task at hand. The House Report accompanying the 1978 Bankruptcy Act states that “[v]alue as of

the effective date of the plan . . . indicates that the promised

payment under the plan must be discounted to present value

as of the effective date of the plan. The discounting should be

based only on the unpaid balance of the amount due under

the plan, until that amount, including interest, is paid in full.”

H.R. Rep. 95-595 at 408, reprinted in 1978 U.S.C.C.A.N. 5963,

6364. The report does not address the appropriate method of

calculating the interest rate.

B.

Our ultimate task is to ascertain the policy decision

made by Congress in enacting this statutory provision. This

task requires that we understand the command of the

statute. We therefore begin, as we always must, with the

text of the statute. We focus on the plain wording of the

provision before us and on the statutory structure of which

that provision is a part.4

 Examining both the text of the

cramdown provision and the structure of the statute, we

think it is clear that Congress intended that, under

§ 1325(a)(5)(B)(ii), the secured creditor, who is being forced

to accept the debtor’s plan and to forfeit his right to foreclose and sell the collateral, is to be compensated for the

diminution of his present interest in the collateral. In short,

from the debtor’s perspective, it is necessary to pay for the

continued use of the collateral at a rate that will preserve

the value of the creditor’s interest.

In ascertaining the precise obligation of the debtor under the cramdown provision, it is helpful to compare
No. 00-4167 9

its requirements to the other provisions of § 1325(a)(5)

that offer alternative ways of protecting the interest of a

secured creditor in a Chapter 13 plan. We think it is reasonable to presume that Congress intended that each of

these options afford the secured debtor somewhat equivalent protection. Certainly, none of the three was designed

to provide the debtor or the creditor with a windfall.

The three possibilities are straightforward: (1) a creditor consents to the plan; (2) the debtor turns over the

collateral to the creditor; or (3) the debtor invokes the

cramdown. A creditor will only consent if the plan adequately protects its interests. See Pearson, supra, at 49-50

(describing the efforts of creditors and debtors to come to

an agreement to avoid bankruptcy litigation). If the creditor receives the collateral, then its rights under state law

are vindicated and its contract with the debtor is fulfilled;

in such a circumstance, the secured creditor’s rights are

not impaired by the Bankruptcy Code. The creditor may

still seek the unsecured portion of its claim in bankruptcy,

but it proceeds as an unsecured creditor and without the

preference the Code gives to secured creditors. Given

these two alternate modes of protection afforded by the

statute, it is logical to conclude that the interest rate under

the cramdown provision must put the creditor in a position reasonably equivalent to the position it would be in

had it consented to the plan or had it received and then

sold the collateral. There seems to be a consensus on this

point among courts of appeal that have addressed this issue. All agree that the rate should compensate the creditor for its delay in receiving the value of the collateral.

See, e.g., Koopmans v. Farm Credit Servs. of Mid-America,

ACA, 102 F.3d 874, 874 (7th Cir. 1996); In re Smithwick,

121 F.3d 211, 214 (5th Cir. 1997); In re Valenti, 105 F.3d 55,

59-60 (2d Cir. 1997); GMAC v. Jones, 999 F.2d 63, 66-67

(3d Cir. 1993); United Carolina Bank v. Hall, 993 F.2d 1126,
10 No. 00-4167

1129-30 (4th Cir. 1993); In re Fowler, 903 F.2d 694, 696-97

(9th Cir. 1990); In re Hardzog, 901 F.2d 858, 859-60 (10th

Cir. 1990); United States v. Arnold, 878 F.2d 925, 928-29

(6th Cir. 1989). “If the debtor chooses to maintain possession of the secured collateral . . . then the debtor must

compensate the creditor for the full value of the allowed

secured claim.” In re Valenti, 105 F.3d at 59.

C.

Despite the consensus on the objective of the statute,

courts have developed divergent formulae for calculating the interest rate. Even here, however, there is consensus about a starting point. Courts agree that a “market” rate

of interest should apply. See Koopmans, 102 F.3d at 874-75;

In re Smithwick, 121 F.3d at 214; In re Valenti, 105 F.3d at 63;

GMAC, 999 F.2d at 66-67; United Carolina Bank, 993 F.2d

at 1129-30; In re Fowler, 903 F.2d 694, 697 (9th Cir. 1990);

In re Hardzog, 901 F.2d at 859-60; Arnold, 878 F.2d at 927-28;

see also Pearson, supra at 40-41; Epstein, supra at 443. There

is disagreement, however, about what rate of interest will

adequately ensure that the creditor receives full value of

his secured claim.

1.

Under one approach, known as the “cost of funds method,” the interest rate is set at the rate the creditor would

have to pay to borrow the amount equal to the collateral’s value. See In re Valenti, 105 F.3d at 64 (holding that,

although cost of funds approach “more appropriately reflects the present value of a creditor’s allowed claim,” it

is difficult to administer, and therefore the interest rate

should be “fixed at the rate on a United States Treasury
No. 00-4167 11

instrument with a maturity equivalent to the repayment

schedule under the debtor’s reorganization plan”); 8

Lawrence P. King et al., Collier on Bankruptcy, ¶ 1325.06[3][B]

(15th ed. 2001) (advocating cost of funds approach). No

court of appeals has adopted the cost of funds method

without further refinement. In In re Valenti, the Second

Circuit expressed the view that this method was the best

of the approaches employed by the various federal

courts, but chose to adopt, for the sake of efficiency and

ease of administration, a standard rate for all cramdown

cases. See In re Valenti, 105 F.3d at 64. As we shall discuss

in more detail later, under the Second Circuit approach,

the Chapter 13 plan ought to set the interest rate at the

rate for Treasury instruments with a maturity equivalent

to the repayment schedule set forth in the plan of reorganization. This rate ought then to be adjusted to take into

account the creditor’s risk in not receiving the payments

scheduled under the plan. See id. The cost of funds’ approach is advocated by Collier on Bankruptcy and has been

adopted by some bankruptcy and district courts.

The cost of funds method is not without its flaws. First,

as the Ninth Circuit has observed, charging an interest

rate equal to the creditor’s borrowing rate forces the creditor to make a firm commitment to borrow (and repay)

funds secured only by the risky stream of payments under the debtor’s Chapter 13 plan and the creditor’s continuing lien on a depreciating piece of collateral. See In re Camino

Real Landscape Maint. Contractors, Inc., 818 F.2d 1503, 1506

(9th Cir. 1987). Such a rate does not give the secured creditor value equivalent to his allowed claim. Second, “it is

doubtful that the secured creditor has an unlimited supply of credit.” Michael E.S. Frankel, The Emerging Fixed

Cramdown Rate Regime, 2 U. Chi. L. Sch. Roundtable 643,

647 (1995). The cost of funds method presupposes that

a creditor will opt to exhaust some of its own credit in or-
12 No. 00-4167

der to replace the liquid capital it would have received after foreclosure and sale. Many Chapter 13 creditors are

not in a financial position to take on such a commitment and, consequently, the imposition of such terms on

them would not afford them the full value of their secured

interest and would deprive them of the protection of the

cramdown provision. Third, the cost of funds approach is

likely to provide a windfall to the debtor. As a practical

matter, it allows the debtor to step into his creditor’s

shoes and pay interest for use of the collateral on the terms

that he would enjoy if he were the secured creditor. This

approach does not compensate the creditor for the risk

that the Chapter 13 plan will fail and leave the creditor

with only the remedy of foreclosure and sale of depreciated collateral.

2.

A second approach, which is an adaption of the cost of

funds method, is the formula method. The Second Circuit, see In re Valenti, 105 F.3d 55, 63 (2d Cir. 1997), has

adopted the formula method; the Ninth Circuit, see In re

Fowler, 903 F.2d 694, 698 (9th Cir. 1990), and Eighth Circuit,

see United States v. Doud, 869 F.2d 1144, 1146 (8th Cir. 1989),

have endorsed the formula method but have not adopted

an exclusive, strict formula; instead those courts have

vested significant discretion in the bankruptcy courts.

“[T]he formula approach requires the court to adopt a riskfree market rate as a base, and then add a risk premium

corresponding to the court’s determination of the riskiness of the reorganization plan.” Pearson, supra, at 50. As

we have noted earlier, the Second Circuit uses the “rate on

a United States Treasury instrument with a maturity equivalent to the repayment schedule under the debtor’s re-
No. 00-4167 13

organization plan” and a risk premium of one to three

percent. In re Valenti, 105 F.3d at 64.

The formula method as adopted by our colleagues in

the Second Circuit has the advantage of being clear and

predictable. The base rate is readily ascertainable, and

there is a small range of risk adjustment. We do not believe, however, that the formula approach necessarily will

produce an interest rate that complies with the statutory

requirement that the creditor receive “value . . . [which is]

not less than the allowed amount of such claim” over

the course of the plan. 11 U.S.C. § 1325(a)(5)(B)(ii). Congress sought to protect the secured creditor who is forced

into the cramdown situation with protection against several factors: (1) the possibility that his continued credit to

the now-bankrupt debtor would not be repaid; (2) the

reality that the collateral will continue to depreciate either

at the same rate as it has in the past or at a different rate,

depending on the nature of the collateral and the prevailing market conditions; (3) the cost of continuing to service the loan in question. Congress left to the bankruptcy

courts the task of ascertaining the appropriate rate which

would protect against all of these factors. As this court

noted in Koopmans, market participants may choose different methods of calculating the market rate of interest for

the new situation precipitated by the debtor’s invocation

of the cramdown provision. See Koopmans, 102 F.3d at 875.

There are a multitude of possible creditor/debtor relationships subject to the cramdown provision. Each presents its

own risks; to adopt a standard interest rate with limited

discretion vested in the bankruptcy court only to take into

consideration the contingency of nonpayment would not

necessarily fulfill the statutory command that the creditor

be afforded the full value of his interest at the time the

reorganization plan becomes effective. The statutory provision necessarily leaves the particular questions of valua-
14 No. 00-4167

tion to the informed discretion of the bankruptcy court.

Our adoption of a rigid formula would unduly restrict

that discretion. The statute contemplates a more particularized inquiry, and we are bound by Congress’ policy

choice in this regard.

3.

A third approach, and the one that we adopted in

Koopmans, has been described as the “coerced loan” or the

“forced loan” method. Courts taking this view conceptualize the cramdown provision as forcing creditors to extend

a new line of credit to the debtor. Consequently, “the

creditor is entitled to the rate of interest it could have

obtained had it foreclosed and reinvested the proceeds in

loans of equivalent duration and risk.” Koopmans, 102

F.3d at 875. This approach views § 1325(a)(5)(B)(ii) as

“seek[ing] to put the secured creditor in an economic

position equivalent to the one it would have occupied had

it received the allowed secured amount immediately, thus

terminating the relationship between the creditor and the

debtor.” GMAC, 999 F.2d at 66-67; see also In re Smithwick,

121 F.3d at 214.

Koopmans was decided under the cramdown provision

of Chapter 12, which applies to family farms. See Koopmans, 102 F.3d at 874. We wrote that in a cramdown, “the

secured creditor is entitled to the ‘indubitable equivalence’

of its property interest, which means a stream of payments including interest that adds up to the present value

of its claim.” Id. at 874 (quoting In re Murel Holding Corp.,

75 F.2d 941, 942 (2d Cir. 1935) (L. Hand, J.)). The question there, as here, is: “At what rate of interest will [the

secured creditor] be as well off in the reorganization as if
No. 00-4167 15

it had been allowed to foreclose on and sell the [collateral].” Id. We held that “the creditor is entitled to the rate

of interest it could have obtained had it foreclosed and

reinvested the proceeds in loans of equivalent duration and

risk.” Id. at 875. We so held “[w]ithout implying that ‘primeplus’ is the only way to approximate the market rate of

interest—for participants in the market may use other

methods . . . .” Id.

Some courts, including the bankruptcy court in this

case, have read our holding in Koopmans to endorse the

formula method discussed above. It is true that we affirmed

the decision of the bankruptcy court, which had:

approximated this by starting with the prime rate of

interest, which it found prevalent for new 20-year wellsecured agricultural loans at the time, and adding 1.5

percent because it deemed this extension of credit

more risky than the norm in light of the Koopmans’

sorry repayment record. This produced a floating rate,

10.5 percent (9 percent + 1.5 percent) at the time the

bankruptcy court approved the plan.

Koopmans, 102 F.3d at 875 (emphasis added). However,

“this” was the “market rate of interest, at the time of the

hypothetical foreclosure, for loans of equivalent duration and risk.” Id. at 874-75. In Koopmans, the forced loan

approach produced a 10.5% interest rate based upon the

prime rate plus a risk factor; this result was a realistic

approximation of the interest rate that the creditor would

have received on a new loan of the same duration and

risk because the secured creditor in Koopmans was oversecured, and the chosen rate was the one for well-secured

agricultural loans. See id. at 874-75. Koopmans did not

endorse a formula approach and should not be read to

have endorsed such an approach. As we emphasized in

Koopmans, “[o]n this record, the market’s approach is prime-
16 No. 00-4167

plus.” Id. at 875. It is clear that Koopmans did not adopt the

prime-plus rate; it adopted the coerced loan method, the

specific application of which led to the prime-plus rate.

See id.

Only the Second Circuit has explicitly rejected the forced

loan method. See In re Valenti, 105 F.3d at 64. The court

in Valenti thought the coerced loan method inappropriate because it computes “ ‘present value’ to include

the profit that the creditor would have generated had

the creditor received the value of the collateral immediately.” Id. at 63. The court elaborated: “The objective

of § 1325(a)(5)(B)(ii) is to put the creditor in the same

economic position that it would have been in had it received the value of its allowed claim immediately. The

purpose is not to put the creditor in the same position

that it would have been in had it arranged a ‘new’ loan.”

Id. at 64. The court also opined that “the value of the creditor’s allowed claim does not include any degree of profit.”

Id. Like several other circuits, we respectfully decline

to adopt this analysis. Like the Third Circuit, see GMAC,

999 F.2d at 69, and the Fifth Circuit, see Smithwick, 121 F. 3d

at 214, we believe that to exclude the element of profit

from the fixing of the market rate would violate the statutory directive that the creditor be placed in the same

position as the one in which it would have been if it had

been allowed to end the lending relationship by repossessing the collateral.

By determining the 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, see GMAC, 999 F.2d at 67 n.4, we acknowledge that we are approximating, not necessarily duplicating precisely, the present value of the collateral to the

creditor as that statute requires. The continuation of the
No. 00-4167 17

5 As the Third Circuit noted in GMAC, an extension of the old

loan will not involve the usual initiation costs and the bankruptcy trustee will assume some, although not all of the monitoring functions that must be undertaken in the administration

of the loan. Other “relational costs” will also be less. See GMAC,

999 F.2d at 68. On the other hand, the usual “equity cushion”

accompanying loans of this sort may be absent in the case of

a coerced extension. See id. “An equity cushion exists when

the appraised value of the collateral is greater than the value of the loan.” Id. In a free market, uncoerced by the cramdown provision, a lender might well insist on a sizable equity

cushion that is missing here. In a free market, the lender of an

extension also might insist on a higher rate.

old contract rate to the bankrupt debtor under the supervision of the bankruptcy court will involve some risks

that would not be incurred in a new loan to a debtor not

in default and also result in some economies.5

 Nevertheless, like our colleagues in the Third Circuit, see GMAC,

999 F. 2d at 68-69, and Fifth Circuit, see Smithwick, 121 F.3d

at 214, we believe that the old contract rate will yield a rate

sufficiently reflective of the value of the collateral at the

time of the effectiveness of the plan to serve as a presumptive rate. Therefore,

[i]n the absence of a stipulation regarding the creditor’s

current rate for a loan of similar character, amount

and duration, we believe it would be appropriate for

bankruptcy courts to accept a plan utilizing the contract rate if the creditor fails to come forward with

persuasive evidence that its current rate is in excess of

the contract rate. Conversely, utilizing the same

rebuttable presumption approach, if a debtor proposes

a plan with a rate less than the contract rate, it would

be appropriate for a bankruptcy court to require the
18 No. 00-4167

debtor to come forward with some evidence that the

creditor’s current rate is less than the contract rate.

GMAC, 999 F.2d at 70-71. The approach we endorse today will, in most cases, provide the best approximation

of the proper rate. Thus, the bankruptcy courts are vested

with significant discretion in the application of the method described in this opinion.

The district court properly determined that our earlier

decision in Koopmans determined that the correct approach

in ascertaining the appropriate interest rate in a cramdown

situation is the coerced loan approach. Nevertheless, because our decision today sufficiently elaborates on that

methodology and gives further guidance to the bankruptcy

courts on this matter, we believe that the best course is

to remand the case to the district court with instructions

that the judgment of the bankruptcy court be vacated

and that further proceedings consistent with this opinion

be held in the bankruptcy court. We believe that fairness

requires that both parties be afforded an opportunity to

address the factors that we have identified in this opinion and that the bankruptcy court be given the opportunity to employ the methodology that we have set forth

today.

Conclusion

Accordingly, the judgment of the district court is vacated

and the case is remanded with instructions. The parties

shall bear their own costs of this appeal.

VACATED and REMANDED
No. 00-4167 19

ROVNER, Circuit Judge, dissenting. My colleagues hold

that section 1325(a)(5)(B)(ii) entitles a creditor to the

same interest rate that it would charge on a new loan to

someone who is situated similarly (except for the bankruptcy) to the debtor. By its own account, the interest

rate that SCS charges its customers for sub-prime, used

car loans is whatever the market will bear. In re Till, No. 99-

13425-13, Transcript of Continued Hearings on Trustee’s

Motion to Dismiss, etc., at 34, 38 (Bankr. S.D. Ind. Feb. 29,

2000). In the Tills’ case, that was an eye-popping 21 percent. Compelling a debtor to pay such a burdensome rate

of interest diminishes the feasibility of the Chapter 13

plan, see § 1325(a)(6); C. Frank Carbiener, Present Value in

Bankruptcy: The Search for an Appropriate Cramdown Discount Rate, 32 S.D. L. REV. 42, 43 (1987), reduces the likelihood that unsecured creditors will receive any remuneration, see In re Scott, 248 B.R. 786, 793 (Bankr. N.D. Ill. 2000),

and is inconsistent with the fresh start that Chapter 13

was intended to provide to debtors, see Local Loan Co. v.

Hunt, 292 U.S. 234, 244, 54 S. Ct. 695, 699 (1934); H. Rep. No.

95-595, at 117 (1977), reprinted in 1978 U.S.C.C.A.N. 5963,

6078. First and foremost, however, I believe it is contrary

to the language and purpose of the statute.

Chapter 13+s “cram down” provision obligates the debtor

over the life of the plan to pay his creditor an amount

of money “not less than the allowed amount” of the claim.

11 U.S.C. § 1325(a)(5)(B)(ii). Of course, a claim can only

be allowed to the extent that it is secured, see 11 U.S.C.

§ 506(a), and so, when the creditor is under-secured as

SCS was, the “allowed amount” of the claim corresponds

to the value of the collateral underlying the loan (here,

the automobile), id. See ante at 6 n.2; Associates Commercial Corp. v. Rash, 520 U.S. 953, 961, 117 S. Ct. 1879,

1884-85 (1997). This means that the debtor must commit

to a stream of payments that ultimately will compensate
20 No. 00-4167

the creditor for the present value of the collateral that

the debtor has chosen to keep. Ante at 7. Furthermore,

because the debtor will be paying the creditor for the

collateral over the three- to five-year life of the plan, the

statute obligates the debtor to pay interest to compensate

the creditor for the delay. E.g., G.M.A.C. v. Jones, 999 F.2d

63, 66 (3d Cir. 1993); United Carolina Bank v. Hall, 993 F.2d

1126, 1129-30 (4th Cir. 1993); In re Bellamy, 962 F.2d 176, 185-

86 (2d Cir. 1992), abrogated on other grounds by Nobelman

v. American Sav. Bank, 508 U.S. 324, 113 S. Ct. 2106 (1993).

In this way, the statute recognizes the time value of

money and attempts to place the creditor in the same

position it would have been in had the debtor surrendered

the collateral, enabling the creditor to liquidate it and

reinvest the proceeds. See Rash, 520 U.S. at 962, 117 S. Ct.

at 1885; Hall, 993 F.2d at 1130; Jones, 999 F.2d at 66. As for

the rate of interest, courts are virtually unanimous in

the view that the interest rate imposed under section

1325(a)(5)(B)(ii) should be a “market” rate. Ante at 10;

Monica Hartman, Comment, Selecting the Correct Cramdown Interest Rate in Chapter 11 and Chapter 13 Bankruptcies,

47 UCLA L. REV. 521, 528 (1999); Matthew Y. Harris,

Comment, Chapter 13 Cram Down Interest Rates: Another

Day, Another Dollar—A Cry for Help in Ending the Quest for

the Appropriate Rate, 67 MISS. L. J. 567, 569 (1997); Todd J.

Zywicki, Cramdown and the Code: Calculating Cramdown

Interest Rates Under the Bankruptcy Code, 19 T. MARSHALL L.

REV. 241, 245 (1994). They are divided, however as to which

among several market rates most fairly compensates the

creditor for the delay in receiving the value of its collateral—the rate at which the creditor could borrow money to

replace the collateral that the debtor has chosen to keep

(the “cost of funds” approach), the prime rate or a U.S.

Treasury rate adjusted upward for the risk of nonpay-
No. 00-4167 21

ment (the “formula” approach), or the rate at which the

creditor would make the same type of loan to someone like

the debtor (the “coerced loan” approach).

The coerced loan approach that my colleagues embrace

posits that the debtor’s decision to keep the collateral in

effect compels the creditor to extend a new loan to the

debtor for the value of the collateral. Ante at 14; see

Jones, 999 F.2d at 67, quoting Memphis Bank & Trust Co. v.

Whitman, 692 F.2d 427, 429 (6th Cir. 1982); In re Hardzog,

901 F.2d 858, 860 (10th Cir. 1990). It further presumes that

had the debtor instead surrendered the collateral, the

creditor would have converted the collateral into cash

and invested the money in the same type of loan that the

debtor originally obtained—here, a sub-prime used car loan

carrying a high rate of interest. See ante at 14, citing

Koopmans v. Farm Credit Servs. of Mid-America, ACA, 102

F.3d 874, 875 (7th Cir. 1996). Based on the notion that the

debtor’s retention of the collateral has deprived the creditor

of this investment opportunity, the coerced loan camp

reasons that the debtor must pay the same rate of interest

the creditor could have earned had it loaned the amount

of the collateral to someone else. Ante at 14.

The sole deprivation that can be charged to the debtor,

however, is the retention of the collateral, not the investment that the creditor presumably would have made with

the proceeds of that collateral. See In re Valenti, 105 F.3d 55,

63-64 (2nd Cir. 1997), abrogated on other grounds by Rash, 520

U.S. 953, 117 S. Ct. 1879. Had the Tills elected to surrender

the collateral, all that SCS would have received is a 1991

Chevrolet S-10 truck, not a new loan package. It would have

been SCS’ responsibility to sell the truck and then make a

new loan with the proceeds of the sale; and, of course, there

would have been costs associated with both of those

transactions. See Hall, 993 F.2d at 1131; see also Koopmans,
22 No. 00-4167

102 F.3d at 874 (deeming the appropriate question to be

“[a]t what rate of interest will [the secured creditor] be as

well off in the reorganization as if it had been allowed to

foreclose on and sell the [collateral]”). Requiring the debtor to pay the creditor the same rate of interest that the

creditor would charge on a new loan to another consumer

thus over-compensates the creditor, because it fails to

account for the costs that the creditor would incur in

funding the new loan. See 8 COLLIER ON BANKRUPTCY,

¶ 1325.06, p. 1325-35-36 (Lawrence P. King, et al., eds., 15th

rev. ed. 2002); In re Ivey, 147 B.R. 109, 116 (M.D.N.C. 1992),

overruled by Hall, 993 F.2d 1126.

In this respect, the costs of funds approach comes closer to recognizing the economic consequences of the debtor’s decision to keep the collateral. See Valenti, 105 F.3d

at 64. Strictly speaking, the debtor’s retention of the collateral does not preclude the creditor from making a new

loan, it simply deprives the creditor of an asset that the

creditor could convert into money and use to fund the

new loan. A straightforward way to account for that

deprivation is to ask what it would cost the creditor to

obtain the cash equivalent of the collateral from an alternative source. 8 COLLIER, ¶ 1325.06, p. 1325-35; In re Benson,

9 B.R. 854, 858 (Bankr. N.D. Ill. 1981); see also Carbiener, 32

S.D. L. REV. at 63 (noting that this is consistent with law’s

general approach to mitigation of damages). Assume,

for example, that SCS could borrow the cash equivalent of

the Tills’ truck at an interest rate of 10 percent and then

lend that money to another consumer at a rate of 21 percent. Under that scenario, the cost of the Tills’ decision to

keep the truck would not be the full 21 percent that SCS

would earn on its investment in another consumer loan,

but the 10 percent that SCS would have to pay to borrow the

money it otherwise would have obtained by liquidating

the truck. Critics of the cost of funds approach point out
No. 00-4167 23

that a creditor is unlikely to have an unlimited supply of

credit and that it may be impractical and unjust to expect

the creditor to borrow the funds necessary to replace the

collateral that the debtor has chosen to keep. See ante at 11-

12; Hall, 993 F.2d at 1130. Whether the creditor can, will,

or should borrow to replace the funds it otherwise would

realize from the collateral is entirely beside the point,

however. The task at hand is to decide what rate of interest will reasonably compensate the creditor for the delay

in receiving the value of the collateral from the debtor.

See Zywicki, 19 T. MARSHALL L. REV. at 257. The cost of

funds approach better approximates this rate by examining what it would cost the creditor to replace the collateral with money from another source. 

The principal disadvantage of the cost of funds method

is that it calls for an individualized inquiry that will burden the parties and the court and may lead to disparate

results depending on an individual creditor’s cost of

borrowing. Valenti, 105 F.3d at 64; Hardzog, 901 F.2d at 860.

Given the relatively small amounts of money that are

involved in a Chapter 13 proceeding, any approach that

invites litigation and adds to the cost of the proceeding

is undesirable. See Carbiener, 32 S.D. L. REV. at 59-60. The

rate that ought to prevail under section 1325(a)(5)(B)(ii)

is one that is predictable to the parties, and thus readily

susceptible to agreement between them without court

intervention. See § 1325(a)(5)(A).

In those respects, a formulaic approach that employs

as a base rate of interest an easily referenced rate like the

prime rate or the rate on U.S. Treasury instruments, and

which allows for modest enhancements to the base to

account for the risk of nonpayment, is superior, and I

would commend it to the court. See Valenti, 105 F.3d at 64;

United States v. Doud, 869 F.2d 1144, 1145 (8th Cir. 1989);
24 No. 00-4167

1 This is essentially the approach that the bankruptcy court

followed here, albeit after hearing testimony as to the prime

rate and the prevailing rates of interest in the market for automobile loans. See In re Till, No. 99-13425-FJO-13, Order Confirming Amended Plan (Bankr. S.D. Ind. June 27,2000). A formula

(continued...)

Carbiener, 32 S.D.L.REV. at 63-65. The Treasury rate and the

prime rate are both easily ascertainable rates that spare the

court and the parties of the need for a potentially timeconsuming and expensive inquiry into prevailing market

rates of interest available to either the debtor or creditor.

Each reflects two of the three components of a market

interest rate—expected inflation, and “real” interest. See

Hartman, 47 UCLA L. REV. at 531. The prime rate also

includes the third component—the risk of nonpayment

(see id.)—and in that sense may represent a better starting point than the Treasury rate. See Koopmans, 102 F.3d

at 875; Hartman, 47 UCLA L. REV. at 545. At the same

time, because the prime rate is available to only the most

credit-worthy borrowers, its risk component is arguably

too small to compensate the creditor for the risk of nonpayment by a Chapter 13 debtor. See Koopmans, 102 F.3d

at 875. Either rate, in any event, can be adjusted upward

to account for the greater risk of nonpayment by a debtor

in bankruptcy. Id. Courts employing the formula approach

recognize that enhancements of one hundred to three

hundred basis points would normally suffice for this purpose. E.g., Valenti, 105 F.3d at 64. What level of enhancement is called for in the individual case is a question wisely

left to the bankruptcy court, which is better situated to

assess the risk of nonpayment and may adjust the rate

accordingly without extensive evidentiary hearings. See

Hartman, 47 UCLA L. REV. at 545-46; Harris, 67 MISS. L.J. at

582. 1
No. 00-4167 25

1 (...continued)

approach that starts with an easily referenced prime or Treasury rate and calls for an enhancement commensurate with the

risks posed by the debtor’s reorganization plan would largely

obviate the need for such testimony. See Hartman, 47 UCLA L.

REV. at 546-47.

The lower interest rate produced by the formula approach

(or for that matter by the cost of funds approach)—seemingly piddling by comparison with the rate produced by

the coerced loan approach in a sub-prime loan case like

this one—may at first blush appear inadequate to compensate the creditor for the costs that the involuntarily

extended lending relationship imposes, including in

particular the risk that the debtor will be unable to discharge his obligations under the reorganization plan.

See ante at 13; see also Jones, 999 F.2d at 67, 68-69; In re

Camino Real Landscape Maintenance Contractors, Inc., 818

F.2d 1503, 1506 (9th Cir. 1987). But courts should consider

the extent to which the creditor has already been compensated for this risk in the rate of interest that it charged

to the debtor in return for the original loan. Sub-prime

lenders charge exorbitant rates of interest precisely because there is a high risk that their borrowers will default

on their loan obligations. See Kathleen C. Engel and Patricia

A. McCoy, A Tale of Three Markets: The Law and Economics

of Predatory Lending, 80 TEX. L. REV. 1255, 1265-66 (2002);

Mavis W. Kennedy, Don’t Let Your Client Be Labeled a

Predatory Lender, 89 ILL. B. J. 595, 597 (2001). These lenders

understand that a significant number of their borrowers will not make good on their obligations—may, in fact,

end up in bankruptcy. Yet, they continue to make highrisk loans because the money they receive from nondefaulting borrowers is enough to offset that risk; they

would not remain in business otherwise. In short, the
26 No. 00-4167

high interest rate on the Tills’ used car loan already accounted for the very possibility of bankruptcy (and with

it, the Tills’ ability to keep their truck rather than surrender it) that has come to pass. Awarding SCS a second risk premium pursuant to section 1325(a)(5)(B)(ii)

may well be unnecessary and inappropriate.

Courts must also have in mind the ways in which bankruptcy law and procedure also work to compensate the

creditor for the risk of nonpayment. Insofar as the typical

automobile loan is concerned, the manner in which the

loan collateral is valued for purposes of the bankruptcy

itself provides the creditor with substantial compensation. Because the automobile typically is the only

collateral securing the loan, and because automobiles

depreciate relatively quickly, the creditor typically finds

itself under-secured. That brings into play section 506(a)

of the Code, which, as I noted at the outset, limits the

amount of the creditor’s allowed secured claim to the value

of the automobile itself. In Rash, however, the Supreme

Court held that for purposes of section 506(a), that value

is to be determined by asking not how much the creditor

could be expected to realize upon foreclosure and liquidation of the collateral, but by how much the debtor would

have to pay in order to replace the collateral. 520 U.S.

at 965, 117 S. Ct. at 1886. As Chief Judge Wedoff has

pointed out, the replacement value of an automobile to the

debtor will normally be significantly higher than the wholesale value that the creditor typically could expect to realize

if it repossessed and liquidated the vehicle. Scott, 248

B.R. at 792. So by requiring the debtor who keeps the

collateral to pay his creditor an amount equal to the replacement cost of the vehicle, the Supreme Court has

already ensured that the creditor will be afforded significant

compensation for the risk of non-payment. Id.; see also

David G. Epstein, Don’t Go and Do Something Rash About
No. 00-4167 27

Cram Down Interest Rates, 49 ALA. L. REV. 435, 455 n.79

(1998). Consequently, “applying a rate of interest that fully

reflects risk of nonpayment—like the contract rate in the

present case—to a secured claim amount that already

includes substantial ‘risk protection’ results in a windfall

for the secured creditor, to the detriment of unsecured

creditors.” Scott, 248 B.R. at 792, 793. Other provisions of

the Code also operate, albeit more modestly, to reduce

the risk of non-payment along with the costs occasioned

by the debtor’s election to retain the collateral: (1) Before

confirming the Chapter 13 plan, the Bankruptcy Court

must be convinced that it is feasible in the sense that

the debtor has the resources to meet his obligations,

§ 1325(a)(6); (2) wage orders can be used to ensure that the

debtor does not inadvertently miss payments; (3) unsecured

debt can be reduced or restructured; and (4) collection

costs to the creditor are eliminated, while administrative costs are borne primarily by the Chapter 13 trustee.

See In re Carson, 227 B.R. 719, 724 (Bankr. S.D. Ind. 1998); see

also Jones, 999 F.2d at 69 & n.8; Carbiener, 32 S.D. L. Rev.

at 60-62.

I believe that my colleagues are correct to read this court’s

opinion in Koopmans as a nod in the direction of the coerced

loan theory that they have elected to adopt; still, Koopmans ought not to be viewed as dispositive of the question we decide today. See Epstein, 49 ALA. L. REV. at 454

(“[Koopmans] can better be described as a case . . . that

does not require bankruptcy courts to use any particular

approach to determine the market rate.”); Carson, 227 B.R.

at 721 n.5 (noting that Koopmans “does not fit neatly into

any of the three categories”). Although the language of

the Koopmans opinion endorses the coerced loan approach, 102 F.3d at 875, the decision actually affirms the

bankruptcy court’s decision to use the prime rate with

an appropriate risk enhancement, id. Indeed, courts and
28 No. 00-4167

commentators have had some difficulty deciding where

in the ongoing debate over the appropriate interest rate

Koopmans came down, as evidenced by the fact that we

have been credited with endorsing all three of the major

approaches. See, e.g., In re Smithwick, 121 F.3d 211, 214

(5th Cir. 1997) (construing Koopmans as adopting the coerced loan approach), cert. denied, 523 U.S. 1074, 118 S. Ct.

1516 (1998); Epstein, 49 ALA. L. REV. at 454 (noting that

Koopmans actually approved the bankruptcy court’s use

of the formula approach); Harris, 67 Miss. L. J. at 580

& n.74 (construing Koopmans as approving cost of funds

approach); Timothy D. Moratzka, Chapter 13 Interest Rate

Pegged to Treasury Rate in Second Circuit, 14 AM.BANKR.INST.

J. 16, 16 (1997) (same). In truth, the consequences of the

choice were modest in Koopmans, because the nature of

the debt at issue in that Chapter 12 case (an over-secured

farm mortgage) rendered the gap between the prime

rate and the prevailing market rate for comparable agricultural loans small—indeed, once the bankruptcy court

had enhanced the prime rate for additional risk, the two

rates were roughly equivalent. See 102 F.3d at 875; Koopmans

v. Farm Credit Servs., 196 B.R. 425, 428 (N.D. Ind. 1996). By

contrast, the disparity here (as in many other Chapter 13

cases involving sub-prime consumer loans) is dramatic,

so that use of a market rate for a comparable consumer

loan will have adverse consequences that we did not

address in Koopmans.

The search for a “market” rate that will place the creditor

in the same position that it would have been in had it been

able to foreclose on the loan is in a sense futile, because

given a choice, a creditor would almost always prefer

to take possession of the collateral immediately rather

than accept a stream of payments over time for the

value of that collateral. See Rash, 520 U.S. at 962-63, 117 S.

Ct. at 1885; see also Ivey, 147 B.R. at 117-18. That choice

has been taken away from the creditor, however, by opera-
No. 00-4167 29

tion of a statute that aims to help the debtor by allowing him to keep an asset—like an automobile—which may

be vital to his ability to generate income and attend to

his family’s day-to-day needs. Because this situation is a

creature of legislation rather than the market, the policy

considerations reflected in the statute cannot be ignored.

A creditor is entitled to interest sufficient to compensate

it for the delay in receiving the value of the collateral

securing the loan, and the rate at which interest is ordered

must reflect the risk of non-payment. To some extent, as I

have noted, SCS has already been compensated for that

risk through the high rate of interest it originally charged

the Tills and other borrowers like them; that rate took into

account the very possibility of default that came to pass. To

the extent that the Tills’ retention of the truck imposes

new risks on SCS, the valuation of collateral at its replacement cost provides a substantial cushion to account

for those risks. Overcompensating the creditor by demanding that the debtor pay interest as high as the market

for high-risk loans will bear greatly increases the burden

on the debtor, and far from the fresh start that Chapter

13 was intended to give him, puts him back in the very

situation that brought him into bankruptcy. That burden works to the detriment not only of the debtor, but to

that of his other creditors, secured and unsecured.

I respectfully dissent.

A true Copy:

Teste:

 _____________________________

Clerk of the United States Court of 

Appeals for the Seventh Circuit 

USCA-97-C-006—8-21-02