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Till v. SCS Credit Corp.
Citations: 158 L. Ed. 2d 787; 124 S. Ct. 1951; 541 U.S. 465; 2004 U.S. LEXIS 3385; 17 Fla. L. Weekly Fed. S 282; 51 Collier Bankr. Cas. 2d 643; 72 U.S.L.W. 4358; 43 Bankr. Ct. Dec. (CRR) 2Docket: 02-1016
Court: Supreme Court of the United States; May 17, 2004; Federal Supreme Court; Federal Appellate Court
In the case of Lee M. Till and Amy Till v. SCS Credit Corporation, the Supreme Court addressed the requirements for an individual debtor's proposed plan under Chapter 13 of the Bankruptcy Code. The plan must accommodate secured creditors by either obtaining their acceptance, surrendering the property securing the claim, or providing a lien and a promise of future distributions that equal or exceed the allowed claim amount. This third option, known as the "cram down option," can be enforced over creditors' objections and often involves installment payments. The Court reviewed four different methodologies for determining the present value of these payments, as various courts and judges had differing opinions. The case originated when the Tills purchased a used truck, financing it through a retail installment contract assigned to SCS Credit Corporation. Following default on payments, they filed for Chapter 13 bankruptcy, where SCS’s secured claim was limited to the truck's value of $4,000, with the remainder deemed unsecured. The bankruptcy filing halted debt collection activities from various creditors and established a bankruptcy estate, which included the truck. Petitioners proposed a debt adjustment plan requiring them to allocate $740 of their monthly wages to a trustee for three years, who would prioritize payments to administrative costs, the IRS, secured creditors, and unsecured creditors. The plan included a 9.5% interest rate on the secured portion of the respondent's claim, calculated by adding a risk premium to the national prime rate. Respondent objected, asserting entitlement to a 21% interest rate based on its practices in the subprime lending market. Respondent provided expert testimony supporting the higher rate, while petitioners presented a professor's opinion that the 9.5% rate was reasonable within Chapter 13 guidelines. The bankruptcy trustee supported the formula rate for its market relevance and objectivity. The Bankruptcy Court confirmed the plan, overruling the objection. However, the District Court reversed the decision, stating bankruptcy courts must set cram down interest rates at levels reflective of what creditors could earn if they foreclosed and reinvested. Citing respondent's testimony, the District Court determined 21% was appropriate. The Seventh Circuit affirmed this reasoning with modifications, emphasizing that the focus should be on the interest rate a creditor would obtain from a new loan to a similarly situated debtor outside bankruptcy. The court recognized that although the original contract rate of 21% would not fully account for the unique risks of lending to a bankrupt debtor, it should serve as a presumptive cram down rate subject to rebuttal. The case was remanded to the Bankruptcy Court for further proceedings to allow both parties to challenge the presumptive rate. Judge Rovner dissented, arguing that the majority's use of a presumptive contract rate overcompensates secured creditors by neglecting the costs associated with issuing new loans. Instead of focusing on comparable loan markets, she favored the Bankruptcy Court's formula approach or a "cost of funds" approach, which would assess the actual cost a creditor incurs to secure cash equivalent to the collateral from alternate sources. Rovner acknowledged that the interest rates from these methods might be minimal compared to the coerced loan rate but emphasized the need for courts to consider how much risk the creditor has already been compensated for in the original loan's interest rate. The court granted certiorari and reversed the previous decision, noting the Bankruptcy Code offers limited guidance regarding the appropriate interest rates—formula rate, coerced loan rate, presumptive contract rate, or cost of funds rate—relevant to the cram down provision found in 11 U.S.C. 1325(a)(5)(B). This provision does not explicitly mention "discount rate" or "interest," but mandates that the property distributed to a secured creditor must equal or exceed the value of the creditor's allowed secured claim, here $4,000. While a lump-sum payment satisfies this requirement, discharging debt through a series of payments complicates matters, as future payments are worth less than immediate ones due to factors like inflation and nonpayment risk. Bankruptcy courts must therefore select an interest rate that adequately compensates creditors for these concerns. Three considerations inform this choice: 1. The Bankruptcy Code mandates discounting deferred payments to present value, suggesting Congress intended for bankruptcy judges to apply this approach when determining interest rates. 2. Chapter 13 allows bankruptcy courts to modify creditor rights for secured claims not tied to the debtor's principal residence, providing clear authority to adjust payment terms based on changing circumstances. 3. The debtor's bankruptcy indicates overextension and default risk, but the court-managed estate reduces some of that risk in repayment scenarios. The cram down provision requires an objective approach from a creditor's perspective, focusing on the present value of property rather than matching pre-bankruptcy loan terms. It does not necessitate that the cram down loan terms make the creditor indifferent between foreclosure and future payments, as creditors would typically prefer foreclosure when faced with a cram down. Courts determining cram down interest rates should treat similarly situated creditors uniformly and ensure that the debtor's interest payments adequately compensate creditors for the time value of money and default risk. The excerpt critiques several approaches to setting cram down rates: 1. **Coerced Loan Approach**: This method increases evidentiary burdens by requiring market comparisons for similar loans, which strays from the bankruptcy court's typical focus. It also risks overcompensating creditors by factoring in irrelevant transaction costs and profits. 2. **Presumptive Contract Rate Approach**: While it allows some creditor-specific evidence, it leads to absurd outcomes by granting inefficient lenders higher rates than well-managed ones. It requires debtors to gather extensive information about creditors, imposing additional burdens. 3. **Cost of Funds Approach**: This approach incorrectly emphasizes the creditor's creditworthiness over the debtor's situation and shares flaws with the previous methods, such as requiring expert testimony about creditors' financial conditions. It can result in creditworthy lenders receiving lower rates compared to less reliable ones. Overall, the document argues for a focus on objective economic analysis rather than individual creditor circumstances in determining cram down rates. The formula approach to determining interest rates in bankruptcy cases is based on the national prime rate and addresses the risks associated with lending to bankrupt debtors. This method adjusts the prime rate to account for increased risks of nonpayment, with the adjustment size depending on factors such as the estate's circumstances, the security's nature, and the reorganization plan's feasibility. A bankruptcy court must hold a hearing to assess the appropriate risk adjustment, allowing both debtors and creditors to present evidence, much of which is already included in the debtor's filings. This approach shifts the evidentiary burden to creditors, who have better access to external information. The formula approach is deemed straightforward and objective, contrasting with other methods that may involve more complex and costly proceedings. The resulting "prime-plus" interest rate reflects market conditions and the specifics of the loan rather than the creditor's prior dealings with the debtor. While the Bankruptcy Court in this case approved a 1.5 risk adjustment, other courts have typically approved adjustments ranging from 1% to 3%. Disagreement exists regarding the failure rates of Chapter 13 plans, but the court must ensure that the interest rate is sufficient to compensate creditors without jeopardizing the plan’s viability. The dissenting view that endorses the presumptive contract rate relies on assumptions about market efficiency and default risks, which the document suggests are unlikely to align with congressional intent in the Bankruptcy Code. The dissent incorrectly assumes that subprime loans operate within a fully informed free market, a premise not supported by Congress's intentions when enacting Chapter 13. The subprime market exhibits imperfections, evidenced by tie-in transactions where vehicle prices are negotiated while financing terms are seller-determined, and extensive federal and state regulations that indicate a need to protect borrowers from potential exploitation by unregulated lenders. Congress enacted the Truth in Lending Act to enhance consumer knowledge and foster competition in credit markets. The dissent further suggests that a debtor's prebankruptcy default indicates a high likelihood of failure for a confirmed Chapter 13 plan. However, the intent of Congress was to ensure that qualifying plans have a high probability of success. While some bankruptcy judges may confirm too many risky plans, the solution lies in stricter confirmation criteria rather than imposing excessively high default cram down rates, which would increase default risk. Additionally, the interpretation of 11 U.S.C. § 1325(a)(5)(B)(ii) does not support including compensation for default risk in cram down rates; rather, it should incorporate the full components of present value, including nonpayment risks. The presumption of successful bankruptcy plans aligns more closely with Congress's objectives than the dissent's focus on debtor instability. Furthermore, the cram down provision applies to both subprime and prime loans, as well as to changes in circumstances that affect the debtor’s insolvency, suggesting that a risk-adjusted prime rate would more accurately reflect current creditor costs and exposure than a contract rate established under different conditions. Relevant information about the debtor's and creditor's circumstances, the nature of the collateral, and the market for comparable loans should be equally accessible to both parties, theoretically leading to a uniform final interest rate under both formula and presumptive contract rate approaches. The disagreement lies not in which final rate to adopt, but in determining which party bears the burden of rebutting the presumptive rate. Justice Scalia outlines four factors affecting risk premium: (1) probability of plan failure, (2) rate of collateral depreciation, (3) liquidity of the collateral market, and (4) administrative expenses of enforcement. Debtors are likely to include information about these factors in their bankruptcy filings, while creditors have greater access to necessary market information. The formula approach, which starts with a low interest rate estimate and places the burden of proof on creditors, supports a more accurate interest rate calculation. Arguments for applying the presumptive contract rate approach based on limited data should be directed to Congress, as the current interpretation of the statutory scheme remains intact. The Court of Appeals' judgment is reversed, and the case is remanded to the Bankruptcy Court for further proceedings. The case addresses the method for discounting deferred payments to present value and the compensation owed to creditors in determining the appropriate discount rate. Both the plurality and dissent agree that future payment promises are worth less than immediate payments due to nonpayment risk, but they differ on the starting point for calculating this risk. The statute mandates that the value of property distributed under the plan must equal the secured creditor's claim at the plan's effective date, not requiring a debtor-specific risk adjustment that equates the secured creditors' position to that of a new loan. This interpretation highlights a departure from ensuring secured creditors are not undercompensated in bankruptcy proceedings. When the language of a statute is clear, courts are obligated to enforce it as written, provided the interpretation is not absurd. Under Section 1325(a)(5)(B), a bankruptcy court must determine three key elements for each allowed secured claim: the allowed amount of the claim, the property to be distributed under the plan, and the value of that property as of the effective date of the plan. The central issue in this case involves how to ascertain this value, emphasizing the time value of money; for instance, $4,000 today is worth more than the same amount received 17 months later due to potential interest earnings. According to the precedent set in Rake v. Wade, a creditor receives the present value of a claim if the total deferred payments include both the claim amount and sufficient interest to offset the diminished value from delayed payments. The respondent's position, supported by both the plurality and dissent, suggests that the interest rate must account for the risk of nonpayment, but the statute does not mandate this. It only necessitates the valuation of the property being distributed, not the promise of future payments. To comply with Section 1325(a)(5)(B)(ii), a plan must propose an interest rate that compensates the creditor for the opportunity cost of receiving property later instead of immediately. Typically, a risk-free rate would be adequate in most cases involving cash payment streams. Concerns regarding whether the prime rate, even with slight risk adjustments, adequately compensates secured creditors for default risks are noted, but such policy issues do not affect statutory interpretation. Thus, while there is a risk of nonpayment in a series of future payments, Section 1325(a)(5)(B)(ii) does not require that this risk be factored into the property value assessment. A debtor's risk of nonpayment can influence the value of property distributed in a Chapter 13 bankruptcy, but "property" encompasses more than just cash, including notes, stocks, and real estate. When property is a note, the risk of nonpayment is inherently part of its value, but this does not imply a statutory requirement for risk adjustment. The respondent asserts that the interest rate must reflect the risks and costs of a debtor's future payment promises, arguing that protections for creditors are paramount in section 1325(a)(5)(B)(ii) of the Bankruptcy Code. However, this interpretation misreads the statute, which does not mandate risk adjustments, and overlooks existing creditor protections, such as those ensuring creditors receive the allowed amount of their claims. The case of Associates Commercial Corp. v. Rash supports the notion that secured claims should be valued based on replacement value rather than foreclosure value due to the risks involved in debtors retaining and using the property. Furthermore, the statute contains various provisions aimed at protecting creditors, indicating that Congress did not intend to impose additional risk adjustments for debtors. The allowed secured claim amount is $4,000, and the proposed Chapter 13 Plan outlines a repayment strategy of $740 monthly for a maximum of 36 months, with the trustee distributing these payments to creditors, including an interest rate proposal of 9.5% for the respondent's secured claim. The legal document clarifies that the "property to be distributed" under the Plan comprises cash payments, specifically up to 36 monthly payments of $740 each, rather than merely a promise of these payments. It discusses the appropriateness of a proposed 9.5% interest rate to compensate for receiving $4,000 over time instead of an immediate payment. The analysis concludes that the 9.5% rate, being higher than the risk-free rate, is adequate compensation. The author contends that a bankruptcy judge should not reduce interest rates merely for feasibility but should ensure that secured creditors are fully compensated for default risks. There is agreement with the plurality on several points, including the potential failure of confirmed Chapter 13 plans and the necessity for adequate compensation for deferred payments. However, disagreement arises regarding the method for determining interest rates; the author advocates for using the contract rate—the actual rate at which creditors lent money—as a presumptive standard, arguing it better reflects actual risk than the prime lending rate suggested by the plurality. This approach assumes competitive efficiency in subprime lending markets, where high rates reflect genuine risks rather than excessive profits. Subprime lending assumptions are scrutinized, particularly regarding the expected costs of default in Chapter 13 bankruptcy. It is posited that these costs are typically no less than at the lending time, supported by a substantial failure rate of confirmed Chapter 13 plans, estimated at 37%. Even with trustee oversight, many plans fail, suggesting that bankruptcy judges and trustees cannot guarantee repayment from financially unstable borrowers. The text argues that creditors are likely to view bankrupt debtors as riskier compared to non-bankrupt subprime borrowers, countering the notion that Chapter 13 is advantageous for secured creditors. The contract rate at lending reflects actual risk and persists through bankruptcy filing, thus serving as a reasonable estimate for interest rates in cramdown scenarios. The plurality's challenge to these assumptions hinges on an unproven assertion that financing terms are solely dictated by sellers, which contradicts common market practices where interest rates are prominently advertised and affect consumer choices. Additionally, the plurality refers to regulatory frameworks, but does not adequately address the competitive nature of subprime lending in practice. State usury laws suggest a belief in the noncompetitive nature of subprime lending markets, but numerous alternative explanations exist. A study indicates that usury laws serve as a "primitive means of social insurance" designed to provide low interest rates for financially vulnerable individuals, similar to how rent controls do not imply inefficiencies in real estate markets. Consequently, the existence of usury laws offers weak support for any particular viewpoint. The federal Truth in Lending Act contradicts the plurality's position by asserting that full disclosure enhances competition, which presupposes that markets are competitive or that non-competition stems solely from a lack of required disclosures. If lending markets were genuinely noncompetitive, disclosure would be irrelevant to consumers. Regarding the risks associated with Chapter 13 bankruptcy, the plurality argues that it could be less risky if bankruptcy courts approved fewer risky plans. However, predicting plan failures remains difficult, and there is little reason to believe judicial practices will improve. The combination of high-risk plans with low interest rates cannot ensure full compensation without a change in confirmation practices. Finally, the plurality contends that the contract rate overcompensates creditors by including transaction costs and profits, but this is equally true for the prescribed prime lending rate. Such costs are essential for commercial lending viability, as lenders must cover expenses and yield profits to attract investment. The plurality's critique hinges on the assumption that subprime lenders are making excessive profits compared to banks; however, available data suggests this is not the case. The plurality also raises concerns about unequal treatment of creditors, but the contract rate can be modified by a judge to prevent unjust disparity, such as averaging rates charged at different times. The argument against the contract-rate approach is misplaced since it does not irrebuttably presume the contract rate. The flaws in the formula approach are significant; it begins with the prime lending rate, which is objectively low, and adjusts it with a risk premium that is subjective and difficult to determine. If the risk premium were substantial, as indicated by a hypothetical 21% contract rate reflecting actual risk, it would dominate the overall interest rate calculation, making the prime rate less relevant. Key factors influencing the risk premium include the probability of plan failure, collateral depreciation, collateral market liquidity, and enforcement costs. Under the formula approach, judges must calculate the risk premium in every case, which can be complex. Conversely, the contract-rate approach relies on market forces to determine value, as the contract rate reflects all relevant risk factors. If the contract rate is undisputed, the bankruptcy judge's role is simplified. Disputes can arise if a debtor can demonstrate that the creditor is oversecured or if another lender offers a lower rate. The plurality argues that creditors have better access to information, but the choice is not between two estimates of varying accuracy; it's between one that is significantly low and another that is generally reliable. Consciously opting for a less accurate estimate because creditors possess better information raises concerns about compliance with the statutory requirement that secured creditors receive property valued at "not less than the allowed amount" of their claim under 11 U.S.C. § 1325(a)(5)(B)(ii). The argument suggesting that such matters would frequently be litigated overlooks the prohibitive costs associated with detailed risk assessments in most consumer loan cases, making it unlikely that these issues will be contested due to their low stakes. Therefore, it is crucial for the initial estimate to be accurate, rather than placing the burden of proving inaccuracy on the more informed party. In this case, the petitioners' economics expert claimed that a 1.5% risk premium was reasonable, asserting that Chapter 13 plans must be financially feasible and supervised by the court. However, this assertion lacks substantiation, especially given that at least 37% of confirmed Chapter 13 plans fail. The expert admitted to having limited knowledge of the subprime auto lending market and was unfamiliar with its default rates or collection costs. Consequently, the 1.5% figure appears arbitrary. A basic financial analysis indicates that the 1.5% risk premium is significantly underestimated. For a risk premium to be adequate, a rational creditor must find the proposed risk-adjusted payment stream equivalent to receiving immediate payment of its present value. When analyzing the proposed risk premium of 1.5% on an 8% prime rate, the total expected benefit to the creditor amounts to about $100, considering potential defaults. In contrast, the costs of default, such as depreciation of collateral, could greatly exceed this benefit. For instance, the value of the truck collateral dropped from nearly equal to the loan amount to only $4,000, while the outstanding loan balance remained higher. Defaulting on Chapter 13 payments would result in a loss of approximately $550 for the respondent due to vehicle depreciation. If the respondent were to liquidate the vehicle instead, they would be entitled to $4,000, representing the replacement value of a similar used truck. However, the actual amount received upon default would be less, reflecting the foreclosure value, which is typically lower than the replacement value due to market illiquidity—estimated to result in an additional loss of about $450. Administrative costs associated with foreclosure include a $150 filing fee and attorney fees varying from $350 to $875, leading to total administrative expenses of at least $600. The cumulative expected costs of default amount to approximately $1,600. When factoring in a 37% chance of plan failure, the expected cost of choosing future payments over a lump sum would be around $590, with an expected benefit of $100, making this an irrational choice for any creditor. To balance these costs and benefits, a risk premium of around 16% would be necessary, resulting in an effective interest rate of 24%. While various assumptions could alter these estimates, the conclusion remains that the 1.5% premium awarded in this case is significantly below fair compensation, contrasting with other recommendations for premiums between 1% to 3% over the treasury rate, indicative of a flawed methodology in setting interest rates in bankruptcy cases. The document critiques the proposed risk-free interest rate approach in bankruptcy cases, arguing that it would unfairly burden debtors by potentially imposing excessively high repayment conditions. Justice Thomas rejects both the formula and contract-rate approaches, interpreting the statutory phrase "property to be distributed under the plan" as referring to the proposed payments which should only reflect a risk-free rate of interest. He contends that the value of this property right must consider the risk of nonpayment, as there is no assurance that promised payments will be made. The document explains that different interpretations of the statutory language can exist, but context suggests that the cramdown option, which is less favorable to creditors than other confirmation routes, should not be significantly underprotective. Justice Thomas acknowledges that if a plan involves a note instead of cash, the property value should reflect default risks, indicating inconsistency in not applying risk compensation in similar scenarios. The analysis highlights that circuit courts uniformly reject the risk-free approach, emphasizing that while there is disagreement on how to calculate risk, all require some form of risk compensation. Various circuit cases are cited, demonstrating a consensus on compensating secured creditors for risk. Justice Thomas fails to identify any decisions that support his risk-free stance, and the document notes that prior rulings do not lend credence to this approach. The discussion revolves around the valuation of a secured creditor's claim in bankruptcy, specifically whether it should reflect the replacement cost of collateral or the lower price obtainable through foreclosure. Justice Thomas argues that the precedent set in Rash supports using replacement value to compensate creditors for the risk of plan failure. The author disagrees, asserting that Rash indicates a need to differentiate between surrendering and retaining collateral, which requires distinct valuations. The Bankruptcy Code mandates that value be assessed based on the property's intended use or disposition, which Rash clarifies. The text emphasizes that retention of collateral poses risks for creditors that surrender does not, yet the court did not link this increased risk to the difference in valuation methods. It states that if Congress intended to compensate creditors for risk, it would have established a specific valuation method in the Bankruptcy Code. The author illustrates this with examples showing that creditors could receive the higher replacement value under certain circumstances, regardless of the risk involved. Furthermore, the necessity for Congress to ensure adequate risk compensation for creditors is highlighted, noting that inadequate compensation could disrupt credit availability in the market. The judgment reached suggests that eight Justices agree that risk premiums must be included in the interest rates of approved debtor plans, indicating a consensus on this aspect of bankruptcy law. Four Justices advocate for starting with the contract rate to accurately reflect risk, while four prefer the prime lending rate. The ninth Justice abstains from this debate, opposing the view that a higher proposed rate provides grounds for complaint, as it surpasses the risk-free rate. He dissents, asserting that the statute demands full risk compensation and supports a valuation method that realistically enforces this requirement. The document references 11 U.S.C. § 1325, which stipulates conditions under which a bankruptcy plan may be confirmed, including that the holder of a secured claim must accept the plan or receive property of at least the claim's allowed value. It also discusses the debtor's option to surrender collateral despite creditor objections, the definition of "present value," and the criteria for determining secured and unsecured claims under § 506(a). The excerpt notes that petitioners initially proposed a higher monthly payment to their trustee, later amended to a lower amount, and highlights Indiana's usury statute limit on consumer loan interest rates. Additionally, it outlines requirements for property payment values relative to creditor claims under § 1129. Section 1322(b)(2) allows certain provisions in the bankruptcy plan. The rights of holders of secured claims may be modified, except for those secured solely by a security interest in the debtor's principal residence. Key factors reducing risk in bankruptcy proceedings include: 1. Courts may only approve "cram down" loans if the debtor is deemed creditworthy and able to meet payment obligations. 2. Chapter 13 plans require debtors to submit their future income as needed for plan execution, minimizing nonpayment risks. 3. The Bankruptcy Code mandates extensive disclosure requirements, reducing the chance of undisclosed obligations. 4. The public nature of bankruptcy proceedings limits the debtor's ability to incur additional debt. In the case of secured interests, the valuation should be from the debtor's perspective, rather than the creditor's, which is supported by the precedent set in *Associates Commercial Corp. v. Rash*. There is no established "cram down market rate of interest" in Chapter 13 due to the lack of a market for such loans. In contrast, Chapter 11 allows for market-based financing options. In determining cram down rates in Chapter 11, courts can reference what an efficient market would yield, whereas in Chapter 13, they must focus on fair compensation for creditor exposure. The plan must treat claims within a class equally. For instance, two loans for identical assets may produce similar income streams despite differing interest rates pre-bankruptcy. Postbankruptcy, the presumptive contract rate approach may grant the first lender a significantly higher cram down interest rate, despite the similarity of the two secured debts. If a court had certainty that a debtor would fulfill their plan, the prime rate would suffice to compensate secured creditors accepting cram down loans. Congress previously considered but did not enact legislation supporting the Seventh Circuit's approach, which bolsters the conclusion reached. This interpretation is also supported by the Executive Branch and the National Association of Chapter Thirteen Trustees. If there is a misinterpretation of Congress' definition of "value as of the date of the plan," remedial legislation would likely follow. The dissenting opinion's assertion that financing markets are competitive because prices and interest rates are evaluated together does not address the core issue, which is the cram down interest rate. The value of the respondent's truck is fixed, making the market's pricing of goods and financing irrelevant to this analysis. Examples of regulatory frameworks, such as the Truth in Lending Act and state usury laws, are cited to illustrate the regulation of interest rates and lending practices. For instance, in Mississippi, where there is no legal usury rate, subprime lenders charge excessively high rates compared to those in more regulated states. The overarching premise is that consumer credit advertising must provide full disclosure to enable effective comparison shopping, aligning with the view that the appropriate discount rate should only account for the time value of money and not include risk premiums. The United States' brief as Amicus Curiae supports a formulaic approach regarding interest rates and their present value equivalents, indicating that a 10% interest rate renders $4,000 received one year from now equivalent to $3,636.36 today. The prime rate, which approximates the riskless rate for money, is discussed as a benchmark. In efficient markets, risks are factored into the original loan's interest rate. The brief references a study indicating a higher true rate of plan failure in consumer bankruptcy than previously reported—37% based on outdated data versus a later finding of a 60% post-confirmation failure rate. It clarifies that the contract interest rate is a presumption that can be adjusted based on market fluctuations. The argument is made that while subprime lending may not be perfectly competitive, it remains reasonably competitive, and concerns about joint pricing affecting risk assessment in contract rates do not significantly favor creditors. If a creditor offers promotional rates, they must demonstrate that the actual interest rate exceeds the contract rate. Inflating interest rates while lowering sale prices is limited by the buyer's ability to secure third-party financing, allowing them to benefit from lower prices despite higher rates. If a seller ties a discount to the provision of financing, the debtor can use this condition to challenge the assumption that the contract rate accurately reflects risk. Debtors are also permitted to counter the contract rate with additional evidence. While joint pricing may lead to some inaccuracies, the contract rate serves as a more reliable estimate than the prime rate. Regulatory context is noted to distort the market; however, federal disclosure requirements do not significantly affect the market, whereas state usury laws do distort it, benefiting debtors by keeping contract rates low. Transaction costs for creditors in bankruptcy, like loan-origination expenses, are minor relative to the interest rate. Evidence shows average new-car loan rates are slightly above prime and treasury rates, indicating that loan-origination costs are minimal in the subprime market. Criticisms regarding the applicability of the cramdown provision to both prime and subprime loans lack merit, and the argument that economic changes affect the formula approach is flawed. If economic changes impact the prime rate, the contract rate can be similarly adjusted, maintaining accuracy. The contract-rate approach provides a more reliable starting figure than the formula approach. In a specific example, under an amended plan, a $4,000 secured claim would be fully repaid within two years, with an average balance of $2,000. The total interest premium over this period would be calculated as 1.5% multiplied by two times the average balance. Assuming a 37% default rate, the expected value of interest payments would be approximately $50. The prime rate at the time of filing was 2% higher than the risk-free treasury rate, primarily reflecting risk and partially transaction costs. Testimony indicated that if approximately three-quarters of this difference (1.5%) accounts for risk, the expected value stands at $50. The original truck was valued at $6,395, with a loan balance of $6,426; depreciation exceeded loan repayment by $864, or 14% of the truck's value. Assuming similar depreciation for a new truck valued at $4,000, this yields a loss of about $550. A truck in a referenced case had a replacement value of $41,000 and a foreclosure value of $31,875, indicating a 22% loss in value. If the truck in this case experienced similar conditions, a repossession after losing half its value would result in a loss of approximately $450. The expected benefit from a 1.5% risk premium plus an equivalent risk component in the prime rate was about $100; to achieve a total compensation of $590, risk compensation would need to increase to nearly 18%. Additionally, the analysis overlooks factors such as potential recovery of undersecured claims, the timing of plan failures, and costs associated with liquidation, suggesting that requiring full payment for collateral liquidation is unreasonable given the risks involved.