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Eleventh Circuit Upholds Limits on Loan Interest During Bankruptcy Period - First United Security Bank v. Garner

December 8, 2011

A major goal for people who file for bankruptcy is protection from payment obligations that have become severely burdensome. Bankruptcy may not eliminate a debt entirely, but it suspends debt collection in the short run and monitors it carefully as the bankruptcy progresses, so the debtor can pay back some or all of the debt without a form of debtor's prison. That's why our Chino consumer bankruptcy lawyers were interested to see a case drawing a sharp distinction between interest owed on a loan before the bankruptcy plan was confirmed and afterward. In First United Security Bank v. Garner, Daniel Garner of Alabama took out a loan from FUSB with an interest rate of 10.5 percent a year, but his confirmed Chapter 13 bankruptcy plan called for a rate of 4.25 percent. FUSB objected, but the Eleventh Circuit ruled that the bankruptcy court was right to award the higher rate only until plan confirmation.

Garner borrowed $33,84 in December of 2008 and promised to repay it at 10.5 percent within 30 months. The loan is secured with multiple vehicles Garner owns, which are worth more than the $26,849 he still owes, making FUSB an oversecured creditor. This gives it priority over other creditors in bankruptcy cases. Garner's confirmed plan calls for full repayment of the loan, with a "prime plus" interest rate of 4.25 percent after the plan was confirmed. FUSB objected, arguing that its oversecured status entitled it to the full 10.5 percent at al points in the bankruptcy. The bankruptcy court reversed in part, allowing FUSB to collect the 10.5 rate for the time between Garner's petition and his plan confirmation, but keeping the 4.25 percent post-confirmation. The district court affirmed this after FUSB's appeal, and the bank appealed once again.

The Eleventh Circuit once again affirmed the bankruptcy court's order. It started by noting that oversecured creditors are special among bankruptcy creditors in that they may claim interest during bankruptcy at all. Furthermore, the Eleventh said, it is not disputed that the post-petition, pre-plan interest is calculated at the contracted rate -- just whether that rate applies after confirmation. Drawing on caselaw, the court said it did not. Its support included a 1993 decision from the U.S. Supreme Court that expressly said an oversecured creditor's interest accrues "from the petition date until the effective or confirmation date of the plan." Though that case had an agreement between the parties, the Eleventh noted that its own later decision saying the party agreement did not undermine the rule. This is supported by Second and Ninth Circuit decisions allowing it as a form of cramdown, the court noted. Thus, it affirmed the lower courts.

As Costa Mesa personal bankruptcy attorneys, we're pleased to see the bankruptcy court upholding the spirit of bankruptcy law, as well as its letter. Garner may have had other reasons to file for bankruptcy, but a loan with 10.5 percent interest surely can't have been helping him financially. Bankruptcy is designed to ease financial burdens on debtors, and it cannot do that if none of the terms of the loan are changed as a result of filing. Because the rule in question applies to oversecured creditors, allowing such creditors to keep their loan terms as they appear could even unfairly penalize people who are close to paying off their loans, or give banks a bad incentive to demand more security than they need. Part of our job as Temecula individual bankruptcy lawyers is preventing or minimizing damage to our clients' financial lives from such bad policies.

Based in Anaheim, Howard Law, P.C., represents Californians who are considering bankruptcy as a solution to overwhelming debts. If you'd like to discuss your eligibility and your situation, call us for a consultation today at 1-800-872-5925 or send us an email.

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