In re Ferrill

ORDER EDWARD R. GAINES, Bankruptcy Judge. There came to be heard the objection of the Hancock Bank to the Debtors’ proposed Chapter 13 plan. The bank objected to the failure of the debtors to provide present value on the bank’s secured claim under § 1325(a)(5)(B)(ii). Having considered the pleadings, memo-randa and oral arguments of counsel for the parties, the Court is of the opinion that said objection is well taken and should be sustained on the issue of the appropriate discount or interest rate on deferred payments to secured creditors under Chapter 13 plans. No factual issues were presented to the Court for determination. Unfortunately, the Bankruptcy Courts are divided in their opinions as to the appropriate discount rate. Most have adopted one of the following formulas: 1. Rate of interest stated in contract; 2. Rate of interest determined under Section 6621 of the Internal Revenue Code; 3. Legal or statutory rate; 4. Fixed rate (e.g. 12 percent in Bankruptcy Courts in the Southern District of Mississippi); 5. An average of the legal rate and the contract rate; 6. Prevailing prime interest rate; 7. Three month Treasury Bill rate with an upward adjustment for risk; 8. Averaging the contract rate, the maximum interest rate allowed under state law in installment sales contracts, and an unexplained “leveling factor” of six percent. While the Bankruptcy Courts are in conflict, there appears to be uniformity among the Circuit Courts of Appeals that have dealt with this difficult matter. While the Fifth Circuit Court of Appeals has not ruled on the question, the Sixth, Eighth, Ninth, and Eleventh Circuit Courts of Appeals have. See Memphis Bank and Trust Co. v. Whitman, 692 F.2d 427 (6th Cir.1982); In re Southern States Motor Inns, Inc., 709 F.2d 647 (11th Cir.1983); In re Monnier Brothers, 755 F.2d 1336 (8th [624] Cir.1985); In re Colegrove, 771 F.2d 119 (6th Cir.1985); United States v. Neal Pharmacal Co., 789 F.2d 1283 (8th Cir.1986); In re Camino Real Landscape Maintenance Contractors, Inc., 818 F.2d 1503 (9th Cir. 1987). This Court has reviewed those decisions and has reluctantly determined that the appropriate discount or interest rate on deferred payments to each allowed secured creditor in a Chapter 13 plan is the lesser of the following: 1. The contract rate, OR 2. The prevailing market rate for a loan of a term equal to the payout period, with due consideration of the quality of the security and the risk of subsequent default. In this particular case, the absence of any evidence that the market rate is less than the contract rate, the contract rate is hereby allowed as the appropriate discount rate to be applied in the Chapter 13 plan of these debtors. This Court is painfully aware of and sympathetic with the burden that this decision places upon the debtors and the attorneys for debtors in Chapter 13 plans. In most cases, the debtors will not have the funds to pay for the type of legal representation and evidentiary proceedings necessary to refute the contract rate. However, in light of the rulings in the Circuit Courts of Appeal, the Court finds itself left with no alternative. SO ORDERED.