Indiana Law Review


Secured Claims Under Section 1325(a)(5)(B):
Collateral Valuation, Present Value,

and Adequate Protection

S. Andrew Bowman

William M. Thompson

I. Introduction

Chapter 13 of the Bankruptcy Reform Act 1 was a legislative
response to the inability of the former Act2 to meet the needs of
overburdened consumer debtors.3 Although most consumer bank-
rupts desired to work out repayment plans, the vast majority were
opting for straight liquidation instead of Chapter XIII.4 Especially in

view of the attractiveness of repayment as opposed to liquidation,5

Chapter XIII clearly was not adequately placing the repayment op-
tion before the consumer bankrupt.

The vague status of secured creditors under Chapter XIII has
been cited as a major cause of the infrequency of resort to repay-

ment plans under the old Act.6 This ambiguity not only resulted in
inconsistent treatment of secured claims among the several districts
but also facilitated the abuse of Chapter XIII by secured creditors.7

In some districts, secured creditors were afforded extra-ordinary
powers merely as a result of their secured status, without regard to

the actual value of their security interest.8 Secured creditors were
able to use the leverage inherent both in the uncertainty of the law9

and in the security interests in personal effects 10 to coerce debtors

x

ll U.S.C. §§ 1301-1330 (Supp. IV 1980).
2
11 U.S.C. §§ 1-1103 (1976) (repealed 1979).

3See H.R. Rep. No. 595, 95th Cong., 1st Sess. 116 (1977) reprinted in [1978] U.S.

Code Cong. & Ad. News 5963, 6076 [hereinafter cited as House Judiciary Committee
Report]. The old Act was simply unable to meet the needs occasioned by the enormous

growth in the incidence of consumer credit transactions in the post-World War II era.
Id, [1978] U.S. Code Cong. & Ad. News at 6076. Consumer credit was rare when the
Act was drafted, and the Act was designed with the business debtor in mind. Id. at

116-17, [1978] U.S. Code Cong. & Ad. News at 6076-77.
4
5 Collier on Bankruptcy 1 1300.02, at 1300-20 (15th ed. L. King 1981) [herein-

after cited as Collier].
5See House Judiciary Committee Report, supra note 3, at 118, [1978] U.S. Code

Cong. & Ad. News at 6078-79.
6See 5 Collier, supra note 4, 1 1325.01[2][E].

'See id, f 1325.01[2][E][1].
6See id. at 1325-18.
9See House Judiciary Committee Report, supra note 3, at 181, [1978] U.S. Code

Cong. & Ad. News at 6142.
10See id. at 124, [1978] U.S. Code Cong. & Ad. News at 6085.

569



570 INDIANA LAWREVIEW [Vol. 15:569

into paying them sums greatly in excess of the value of their security
interests.

11

The new Chapter 13, therefore, was specifically drafted to define
the rights of secured creditors and to eliminate past inequities by

bringing these rights into proportion with the actual value of their

secured claims. Secured creditors were brought under the strict
scrutiny and control of bankruptcy courts and were assured that
they would receive the full economic value of their secured claims —
no more and no less. 12

This Article focuses on the two-step process whereby the secured
creditor receives the value of his claim under a Chapter 13 plan.13

First, the amount of the secured claim is determined; second, the
amount is paid to the creditor in installments over the period
covered by the plan. Judicial conflict abounds at both of these

stages.

II. Amount of a Creditor's Secured Claim

Bankruptcy Code Section 506(a) gives a secured creditor a
"secured claim" against the debtor's estate to the extent of the

value of his collateral and an "unsecured claim" to the extent of any

balance remaining.14 In addition, section 1325(a)(5)(B) of the Code pro-
vides that a debtor's repayment plan under Chapter 13 may not be
confirmed over the objections of the holder of a secured claim un-

less:

(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 . . . . 15

"See id., [1978] U.S. Code Cong. & Ad. News at 6085.
12See id. at 181, [1978] U.S. Code Cong. & Ad. News at 6141-42.
13More specifically, this Article discusses problems of collateral valuation, present

value determination, and adequate protection in connection with the minimum
guarantees afforded secured creditors by section 1325(a)(5)(B) of the Bankruptcy Code.

Problems relating to proof of value, adequate protection during the interim between

filing and confirmation, and post-petition interest under section 506(b) are beyond the

scope of this Article.
14
11 U.S.C. § 506(a) (Supp. IV 1980). Consequently, if the value of the collateral ex-

ceeds the amount of the debt to the creditor, the creditor's entire claim is secured. If,

however, the value of the collateral is less than the amount of the debt, the creditor's

claim is bifurcated. To the extent of the collateral's value, he has a secured claim, but
to the extent of the remainder of the debt he must queue with the general creditors.

See S. Rep. No. 989, 95th Cong., 2d Sess. 68 (1978) reprinted in [1978] U.S. Code Cong.

& Ad. News 5787, 5854 [hereinafter cited as Senate Judiciary Committee Report].
15
11 U.S.C. § 1325(a)(5)(B) (Supp. IV 1980).



1982] COLLATERAL VALUATION 571

Consequently the value of the collateral securing a debt governs the

extent of a secured creditor's rights under a Chapter 13 plan.

Courts have experienced substantial difficulty with collateral

valuation in this context. Disparity has developed among courts re-
garding the appropriate measure of value. Moreover, inconsistency

has developed regarding the proper time at which value should be

determined. As will be shown, the lack of a consistent scheme of col-
lateral valuation in this Chapter 13 context is a result of insufficient

regard for the purpose of the valuation and the policies behind the

Code.

A. Measure of Value

Determination of the value of collateral, hence the amount of a
creditor's secured claim, has consequences beyond those pertaining

to the creditor's rights under section 1325(a)(5)(B). Whether a debtor
has equity in collateral for purposes of lifting the automatic stay

hinges on a determination of the collateral's value.16 Value deter-

mination is also crucial in the context of adequate protection.17

Because of the variety of purposes for which a value determina-

tion must be made, the Code makes it clear that "value shall be de-
termined in light of the purpose of the valuation . . . ." 18 Moreover,

legislative history indicates that a determination of value for one

purpose was not intended to bind the parties in later proceedings to
determine value for another purpose. 19

The purpose of valuation under section 1325(a)(5)(B) is to ensure,
as a matter of fairness, that a secured creditor who is forced to ac-
cept a repayment plan will receive the equivalent of what he would

16
See, e.g., Imperial Bank v. El Patio, Ltd. (In re El Patio, Ltd.), 6 Bankr. 518

(CD. Cal. 1980).
11
See, e.g., ABD Fed. Credit Union v. Williams (In re Williams), 6 Bankr. 789

(E.D. Mich. 1980).
18
11 U.S.C. § 506(a) (Supp. IV 1980). Section 506(a) also provides that "the proposed

disposition or use" of the collateral is to be considered in determining value. Id. It is

difficult to imagine how the proposed disposition or use of collateral would affect its

value for purposes of determining the extent of a creditor's secured claim. Cases

discussing value in this context have paid lip service to the "proposed disposition or

use" language, but have not allowed the language to influence their determination of

value. See, e.g., In re Damron, 8 Bankr. 323, 325 (S.D. Ohio 1980). Cf. In re Crockett, 3

Bankr. 365, 367 (N.D. 111. 1980) (debtor's continued use of collateral made repayment

feasible and enhanced value of creditor's secured claim). The language was probably in-

tended to apply to value determinations in other contexts. For example, if value was

being ascertained for purposes of determining whether a secured creditor was ade-

quately protected, the proposed use of the collateral would be highly relevant insofar

as the use would result in future depreciation.

"See Senate Judiciary Committee Report, supra note 14, at 68, [1978] U.S. Code

Cong. & Ad. News at 5854.



572 INDIANA LAWREVIEW [Vol. 15:569

have realized if allowed to pursue the remedies available to him out-

side of bankruptcy.20 In virtually all cases, therefore, the value of

collateral for section 1325(a)(5)(B) purposes should be what the
creditor would receive upon repossession and sale of the collateral.21

This sum would be, simply, the net amount22 which would be realized
through a commercially reasonable sale23 in the market to which the

creditor has access.
24

In a number of section 1325(a)(5)(B) cases, however, courts have
failed to comply with the legislative mandate of determining value
in light of the purpose of the valuation. In re Willis 2* is perhaps the

most extreme example of this phenomenon. In Willis, the court

established valuation guidelines to "eliminate the need for repeti-

tious hearings on present and future value of collateral at . . .

Chapter 13 confirmation hearings."26 Under the guidelines, automo-
biles are valued at their blue book value and furniture, appliances,

carpeting, and draperies are valued on a cost-less-depreciation

20See Chrysler Credit Corp. v. Van Nort (In re Van Nort), 9 Bankr. 218, 221 (E.D.
Mich. 1981); In re Damron, 8 Bankr. 323, 325-26 (S.D. Ohio 1980).

"More specifically, the value should be the value the collateral would have in the
creditor's hands upon his repossession. In most cases, this value would be determined

by ascertaining what the creditor would receive through a commercially reasonable

disposition of the collateral. See U.C.C. § 9-504(3) (1978). If, however, the security

agreement relieves the creditor of his obligation to dispose of the collateral, the

creditor should not be bound by the above standard. For example, collateral with

speculative value would arguably be worth more in the creditor's hands if he were not

obligated to dispose of the collateral.

Similarly, valuation should account for any going-concern value that the collateral

would have in the creditor's hands. Thus, if a creditor is entitled under his security

agreement to realize the going-concern value of business assets held as collateral, the

value of the business assets should be determined in light of their value as part of a

going-concern. It has been posited that a creditor should benefit from going-concern

value even in the absence of a right outside of bankruptcy to realize such a value. See

Comment, Bankruptcy Reform Act of 1978: Chapter 13 Cramdown of the Secured
Creditor, 1981 Wis. L. Rev. 333, 343 & nn. 62, 65. This analysis is unsound because it
places a creditor in a better position in bankruptcy than he would have been in outside

of bankruptcy. See note 20 supra and accompanying text.

"Because the debtor's retention of the collateral relieves the creditor of expenses

associated with resale, the creditor should not be allowed to realize the full amount he
would receive on resale. The amount which would be received on resale must be reduced
by selling costs to determine the amount to which the creditor is entitled. See Com-
ment, supra note 21, at 342.

23See note 21 supra.
uSee In re Klein, 10 Bankr. 657, 660 (E.D.N.Y. 1981); In re Damron, 8 Bankr. 323,

326 (S.D. Ohio 1980); Virginia Nat'l Bank v. Jones (In re Jones), 5 Bankr. 736, 739 (E.D.
Va. 1980); In re Crockett, 3 Bankr. 365, 367 (N.D. 111. 1980); In re Adams, 2 Bankr. 313,
313-14 (M.D. Fla. 1980).

25GMAC v. Willis (In re Willis), 6 Bankr. 555 (N.D. 111. 1980).
26/d at 557.



1982] COLLATERAL VALUATION 573

basis.
27 A valuation hearing is held in the "exceptional situations" in

which the guidelines do not establish values acceptable to the par-

ties in interest.
28 Even then, however, it is questionable whether a

party would be allowed to prove a value in excess of that established

by the guidelines.29

By relegating the valuation hearing to the status of a "last
resort," the Willis court demonstrated complete disregard for the

importance of value determination under Chapter 1330 and the flexi-
bility with which Congress intended courts to approach questions of

"Id. at 557-58. Specifically, the guidelines provided that value be determined in

the following manner:

(a) Automobiles

The Average Trade-In value as shown in the N.A.D.A. Official Used Car
Guide for the month in which was filed the debtor's petition for relief will be
taken as present value.

(b) Furniture

The cost of the furniture new will be used as a base against which the
following percentages shall be applied to determine present value:

Less than one year old 75%
One year to two years old 50%
Two years to three years old 25%
More than three years old
(c) Appliances {including TV and Stereo)
The cost of the appliances new will be used as a base against which the

following percentages shall be applied to determine present value:

Less than one year old 80%
One year to two years old 65%
Two years to three years old 50%
Three years to four years old 25%
More than four years old 10%
(d) Carpeting and Draperies

The cost of the finished goods new will be used as a base against which
the following percentages shall be applied to determine present value:

Less than one year old 25%
One year to two years old 10%
More than two years old

28M at 558.
n
Id. at 557.

30See text accompanying notes 6-13 supra. For example, the Willis court did not

believe it was necessary "to take recognition of the probability that a stove will

outlast a television set." 6 Bankr. at 558. Both of these items are depreciated at the

same rate under the guidelines. It is likely that a creditor with a security interest in

the stove would not agree with this generalization, and rightly so. The question of
value is too fact-sensitive to be resolved by a handful of general guidelines. Within

practical limits, accuracy in determining value should not be sacrificed for the sake of

expediency. As stated by one court, "however tempting the easier route to resolution
may be, the Court finds that it cannot equate ease with equity nor fairness with fair
market value." In re New York, New Haven & Hartford R.R., 4 Bankr. 758, 791 (D.
Conn. 1980).



574 INDIANA LAWREVIEW [Vol. 15:569

valuation in order to ensure proper compensation of secured credi-

tors under section 1325.31 The guidelines purport to approximate the
value of collateral in the abstract, without regard to the actual

amount a creditor could expect to receive upon repossession and
sale of the collateral. No consideration is given to the market
available to the creditor on resale or the actual condition of the col-

lateral.
32

In light of the significance afforded the value determination pro-

cess under Chapter 13, it is inconceivable that Congress intended for

courts to adopt inflexible valuation standards and discourage use of

the valuation hearing. It is more reasonable to infer that Congress
intended for the valuation hearing to acquire increased significance

in promoting equitable distribution of the bankrupt's assets.

Disregard of the valuation's purpose in determining the value of

collateral was evinced in In re Miller, in which the parties agreed
that the value of an automobile for purposes of section 1325(a)(5)(B)

was the debtor's replacement cost.33 Had the creditor been a retail
dealer, the debtor's replacement cost would have approximated the

value the creditor would have realized upon repossession and sale of

the automobile.34 In Miller, however, the creditor's customary means
of disposition would likely have been through the wholesale market.35

Consequently, the section 1325(a)(5)(B) value of the automobile was
lower than the parties believed, and the creditor's secured claim

was inflated. Under these circumstances, the court could have appro-
priately refused to confirm the plan, instructed the parties on the

proper means of valuation, and rescheduled the confirmation hear-
ing.

36

Similarly, in In re Jordan37 neither party argued the proper stan-

dard for a section 1325(a)(5)(B) valuation. Jordan involved a question

of the value of a husband's interest in entireties property for pur-

poses of determining the amount of a judicial lien-creditor's secured

claim. The creditor argued that the value should be the husband and

wife's combined equity in the property; the debtor-husband contended

31This flexibility is implicit in the wording of section 506(a). See Virginia Nat'l

Bank v. Jones (In re Jones), 5 Bankr. 736, 738 (E.D. Va. 1980).
32The current condition of the market available to the creditor is also an impor-

tant consideration. See In re Crockett, 3 Bankr. 365, 367 (N.D. 111. 1980).
33Ford Motor Credit v. Miller (In re Miller), 4 Bankr. 392, 393 (S.D. Cal. 1980).
34The replacement cost would actually exceed the value which the creditor would

realize on resale by an amount equal to the creditor's selling costs. See note 22 supra.
35The creditor was Ford Motor Credit, a finance company.
36See Chrysler Credit Corp. v. Cooper (In re Cooper), 7 Bankr. 537, 543 (N.D. Ga.

1980) in which the court, unsatisfied with the parties' arguments in connection with the

present value of the creditor's secured claim, requested new arguments on the issue.
"Jordan v. Borda (In re Jordan), 5 Bankr. 59 (D.N.J. 1980).



1982] COLLATERAL VALUATION 575

that the value was one-half the total equity.38 The court recognized
the fault in the parties' arguments, that is, that they were viewing
section 1325 value without regard to the creditor's actual realization

on resale.39

"The starting point for valuing [the creditor's] claim," stated the
court, "should be an understanding of exactly what he has without,
for the moment, a consideration of the bankruptcy . . . ." 40 Upon
foreclosure and sale, the creditor could sell only the husband's right

of survivorship and the husband's interest as a tenant in common
with the wife.41 The amount received for these rights would likely be
less than the value argued by either party.42 Nevertheless, the court

adopted the debtor's measure of value, finding that measure to be
"more appropriate" than the creditor's.43 Again, it would seem to
have been most appropriate if the court had refused to confirm the
plan, instructed the parties regarding the proper measure of section

1325 value, and requested new arguments on the valuation issue.44

A final case which poses an interesting problem regarding sec-
tion 1325(a)(5)(B) value is In re Stumbo,45 in which Chrysler Credit
Corporation was the assignee of a security interest in an automobile
sold to the debtor by the dealer-assignor. By the terms of the as-
signment contract, the dealer agreed that in the event Chrysler

Credit repossessed the automobile the dealer would purchase the

automobile from Chrysler Credit for $10,676.29, a sum clearly in ex-
cess of the automobile's actual value. After assignment of the security

interest, the debtor filed a Chapter 13 petition.

At the confirmation hearing Chrysler Credit successfully argued
that the value of its secured claim was $10,676.29 — the amount it
would receive upon repossession and sale of the automobile to the

3
*I<L at 61-62.

39
Id. at 62.

i0
Id.

n
Id.

42The court referred to Newman v. Chase, 70 N.J. 254, 359 A.2d 474 (1976) in
which the purchaser of the husband's interest in entireties property acquired the hus-

band's right of survivorship and became a tenant in common with the wife. The pur-
chaser did not, however, have the right to demand partition of the property. Id. at 262,

359 A.2d at 478-79. Though the purchaser was entitle to receive one-half of the rental

value of the property from the wife, who retained possession, he was also obligated to
account for one-half of the costs associated with the property. Id. at 266-68, 359 A.2d at

480-81. In Newman, the result of these calculations was that the purchaser received no
income from the property; rather, he was obligated to account to the wife for his share

of the net loss on the property. 5 Bankr. at 62 n.5.
43
5 Bankr. at 62.

"See note 36 supra.
45
7 Bankr. 939 (D. Colo. 1981).



576 INDIANA LA WREVIEW [Vol. 15:569

dealer.
46
In accepting Chrysler Credit's argument, the court reasoned:

The proposed valuation is the amount which the creditor
could receive if it were granted its property under foreclo-
sure as the cram-down provisions of § 1325(a)(5) are a simple

substitution by the Congress of payment to the creditor of
the amount it would receive if it in fact foreclosed upon the
property.

47

At first blush, the Stumbo court's argument appears to be sound
because it looks to the position of the creditor upon foreclosure and

sale to determine the amount of its secured claim. The decision,
however, has not been followed by other bankruptcy courts.48 The
logic often used in rejecting Stumbo is reflected in In re Cooper,49 in
which the court reasoned that "'value' as used in § 506(a) . . . con-

templates current fair market value of the particular collateral." 50

Because the price established by the repurchase agreement bore no

relation to the value which would be established by the market-

place, it would be error to use the figure as the collateral's section

506(a) value.
51

This argument, however, does not adequately respond to the po-

sition adopted by the Stumbo court. That argument, properly
premised on the purposes of section 1325(a)(5)(B) valuation, is not

adequately rebutted by the mere assertion that section 506(a) con-
templates fair market value. Few would attack the result obtained
in Cooper. In a Chapter 13 proceeding, the unfairness inherent in

allowing a creditor and a third party to arbitrarily establish inflated

46
Id. at 939-40.

"Id. at 940.

"See In re Clements, 11 Bankr. 38, 39 (N.D. Ga. 1981); In re Beranek, 9 Bankr.

864, 865-66 (D. Colo. 1981); Chrysler Credit Corp. v. Van Nort (In re Van Nort), 9
Bankr. 218, 221 (E.D. Mich. 1981); Chrysler Credit Corp. v. Cooper (In re Cooper), 7
Bankr. 537, 539-40 (N.D. Ga. 1980); In re Willis, 2 C.B.C.2d 141, 144 (W.D.N.C. 1980);

Virginia Nat'l Bank v. Jones (In re Jones), 5 Bankr. 736, 739 n.l (E.D. Va. 1980); cf. In
re Fortson, 14 Bankr. 710, 711 (N.D. Ga. 1981) (failure to use value stated in repurchase

agreement does not deny creditor adequate protection).
49Chrysler Credit Corp. v. Cooper (In re Cooper), 7 Bankr. 537 (N.D. Ga. 1980).

But see Chrysler Credit Corp. v. Van Nort (In re Van Nort), 9 Bankr. 218 (E.D. Mich.
1981), which poses a somewhat stronger argument. The Van Nort court argues that
the rights under a repurchase agreement are not among the interests intended to be
protected by section 1325. Id. at 220-21. "The interest protected by § 1325(a)(5) is the
right a creditor has to realize the value of certain property — the property subject to
its lien." Id. at 221. Though this reasoning is superior to that used by the Cooper
court, it still does not adequately explain why the rights under a repurchase agree-
ment are not among the interests protected by section 1325.

50
7 Bankr. at 539-40.

51
Id. at 540.



1982] COLLATERAL VALUATION 577

collateral value to the detriment of the bankrupt and unsecured

creditors is self-evident. To rebut the Stumbo court's argument,
however, it is necessary to show that the purposes of section
1325(a)(5)(B) do not demand that the creditor be guaranteed the
amount he would receive under the repurchase agreement.

Section 1325(a)(5)(B) is meant to ensure that a secured creditor
will receive the equivalent of recourse to the collateral which was
the inducement for extending the loan to the debtor. In other words,

section 1325(a)(5)(B) protects the creditor's expectations of recovery

against the debtor in the event of default. As long as only the debt-
or and creditor are involved, these expectations are protected by

guaranteeing the creditor the amount he would receive upon repos-
session and sale of the collateral.

The existence of a repurchase agreement, however, alters the
creditor's expectations. Though the creditor still only expects to
recover the value of the collateral from the debtor, he anticipates

additional recovery from the dealer in the amount by which the re-
purchase price exceeds the market value of the collateral in the

creditor's hands. Thus, permitting the creditor to recover only the

fair market value of the collateral in his hands does protect his ex-
pectations of recovery as against the debtor.

Although the creditor's expectations of recovery against the

dealer are, admittedly, thwarted, the creditor is clearly in the best

position to protect his bargain with the dealer. The insertion of a
provision that, upon the debtor's bankruptcy, the dealer is required

to tender the repurchase price to the creditor and is subrogated to

the rights of the creditor would protect the creditor's expectations

of recovery against the dealer at the expense of the dealer— not at
the expense of the debtor.

B. Timing of Valuation

The Code is silent on the issue of when collateral should be
valued for purposes of determining the amount of a creditor's se-
cured claim. A few courts, however, have misread the Code and de-
termined that section 1325(a)(5)(B) provides that collateral should be

valued on the effective date of the plan for this purpose.52

Section 1325(a)(5)(B) prohibits confirmation of a plan over a

secured creditor's objection unless the plan provides for payment of
the equivalent of the amount of the creditor's secured claim on the

52
See, e.g., In re Klein, 10 Bankr. 657, 660-61 (E.D.N.Y. 1981); GMAC v. Willis (In

re Willis), 6 Bankr. 555, 559 (N.D. 111. 1980); In re Smith, 4 Bankr. 12, 12 (E.D.N.Y.

1980).



578 INDIANA LAWREVIEW [Vol. 15:569

date of confirmation.53 A careful reading of the section reveals that
it does not address the question of when the secured claim is to be
determined. It merely provides that the amount of the secured
claim, whenever determined, must be paid to the creditor "as of the
effective date of the plan."54 If the payments are made in install-
ments, the creditor is entitled to compensation for the time value of

his money.55

The source of the difficulty encountered by some courts in inter-
preting section 1325(a)(5)(B) is probably the section's directive that

"the value ... of property to be distributed under the plan" must be
determined as of the plan's effective date.56 "Property" in the

preceding passage clearly refers to the property, usually cash, which
the debtor proposes to give the creditor in satisfaction of the credi-

tor's claim.
57 A careless reading of the section, however, might lead

the reader to believe that "property" refers to the collateral secur-

ing the debt.
58 Hence, the erroneous interpretation.

Why was Congress silent regarding the date of valuation for
purposes of establishing the creditor's secured claim under section

1325(a)(5)(B)? This silence is clearly in accord with Congress' desire

that "value" be a flexible concept.59 Therefore, it might be argued

that Congress did not intend for any single date to be used for pur-

poses of determining a creditor's secured claim in this context.

Rather, courts should be permitted to establish the appropriate val-

uation date on a case-by-case basis.

It must be emphasized, however, that the flexibility envisioned
by Congress was flexibility depending on the purpose of the valua-
tion and the circumstances of the case.60 Selection of a single date

53See 11 U.S.C. § 1325(a)(5)(B) (Supp. IV 1980), reprinted in text accompanying

note 15 supra.
5l
Id. § 1325(a)(5)(B)(ii).

55See text accompanying notes 115-25 infra.
56
11 U.S.C. § 1325(a)(5)(B)(ii) (Supp. IV 1980) (emphasis added).

51
See, e.g., GMAC v. Hyden (In re Hyden), 10 Bankr. 21, 22-23 (S.D. Ohio 1980)

(quoting 5 Collier, supra note 4, 1 1325.01[2][E][2][b][ii][A][2], at 1325-24).
58
In In re Smith, 4 Bankr. 12, 12 (E.D.N.Y. 1980), for example, the court stated:

"This Court finds that the value of the collateral as of the date of the confirmation

hearing was $2,600. This is also deemed to be the value as of the effective date of the

plan within the meaning of section 1325{a)(5)(B)(ii). . . ." (emphasis added). In support of

this statement the court cited 5 Collier, supra note 4, 1 1325.01[2][E][2][b][ii][A][3][b][i],

at 1325-25. That passage in Collier states that "[t]he value of property to be

distributed under the plan is to be ascertained as of the effective date of the plan." Id.

Therefore, the court must have believed that "property to be distributed under the

plan" meant "collateral."
59See note 31 supra.
60See Senate Judiciary Committee Report, supra note 14, at 68, [1978] U.S. Code

Cong. & Ad. News at 5854; House Judiciary Committee Report, supra note 3, at 356,
[1978] U.S. Code Cong. & Ad. News at 6312.



1982] COLLATERAL VALUATION 579

for purposes of determining a creditor's secured claim does not con-

travene this notion of flexibility.61 To the contrary, logic would seem
to require that valuation for a particular purpose be performed con-

sistently. A single valuation date should be established for the pur-
pose of determining a creditor's secured claim under section

1325(a)(5)(B).

The effect of the valuation date on the ultimate distribution of a
debtor's assets must be considered in determining the date which
best furthers the goals of Chapter 13. Whether the valuation date is
significant in this respect depends on whether the collateral is

depreciating or appreciating.62

Seemingly, in the case of depreciating collateral, a secured credi-

tor would benefit at the expense of general creditors if the collateral

is valued early in the proceedings. An earlier valuation would cer-
tainly increase the amount of the creditor's secured claim. However,
to the extent that a delay in valuation would cause a decrease in the

creditor's secured claim, the creditor would be entitled to recovery

based on adequate protection.63 The creditor therefore would receive
the same amount regardless of when his secured claim was deter-
mined.

If, on the other hand, the collateral is appreciating, the timing of

valuation does affect the amount a secured creditor will ultimately
receive. Although the Code protects the creditor against deprecia-
tion of his collateral during the automatic stay, it does not provide a

corresponding guarantee that the creditor benefit from appreciation

of his collateral during the same period. Consequently, the longer
the creditor delays valuing his secured claim, the greater his recov-

ery under the Chapter 13 plan will be.

Valuing the collateral at a date other than the filing date would,

therefore, allow a secured creditor to speculate at the expense of

general creditors. The creditor would delay valuation as long as
possible, knowing that he was protected against depreciation of the

61For example, the legislature intended for the filing date to be used to determine

the amount of a creditor's secured claim for adequate protection purposes. In discuss-

ing the treatment of secured claims, the House Judiciary Committee stated: "[f]or the

creditor, the bill requires that once the secured claim is determined, the court must in-

sure that the holder of the claim is adequately protected." House Judiciary Committee

Report, supra note 14, at 181, [1978] U.S. Code Cong. & Ad. News at 6141. Adequate
protection is guaranteed from the time the petition is filed. See 11 U.S.C. §§ 361, 362(d)(1)

(Supp. IV 1980). Therefore, the secured claim must be determined as of the filing date

when the court is faced with an adequate protection question.
62
If the value of the collateral is static, of course, the date of valuation will have

no effect on the distribution of the debtor's assets.
«3See 11 U.S.C. § 362(d)(1) (Supp. IV 1980); GMAC v. Miller (In re Miller), 13

Bankr. 110, 117 (S.D. Ind. 1981).



580 INDIANA LAWREVIEW [Vol. 15:569

collateral and hoping that the collateral would appreciate, thereby

increasing his secured claim — a perfect hedge.
Clearly, allowing a secured creditor to speculate at the expense

of general creditors is contrary to the purposes of the Code.64 If the

potential for speculation is to be eliminated, the secured creditor's

claim must be established as of the date the Chapter 13 petition is
filed.

Valuing a creditor's secured claim as of the filing date is desira-

ble in other respects as well. It is sensible to use the filing date

because "[t]hat is the date on which the estate [is] created and the

creditor's rights [become] fixed."65 In addition, the debtor's task of

formulating a plan in compliance with section 1325 is simplified

because of his ability to judge the value of a creditor's secured claim

in retrospect.
66

Similarly, the court would always have the benefit of

hindsight when questions arise concerning the amount of a secured
claim.

67

III. PAYMENT OF THE SECURED CLAIM

A. Present Value

A secured creditor's entitlement to compensation for the time
value of his claim arises from the language of section 1325(a)(5)(B)(ii)

which allows the court to confirm a plan only if "with respect to

each allowed secured claim provided for by the plan . . . 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 .... "68 After a thorough examination of the
legislative history of Chapter 13 and 11, several courts have inter-

preted the language of section 1325(a)(5)(B)(ii) to require the applica-

tion of present value analysis to proposed deferred payments.
69 Simply

"See In re Adams, 2 Bankr. 313, 314 (M.D. Fla. 1980); cf. Annot., 21 A.L.R. Fed.
289, 291-94 (1974) (discussing the date of valuation and the ability of secured creditors
to speculate at the expense of other creditors under the old Bankruptcy Act).

65In re Adams, 2 Bankr. at 314.
66Bankr. R. 13-201 permits the debtor to file his Chapter 13 plan within 10 days

of the filing of his petition. Determining the amount of secured claims as of the filing
date would, therefore, allow the debtor to exercise hindsight in estimating the

payments which should be made to secured creditors under the plan.
61See Chemical Bank v. American Kitchen Foods, Inc. (In re American Kitchen

Foods, Inc.), 2 Bank. Ct. Dec. (CRR) 715, 719 (D. Me. June 8, 1976) (valuation of col-

lateral as of filing date "involves judicial hindsight and is therefore easier, as a rule,

than where neither the amount nor the condition of the collateral can be confidently

forecast . . . ."). But see Comment, supra note 21, at 345 n.71 (arguing that current
valuation is easier than retrospective valuation).

68
11 U.S.C. § 1325(a)(5)(B)(ii) (Supp. IV 1980).

69GMAC v. Miller (In re Miller), 13 Bankr. 110 (S.D. Ind. 1981); GMAC v. Hyden



1982] COLLATERAL VALUATION 581

put, section 1325(a)(5)(B)(ii) requires that the present value of the

debtor's proposed stream of future payments equal the value of the
secured claim. The rationale behind this requirement is most clearly
stated by the court in In re Benford:70 "One need not possess a great
deal of business and financial acumen to appreciate that a dollar to-
day is worth more than a dollar tomorrow."71

There is no dispute that a Chapter 13 plan must provide for the
time value of the secured creditor's claim to be confirmed. Nor is
there any disagreement that interest payments readily provide a
simple mechanism of accounting for time value.72 The rub occurs
when the parties attempt to determine the appropriate interest rate.
The number of methods employed to arrive at the appropriate inter-
est rate almost equals the number of decisions confronting this issue:
the legal judgment rate;73 the average of an arbitrary floor rate, the
debtor's contract rate, and the statutory maximum rate on install-
ment contracts;74 the average of the debtor's contract rate and the
current contract rate;75 the contract rate;

76
the IRS rate;77 the

average of the legal judgment rate and the contract rate;78 the prime

rate;
79 the three-month United States Treasury Bill rate;80 arbitrary

rates;
81

the current contract rate;82 and the current market rate.83

(In re Hyden), 10 Bankr. 21 (S.D. Ohio 1980); GMAC v. Anderson (In re Anderson), 6
Bankr. 601 (S.D. Ohio 1980); In re Ziegler, 6 Bankr. 3 (S.D. Ohio 1980); In re Crockett, 3

Bankr. 365 (N.D. 111. 1980); GMAC v. Lum (In re Lum), 1 Bankr. 186 (E.D. Tenn. 1979).
70
14 Bankr. 157 (W.D. Ky. 1981).

n
Id. at 158.

72
5 Collier, supra note 4, f 1325.01[3][b][ii], at 1325-26.

13
In re Marx, 11 Bankr. 819, 822 (S.D. Ohio 1981); In re Williams, 3 Bankr. 728,

732 (N.D. 111. 1980).
74GMAC v. Hyden (In re Hyden), 10 Bankr. 21, 27 (S.D. Ohio 1980).
75GMAC v. Miller (In re Miller), 13 Bankr. 110, 113 (S.D. Ind. 1981); In re Kibler, 8

Bankr. 957, 960 (D. Hawaii 1981).

"Memphis Bank & Trust Co. v. Walker (In re Walker), 14 Bankr. 264, 266 (W.D.
Tenn. 1981); In re Clements, 11 Bankr. 38, 40 (N.D. Ga. 1981); GMAC v. Anderson (In
re Anderson), 6 Bankr. 601, 610 (S.D. Ohio 1980); In re Rogers, 6 Bankr. 472, 475 (S.D.

Iowa 1980); In re Smith, 4 Bankr. 12, 13 (E.D.N.Y. 1980).
77w re Caudle, 13 Bankr. 29, 38 (W.D. Tenn. 1981) (citing 26 U.S.C. § 6621); In re

Strong, 12 Bankr. 221, 225 (W.D. Tenn. 1981); In re Crotty, 11 Bankr. 507, 510 (N.D.

Texas 1981); In re Ziegler, 6 Bankr. 3, 6 (S.D. Ohio 1980).
ls
In re Klein, 10 Bankr. 657, 661-62 (E.D.N.Y. 1981).

79Ford Motor Credit v. Miller (In re Miller), 4 Bankr. 392, 394 (S.D. Cal. 1980).
80GMAC v. Willis (In re Willis), 6 Bankr. 555, 557 (N.D. 111. 1980).
"'Chrysler Credit Corp. v. Van Nort (In re Van Nort), 9 Bankr. 218, 222 (E.D.

Mich. 1981); In re Weaver, 5 Bankr. 522, 523 (N.D. Ga. 1980); In re Crockett, 3 Bankr.

365, 368 (N.D. 111. 1980); GMAC v. Lum (In re Lum), 1 Bankr. 186, 188 (E.D. Tenn.
1979).

"Chrysler Credit Corp. v. Cooper (In re Cooper), 11 Bankr. 391, 394 (N.D. Ga.

1981).
S3In re Benford, 14 Bankr. at 160.



582 INDIANA LAWREVIEW [Vol. 15:569

This plethora of rates demonstrates, if not the courts' answer to
"creative financing," the blatant inequities among districts in the
treatment of secured creditors.

Clearly, what is needed is a uniform measurement of the appro-
priate interest rate to be applied to the deferred payments. To be
useful, the selected measure must be susceptible of uncomplicated
application to a broad range of financial transactions.

An appropriate starting point to develop a useful measure is to
focus on the purpose of using present value analysis in a Chapter 13

setting. Generally, present value can be viewed as the value of money
at a present date which will be paid or received in future periods.

For the secured creditor, the present value of his claim is the

amount he would realize if he had the full amount of his allowed
secured claim in his hands on the effective date of the plan and

could invest it at the prevailing rate of return for a period equal to

the length of the debtor's plan.
84 Outside of bankruptcy, the prevail-

ing rate of return or interest rate will be largely determined by: (1)

preferences of individuals for current consumption over future con-

sumption; (2) the supply of potentially productive investments; and

(3) anticipated inflation.
85 These elements are reflected in the current

market rate which is the result of all borrowers and lenders stating

their beliefs as to each of the three elements. No one lender or bor-
rower can affect the market rate. If a lender sets his interest rate
or price of credit too high, no one will borrow from him. Conversely,

if a borrower's risk is greater than the risk compensated for by the

market rate, no one will lend money to him. Thus, the current mar-
ket rate of interest could serve as a uniform and straightforward

measure to be employed in the present value analysis of section

1325(a)(5)(B)(ii).

As in the case of valuation of collateral, the appropriate market
is the market which the secured creditor confronts.86 For example, a
creditor in the business of making automobile loans could lend the
money to another debtor at the prevailing interest rate charged on
automobile loans if he had the money in his hands rather than re-
stricted to the bankrupt's rehabilitation. The prime rate is immaterial
because it represents the lowest rate of interest on short-term loans

charged to businesses with the highest credit rating, a money
market measure of the cost of capital.87 Similarly, the legal judgment

rate is immaterial because the creditor is not limited to what he

MIn re Smith, 4 Bankr. 12, 13 (E.D.N.Y. 1980).
85W. Sharpe, Investments 79-84 (1981).
S6See notes 20-24 supra and accompanying text.
87
L. Schall & C. Haley, Introduction to Financial Management 551-52 (1977).



1982] COLLATERAL VALUATION 583

could collect on a judgment granted by a court but may go into the
market for automobile loans and receive the rate that the market is
currently willing to give lenders.

The importance of defining the creditor's relevant market be-
comes clear if the Chapter 13 plan is viewed as an involuntary loan

where the secured creditor is forced to forgo the investment oppor-
tunities he would have had outside bankruptcy. Recognition of this

inequitable situation led the court in In re Cooper88 to posit that the

"best method to ascertain the value of money to a creditor paid over
a period of time is to determine what that particular creditor rou-
tinely receives as negotiated finance charges over the period of time

with similar collateral."89 The Cooper court held that the most
equitable method of interest rate determination is the recognition of
a rebuttable presumption that

u
[i]t is the current rate of return on

negotiated loans made by the secured claimant to borrowers of a
class similar to the Chapter 13 debtor which is determinative of the

rate to be allowed the holder of an allowed secured claim paid in

deferred terms under 1325(a)(5)(B)(ii)." 90

Employing the prevailing interest rate, as of the effective date
of the plan, which the creditor would receive for a similar financial

transaction involving a comparable time period, risk, and collateral,

best replicates the current market interest rate and is superior to
any method which results in a lower rate. As the Cooper court
noted, any rate lower than current market rate would fall short of

complying with the adequate protection requirement of sections 361,

362(d)(1), and 363(e).91

The court in In re Benford92 reached the conclusion that the cur-
rent market rate is the optimal measure while seeming to reject the

method applied in In re Cooper. A closer examination, however, re-
veals that the two courts utilized the same method of interest rate
determination. The Benford court's announcement that the prevail-
ing market rate on the date on which the plan becomes effective as
the preferable method of interest rate determination was based on
its belief that:

The touchstone of providing present value of a claim to
be paid in the future is responsiveness to current market
conditions. A rule that the contract rate applies would lack
such responsiveness. For instance, if a plan were confirmed

""Chrysler Credit Corp. v. Cooper (In re Cooper), 11 Bankr. 391 (N.D. Ga. 1981).
89M at 395.
90
Id. at 394 (emphasis added).

"Id.
92
14 Bankr. 157 (W.D. Ky. 1981).



584 INDIANA LAWREVIEW [Vol. 15:569

today, an installment contract entered into by the debtor

two years ago would likely contain an interest rate below

the present market rate.593

So far, the Benford and Cooper courts are in agreement. The
Benford court attempted to distinguish Cooper by asserting that the

use of the prevailing rate available to the creditor "would result in a

debtor being charged disparate interest rates depending on the se-

cured creditor, and thus sacrifice consistency for the sake of flexibil-

ity."
94 This distinction evaporates, however, when one recognizes

that the crux of the market interest rate method depends on how each
secured creditor's relevant market is defined and on what interest
rate is available in that market. For example, it would make little
sense to allow a mortgagee to benefit from the rate of 21% cur-
rently available to consumer lenders when the current home mort-
gage yield is only 17% merely to treat all secured creditors consis-
tently. The purpose of section 1325(a)(5)(B)(ii) is to equitably provide
each secured creditor what he would have had outside bankruptcy
but for the debtor's financial demise — no more and no less.95

Moreover, the current market interest rate is the prevailing in-

terest rate the creditor would be able to obtain in a similar transac-

tion on the effective date of the plan. The Benford court implicitly
recognized this fact when it gave the bank thirty days to provide
proof of the market interest rate.96 Presumably, the bank would
present to the court evidence of the interest rate that it and its geo-

graphic competitors are currently negotiating on such transactions.

Thus, the adequate protection provisions of the Code require
that secured creditors subject to the cram-down effects of section
1325(a)(5)(B) be given the time value of their claims. The market in-
terest rate, as represented by the prevailing interest rate available
to the creditor in a similar transaction outside bankruptcy, at the ef-

m
Id. at 159.

9i
Id. at 160.

950ne commentator contends that the market will "likely charge an additional risk

premium above that reflected in the contractual interest rate" because the Chapter 13

plan exposes the creditor to more risk than a loan to another debtor. See Comment,

supra note 21, at 357. This argument misdetermines the creditor's relevant market.

Outside of bankruptcy the creditor presumably would undertake a similar transaction

with another debtor who has collateral and risk similar to that which was possessed by
the Chapter 13 debtor before his bankruptcy. Obviously, the creditor would not seek

out other bankrupt debtors as new customers nor is the Chapter 13 debtor a part of
the creditor's relevant market. Thus, the riskiness of the Chapter 13 plan is not rele-

vant to the determination of an appropriate interest rate which would be available to

the creditor outside of bankruptcy.

"ta at 161.



1982] COLLATERAL VALUATION 585

fective date of the plan, is the most accurate measure of the present
value of the deferred payments. With this straightforward and uni-
form method of calculating the present value available, this Article
will explore the necessity of and means of providing adequate pro-
tection of the value of the claim throughout the life of the Chapter

13 plan.

B. Adequate Protection During the Plan

Section 1325(a)(5) provides that the court shall confirm the deb-

tor's rehabilitation plan if (1) the secured creditor accepts the plan;

(2) the secured creditor retains his lien and receives deferred pay-

ments with a present value equal to his allowed secured claim; or (3)
the debtor surrenders the collateral securing the claim.97 The re-
quirements of section 1325(a)(5)(B) resemble the adequate protection

provisions of section 361.
98

In fact, section 103(a) makes Chapter 3
applicable to Chapter 13 cases.99 Moreover, section 1325(a)(1) re-

quires that the debtor's plan comply with all of the provisions of

Chapter 13. 100 Section 1303 grants the debtor the same rights and
powers of a trustee and subjects him to the same limitations in their
exercise relating to the use, sale, or lease of property other than in

the ordinary course of business.101 One such limitation, section 363(e),
allows the court, upon the secured creditor's request, to prohibit or
condition the use, sale, or lease of the property as is necessary to

provide adequate protection of the secured creditor's interest in the

property.
102

97
11 U.S.C. § 1325(a)(5) (Supp. IV 1980).

98
Id. § 361 provides three nonexclusive methods of adequately protecting a

secured creditor's interest in property: (1) periodic cash payments; (2) an additional or

replacement lien; or (3) other relief that insures receipt of the indubitable equivalent.

"Id. § 103(a) states in part: "chapters 1, 3, and 5 of this title apply in a case under

chapter 7, 11, or 13 of this title."
m

I<L § 1325(a)(1).
101
Id. § 1303 provides: "Subject to any limitations on a trustee under this chapter,

the debtor shall have, exclusive of the trustee, the rights and powers of a trustee

under sections 363(b), 363(d), 363(e), 363(f), and 363U), of this title."
102

Id. § 363(e) states:

Notwithstanding any other provision of this section, at any time, on request

of an entity that has an interest in property used, sold, or leased, or propos-

ed to be used, sold, or leased, by the trustee, the court shall prohibit or con-

dition such use, sale, or lease as is necessary to provide adequate protection

of such interest. In any hearing under this section, the trustee has the

burden of proof on the issue of adequate protection.

See Brickel v. Merchants Nat'l Bank (In re Brickel), 11 Bankr. 353, 355 (D. Me. 1981)

Ford Motor Credit Co. v. Lewis (In re Lewis), 8 Bankr. 132, 136 (D. Idaho 1981)

Chrysler Credit Corp. v. Cooper (In re Cooper), 7 Bankr. 537, 542 (N.D. Ga. 1980)

GMAC v. Lum (In re Lum), 1 Bankr. 186, 187 n.l (E.D. Tenn. 1979).



586 INDIANA LAWREVIEW [Vol. 15:569

Both the provisions of section 1325(a)(5)(B) and the linkages be-

tween section 363 and Chapter 13 indicate Congress' intent that the

debtor's rehabilitation should not be at the expense of his secured

creditors. This intent is most clearly pronounced by the legislative

history which accompanies section 1325(a)(5)(B). After noting that the

enacted version of section 1325(a)(5)(B) will "significantly protect

secured creditors in chapter 13," the legislative history reports:

Of course, the secured creditors' lien only secures the value

of the collateral and to the extent property is distributed of

a present value equal to the allowed amount of the creditor's
secured claim the creditor's lien will have been satisfied in

full. Thus the lien created under section 1325(a)(5)(B)(i) is ef-
fective only to secure deferred payments to the extent of the
amount of the allowed secured claim. To the extent the de-
ferred payments exceed the value of the allowed amount of
the secured claim and the debtor subsequently defaults, the

lien will not secure unaccrued interest represented in such

deferred payments.103

According to Collier, however, the secured creditor's interest in

property need not be adequately protected in the sense of providing

additional security or payments to account for depreciation in the
value of the collateral or for the interest component of the deferred
payments.104

1. Depreciation. — Dealing first with the problem of collateral
depreciation, Collier states:

Section 1325(a)(5)(B)(i) assures the holder of an allowed

secured claim that its lien cannot be directly affected by a

chapter 13 plan without its consent, although various indi-

rect deleterious effects, resulting from depreciation, deter-

ioration, damage, or loss may nonetheless occur during the
extension period. There is no requirement that a chapter 13

plan provide protection to the holder of an allowed secured

claim against whatever diminution in value may result to the
property securing the allowed secured claim in which the

lien is retained. Section 1325(a)(5)(i) [sic] merely requires a

provision in the plan for the retention of the lien.
105

If a Chapter 13 plan fails to adequately protect a secured credi-

103124 Cong. Rec. 32,410 (1978).
104

5 Collier, supra note 4, f 1325.01[2][E][2][b][i], at 1325-21 to -23 &
[2][E][2][b][ii][A], at 1325-23 to -25.

l05
Id. at 1325-22 to -23 (emphasis in original).



1982] COLLATERAL VALUATION 587

tor from diminutions in collateral value by granting him additional
security or payments, the plan no longer shields the debtor but arms
him with a sword with which the debtor may rehabilitate his finan-
cial condition at the secured creditor's expense.

Denying the secured creditor adequate protection of his security
interest during the life of the plan is inconsistent with the purpose

of the Code to not deprive a secured creditor of the benefit of his
bargain.

106 The secured creditor is entitled to money or property to
the extent of the value of his claim as of the effective date of the

plan.
107 The secured party will receive the value of his original bar-

gain only to the extent that he "is adequately protected in respect

to that value over the life of the plan." 108

A simple example will illustrate this point. Creditor lends Deb-
tor $1,000 and takes a security interest in Debtor's VCR. At the con-
firmation hearing, the parties agree that the VCR has a liquidation
value of $720. Thus, under section 506(a) Creditor has a secured claim
of $720. In his Chapter 13 plan, Debtor provides for thirty-six month-
ly payments of $20 to satisfy Creditor's secured claim for $720.109

After the end of the plan's second year, Debtor defaults. Debtor still

owes Creditor $240, but the value of the collateral has depreciated
to $140.

110
If Creditor reposseses the VCR and sells it for $140, he

will incur a loss of $100.

Clearly, whenever a secured claim is satisfied at a rate slower

than the rate of depreciation in value of the underlying collateral,

the secured creditor will be deprived of the full value of his claim in

mSee House Judiciary Committee Report, supra note 3, at 338-40, [1978] U.S.
Code Cong. & Ad. News at 6294-97. See Wright v. Union Central Life Ins. Co., 311
U.S. 273 (1940); Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 560 (1935).

107
11 U.S.C. § 1325(a)(5) (Supp. IV 1980). For methods of claim valuation, see the

discussion of § 506(a) accompanying note 14 supra.
mIn re Crockett, 3 Bankr. 365, 367 (N.D. 111. 1980); See GMAC v. Miller (In re

Miller), 13 Bankr. 110, 117-18 (S.D. Ind. 1981); ABD Federal Credit Union v. Williams
(In re Williams), 6 Bankr. 789, 792-93 (E.D. Mich. 1980); Citizens & Southern Nat'l Bank
v. Feimster (In re Feimster), 3 Bankr. 11, 14-15 (N.D. Ga. 1979); GMAC v. Lum (In re
Lum), 1 Bankr. 186, 187 n.l (E.D. Tenn. 1979). Contra, Associates Com. Corp. v. Brock

(In re Brock), 6 Bankr. 105, 107-08 (N.D. 111. 1980) (adequate protection available only

between time of filing and confirmation).
109See valuation discussion accompanying notes 20-24 supra. In order to focus at-

tention on the impact of depreciation on the secured creditor, this example ignores the

time value of the claim which is treated separately at notes 115-25 infra and accom-

panying text.
n0For simplicity, assume that the VCR has a useful life of two years and a salvage

value of $140. Using the straight line depreciation method, the VCR would depreciate
by $290 per year.

$720 - $140 = $290



588 INDIANA LAWREVIEW [Vol. 15:569

the event that the debtor defaults before the plan is completed. The

debtor may, however, provide adequate protection either by adjust-

ing the payments under the plan so that the unsatisfied claim is

never more than the value of the collateral or by supplying the

creditor with additional security.111

For example, if Debtor knew that his VCR would depreciate in
value by $290 per year, he could have fully protected the value of

Creditor's claim by adjusting the monthly payment by $4.17 so that

Creditor would be paid $24.17 per month.112 To guard against a loss
of $4.17 if Debtor defaults when the first payment comes due, the
plan should provide for an initial payment to Creditor of $4.17 on

the first day of the plan. Thus, if Debtor defaults, the unsatisfied

portion of the claim will exactly equal the value of the collateral.

If the debtor does not make allowance in his plan for deprecia-
tion of the collateral, the secured creditor would have cause to re-

quest the court to lift the stay.
113 The debtor would have the burden

to show that the creditor's interests are adequately protected. 114

2. Time Value. — The same adequate protection considerations
apply to providing for the payment of interest over the course of

the plan to account for the time value of the creditor's claim. The

m
ll U.S.C. § 36K1M2) (Supp. IV 1980). See, e.g., In re Methvin, 11 Bankr. 556, 558

(S.D. Miss. 1981); Chrysler Credit Corp. v. Cooper {In re Cooper), 7 Bankr. 537, 542

(N.D. Ga. 1980).
112The monthly depreciation adjustment of $4.17 was calculated by taking the dif-

ference between the annual rate of depreciation, $290, and the annual rate of claim

satisfaction, $240, and dividing by 12.

($290 - $240) + 12 = $4.17

To assist the debtor in calculating depreciation or other financial measures, the
secured creditor, who normally has greater access to such data, should provide the
debtor with the relevant tables or information. In re Clements, 11 Bankr. 38, 41 (N.D.

Ga. 1981) (court ordered the creditor to provide the debtor with loan amortization in-

formation).
113
11 U.S.C. §§ 362(d)(1), 363(e) (Supp. IV 1980). See, e.g., Chrysler Credit Corp. v.

Cooper {In re Cooper), 7 Bankr. 537, 542 (N.D. Ga. 1980). A split has developed among
the courts on the applicability of section 362(d)(2) to Chapter 13 as a discrete alter-

native for requesting the court to lift the stay. For a well-reasoned decision finding

section 362(d)(2) applicable to Chapter 13, see GMAC v. Miller (In re Miller), 13 Bankr.
110, 115-16 (S.D. Ind. 1981). Accord, State Employees' Retirement Fund v. Gardner {In
re Gardner), 14 Bankr. 455, 456 (E.D. Pa. 1981); Provident Sav. Ass'n v. Pannell {In re

Pannell), 12 Bankr. 51, 53 (E.D. Pa. 1981); First Nat'l Bank of Northglenn v. Pittman {In
re Pittman), 8 Bankr. 299, 301-02 (D. Colo. 1981); First Connecticut Small Business Inv.

Co. v. Ruark, 7 Bankr. 46, 47-49 (D. Conn. 1980); In re Zellmer, 6 Bankr. 497, 500 (N.D.

111. 1980); Associates Commercial Corp. v. Brock {In re Brock), 6 Bankr. 105, 107 (N.D.

111. 1980). Contra, In re Garner, 4 C.B.C. 1417, 1424 (S.D.N.Y. 1981); Carpenter v.

Youngs {In re Youngs), 7 Bankr. 69, 71 (D. Mass. 1980); Citizens & Southern Nat'l
Bank v. Feimster {In re Feimster), 3 Bankr. 11, 14 (N.D. Ga. 1979).

114
11 U.S.C. §§ 362(g)(2), 363(e) (Supp. IV 1980).



1982] COLLATERAL VALUATION 589

legislative history of section 1325(a)(5)(B) indicates that the debtor's

plan of deferred payments must have a present value equal to the
value of the allowed secured claim as of the date of the confirmation

hearing.
115

In section 1325(a)(5)(B)(ii), Congress recognized the necessity of

compensating the creditor for the time value of his claim by in-
cluding in the plan interest payments at a rate equal to the discount
rate, thereby equating the value of the future stream of payments
as of the confirmation date to the value of the allowed secured

claim.
116 The protection afforded by section 1325(a)(5)(B)(ii) is of prac-

tical significance, however, only if the interest component of each
deferred payment is secured.

Crucial to an understanding of section 1325 is the recognition

that the allowed secured claim does not have a static value. The
claim increases in value over the course of the plan as the secured

creditor forgoes the ability to earn a return on his money while the
debtor undergoes rehabilitation. As the value of the claim increases
over time, so also must the amount of the deferred payments in-
crease to satisfy the claim. The only way to guarantee that the se-
cured creditor receives the full value of his claim, indeed to satisfy

the requirements of section 1325, is by the debtor's provision in the

deferred payments for the time value of the secured creditor's claim.

Once the time value of the claim is accounted for, the secured credi-

tor's realization of the full value of his claim is wholly dependent

upon providing the secured creditor with additional security in the

amount of the accrued interest (time value) to adequately protect
the secured creditor in the event that the debtor is unable to comply

with his plan.

Collier would deprive the creditor of the full value of his claim

by interpreting section 1325(a)(5)(B)(i) to exclude from the protection

of the lien retained by the creditor under the plan interest pay-

ments in excess of the deferred payments aggregating to the amount

of the allowed secured claim. 117 This interpretation has no logical

basis and is inconsistent with the legislative history accompanying

section 1325(a)(5)(B) as well as with the purpose of the Code to ade-

quately protect the interests of secured creditors.
118

A few examples will show that it is essential for the present
value of the stream of deferred payments to equal the amount of the

,16
124 Cong. Rec. 32,410 (1978).

ll,
ll U.S.C. § 1325(a)(5)(B)(ii) (Supp. IV 1980).

ulSee 5 Collier, supra note 4, 1 1325.01[3][b][ii], at 1325-26 to -27.

"'See House Judiciary Committee Report, supra note 3, at 338-40, [1978] U.S.

Code Cong. & Ad. News at 6294-97.



590 INDIANA LAWREVIEW [Vol. 15:569

allowed secured claim in order to provide the creditor with the full

value of his claim. In addition, the examples will illustrate the

necessity of sheltering the interest component of the deferred pay-
ments under the umbrella of the section 1325(a)(5)(B)(i) retained lien.

Consider a case in which Creditor has an allowed secured claim

for $3000. If Creditor had the $3000 available outside bankruptcy, he

could invest it and earn an annual return of 18%. For simplicity,
assume that Debtor's plan calls for making three equal annual pay-
ments of $1379.77. 119 An amortization schedule would show that
$540.00 of the payment goes to interest (time value) and $839.77
goes to principal.

120 Therefore, if Debtor defaulted when the first
payment came due, the Collier interpretation of the Code would give
Creditor a lien for $3000, the principal, but no lien for $540.00, the

time value of the $3000 on which Creditor has lost the opportunity

to earn an annual return of 18%. Forcing Creditor to queue up with
the other unsecured creditors may be tantamount to completely
depriving him of the time value of his claim.

Without adequate protection of the interest portion of the defer-

red payment, the requirement that the present value of the deferred

payments must equal the amount of the allowed secured claim is no
longer met. This is evident when a default occurs one year into the
plan. Creditor will repossess the collateral covered by the lien and

presumably either retain the property worth $3000 or convert it into

its cash equivalent. Thus, the repossession of the collateral can be

viewed as the repayment of a $3000 loan in a lump sum of $3000 after
one year. The present value as of the confirmation hearing of a $3000
payment one year hence is $2542.37. 121 Obviously, the present value of
this interestless "deferred payment" does not equal the allowed

amount of the secured claim of $3000. Yet section 1325(a)(5)(B)(ii) re-
quires such an agreement of values.

119The general formula for calculating present value is:

PV = PMT / l-(l + i)~N \

where: PV = Present value of a debt or an account
PMT = Payment per period
i = interest rate for payment period

N = Number of periods

PMT = $3000 * / 1- (1.18)-

3

,

\ = $1379.77.
V .18 /

120
D. Thorndike, Thorndike Encyclopedia of Banking and Financial Tables

Table 2 at 202-05 (Supp. 1980).
121PV = $3000 / l-d.18)- 1 v = $2542.37./ i-u.isr

x
\

I 18 J



1982] COLLATERAL VALUATION 591

Without protecting the time value of Creditor's claim by grant-
ing him additional security, Creditor is denied the benefit of his bar-
gain, the full value of his claim outside of bankruptcy. In effect, Debt-

or will have exacted an interest-free loan from Creditor unless the
Code is properly construed to adequately protect Creditor's valuable
property interest by providing him not only the time value of his
claim but also the means to realize his compensation for lost oppor-
tunities.

To support the contention that the interest component of the de-
ferred payments is not secured, Collier cites the legislative history
of section 1325 which contains the language: "Thus the lien created

under section 1325(a)(5)(B)(i) is effective only to secure deferred

payments to the extent of the amount of the allowed secured claim." 122

Collier assumes that the amount of the allowed secured claim is a
fixed value, but, as shown above, the value of the allowed secured
claim increases over time because of its inherent time value.

Congress recognized the time value of the claim when it directed
the debtor to equate the present value of the deferred payments
with the amount of the allowed secured claim in the preceding sen-
tence of the same legislative history.123 The legislative history con-
tinues: "To the extent the deferred payments exceed the value of
the allowed amount of the secured claim and the debtor subse-
quently defaults, the lien will not secure unaccrued interest

represented in such deferred payments." 124

The legislative history merely indicates that to the extent the
value of the allowed secured claim has not yet been augmented by
its time value, the creditor will have only the amount of the secured
claim secured. For example, after one year the allowed secured

claim has increased in value from $3000 to $3540 because of time

value. Both the $540 representing accrued interest and the $3000

representing the original value of the claim are secured by the lien.

If the Debtor had not defaulted, however, the value of the allowed

secured claim would have grown to $4929.10 by the end of the third
year. Of that total amount, $1929.10 represents time value. At the
end of the first year, $540 of the $1929.10 has been accrued and the

remainder, $1389.10, is unaccrued interest. The latter amount is, of

course, not secured by the lien because after the default the creditor

122
124 Cong. Rec. 32,410 (1978).

129
Id. "Of course, the secured creditors' lien only secures the value of the collateral

and to the extent property is distributed of a present value equal to the allowed

amount of the creditor's secured claim the creditor's lien will have been satisfied in
full."

12
*Id. (emphasis added).



592 INDIANA LA W REVIEW [Vol. 15:569

will repossess collateral worth $3540 and invest it at a return of

18% to earn that interest himself.
Thus, neither the Code nor the legislative history casts the time

value of the allowed secured claim from the protection of the section

1325(a)(5)(B)(i) retained lien. In fact, the adequate protection provi-

sions of sections 361 and 363(e) demand that the lien be supported
by additional underlying collateral to assure the secured creditor of

the same full value of his claim as if he had been permitted to utilize
his non-bankruptcy remedies.

As in the case of depreciation, if the debtor either does not pro-
vide for the time value of the secured creditor's claim in his deferred

payments or does not provide the secured creditor with additional
security to protect his right to the time value of his claim, the

secured creditor should request that the court lift the stay and allow

the secured creditor to immediately realize the value of his claim.125

IV. Conclusion

There is no justification for the disparity among courts in their
treatment of secured creditors under Chapter 13. This Article pro-

poses consistent treatment of secured creditors under section

1325(a)(5) based on the purpose of that section. This purpose is simp-

ly stated: Section 1325(a)(5) is intended to guarantee the secured

creditor the equivalent of recourse to his collateral on the date a

Chapter 13 plan is confirmed. If problems of collateral valuation,

present value, and status of the creditor during the repayment
period were approached with this purpose in mind, the cases would
exhibit a rational consistency currently missing in this area of the

law.

125
11 U.S.C. § 362(d)(1) (Supp. IV 1980).