Post-Petition Interest: Key Facts for Creditors in Bankruptcy

Post-petition interest refers to the interest that accrues on a creditor's claim after the filing of a bankruptcy petition. In general, interest ceases to accrue on claims as of the petition date, with two main exceptions:

1. Oversecured Creditors: Under Section 506(b) of the Bankruptcy Code, oversecured creditors are entitled to post-petition interest up to the value of their collateral. 45
2. Solvent Debtor Exception: In cases where the debtor is solvent, unsecured creditors may be entitled to post-petition interest under the "solvent-debtor exception." This exception is based on equitable principles and aims to ensure that creditors receive the interest they would have been entitled to under their contracts if the debtor were not in bankruptcy. 17

Determining the Applicable Interest Rate

The applicable interest rate for post-petition interest is a subject of debate. Some courts have held that the contract rate should apply, while others have ruled that the federal judgment rate is the appropriate rate. The Bankruptcy Code refers to "the legal rate" in Section 726(a)(5), but does not provide clear guidance on what this rate should be. 16

Recent Court Decisions

Recent decisions from the Fifth and Ninth Circuit Courts of Appeal have addressed the issue of post-petition interest in solvent debtor cases. These courts have ruled that unsecured creditors are entitled to post-petition interest at the contract rate in order to render their claims unimpaired. 17 However, other courts have held that the federal judgment rate is the appropriate rate, citing the need for uniformity and fairness in bankruptcy cases. 28

Key Considerations

• Equitable Principles: The solvent-debtor exception is based on equitable principles, which aim to ensure that creditors receive fair treatment in bankruptcy cases.
• Contract Rate vs. Federal Judgment Rate: The choice of interest rate can have significant implications for creditors, as the contract rate may be higher than the federal judgment rate.
• Uniformity and Fairness: Courts have emphasized the need for uniformity and fairness in bankruptcy cases, which may lead to the adoption of a single interest rate for all unsecured creditors.