When can (or must) Postpetition Interest be Paid through a Plan?

26 Oct When can (or must) Postpetition Interest be Paid through a Plan?

Oversecured claims are entitled to postpetition interest in a plan if they are being paid through a plan. A claim is oversecured when their is some equity in the collateral after deduction of the claim (and any senior secured claims). On the other hand, claims that are undersecured or unsecured can not be paid postpetition interest via a Chapter 13 plan. This is because Section 502 of the Bankruptcy Code prohibits the application of bankruptcy estate funds to unmatured, postpetition interest. This is disadvantageous for debtors who would rather, for example, pay interest on a nondischargeable tax debt than a higher dividend to their unsecured creditors. See this post.

A special situation exists when their is a cosigner on a debt. Some courts have held that a debtor can pay postpetition interest on a claim to protect a co-debtor. See Southeastern Bank v. Brown, 266 B.R. 900 (S.D.Ga.2001). However, this is the minority view, see Simon v. Myers, 2008 WL 276546 (Bkrtcy.S.D.Ill.2008), and unlikely to be allowed by all courts.

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