Reconceptualizing Present-Value Analysis in Consumer Bankruptcy

Abstract

During the three decades following the enactment of the Bankruptcy Code, courts and commentators have been vexed by the problem of determining the present value of future payments to creditors proposed in a debtor’s repayment plan. The central issue to this problem has been the discount rate to be applied when conducting present-value analysis. While the Code unmistakably requires the discounting of future payments as part of the process for confirming a repayment plan, the Code does not explicitly specify the rate itself or the manner in which the rate should be calculated.

No uniform rule of decision has emerged on this issue. Instead, a multitude of approaches has proliferated within and across circuits. Not even the Supreme Court has been able to bring uniformity to bear on the issue. When given the opportunity to do so in 2004, the Court in Till v. SCS Credit Corp. could only muster a plurality opinion. In the wake of Till, disarray over the discount-rate calculus continues to abound.

The main goal of this Article is to reconceptualize present-value analysis in consumer bankruptcy. It argues that, as a positive matter, the Bankruptcy Code compels use of a discount rate that solely accounts for expected inflation, but that does not take into account opportunity cost or the risk of nonpayment. The Article also examines whether the doctrinal prescription for the application of an inflationary discount rate is normatively desirable. The Article concludes that, not only does an inflationary rate comport with generally held theory of bankruptcy law’s procedural and substantive goals, it also optimizes the statutory design of the Bankruptcy Code and the institutional design of the bankruptcy courts.

Keywords: bankruptcy, Chapter 13, cramdown, discounting, present value, Till v. SCS Credit Corp