Valuation of Collateral

Abstract

This short Essay analyzes two Supreme Court cases that considered valuation issues in consumer bankruptcy cases: Associates Commercial Corp. v. Rash, 520 U.S. 953 (1997), and Till v. SCS Credit Corp., 541 U.S. 465 (2004). The Bankruptcy law provides some wage insurance by permitting debtors to discharge debts in bad states of the world, and also provides incentives for borrowers to avoid those states because bankruptcy is costly to persons and discharge may not be complete. The Essay shows that these two cases reach inconsistent results from an insurance and an incentive point of view. Rash chose a valuation standard for collateral whose effect is to reduce the Code's ability to insure, but thereby to increase the borrower's incentive to avoid bankruptcy. Till chose an interest rate standard for discounting to present value the periodic payments that are supposed to equal the collateral's actual value. The effect of the Till standard is to require the individual borrower to purchase more insurance against default than theretofore, and thereby to reduce the borrower's incentive to avoid bankruptcy. The opinions in Till appear to be unaware of these inconsistencies, and the opinions in Rash seem not to understand its effect. Both cases also increased the administrative costs of bankruptcy by creating additional occasions for valuation and interest rate hearings. The Essay concludes by remarking that the Supreme Court's limited competence in the bankruptcy field and its restricted docket suggest that the task of harmonizing bankruptcy law among the circuits actually falls on the circuit courts unaided. These courts thus should be more sensitive to uniformity issues than they have been.