Post-petition interest: Overview, definition, and example
What is post-petition interest?
Post-petition interest refers to the interest that accrues on debts or liabilities after a bankruptcy petition has been filed by the debtor. In the context of bankruptcy, a petition is filed by an individual or company seeking relief from creditors, typically to reorganize or liquidate their assets under the protection of the bankruptcy court.
The issue of post-petition interest arises when creditors are entitled to continue receiving interest payments on their debts during the bankruptcy process. The accrual of interest on outstanding debts after the bankruptcy filing is subject to specific rules, and the bankruptcy court has the discretion to determine whether, how, and at what rate post-petition interest will be paid to creditors.
Why is post-petition interest important?
Post-petition interest is important because it impacts the total amount owed to creditors and the timing of repayment during bankruptcy proceedings. Creditors may seek to recover this interest to ensure they are fairly compensated for the time that passes while the bankruptcy case is pending.
For debtors, post-petition interest can increase the overall cost of the bankruptcy process, affecting the outcome of debt restructuring or liquidation. Understanding how post-petition interest works is crucial for both debtors and creditors as it affects the financial dynamics of the bankruptcy case and the distribution of assets.
Understanding post-petition interest through an example
Imagine a company files for bankruptcy protection, and as part of the process, it owes a creditor $1 million. The creditor initially agreed to an interest rate of 5% per year on the debt. After the bankruptcy petition is filed, the creditor wants to continue accruing interest on the amount owed, despite the automatic stay that halts collection actions.
In this case, post-petition interest may be allowed, but the bankruptcy court has to determine whether the creditor is entitled to it and at what rate. If the court allows the post-petition interest at 5%, the total amount owed by the company could increase over the duration of the bankruptcy process, making the overall debt larger.
However, if the court decides that no post-petition interest will be granted, the creditor’s claim would remain fixed at $1 million, and no additional interest would be accrued during the bankruptcy proceedings.
In some cases, post-petition interest may also be limited to certain classes of creditors, such as secured creditors, and may be applied only to specific types of debts.
Example of a post-petition interest clause
Here’s an example of what a post-petition interest clause might look like in a bankruptcy settlement or reorganization plan:
“The Debtor agrees that post-petition interest shall accrue on all allowed claims at the rate of [interest rate], beginning from the date the bankruptcy petition was filed, until such claims are paid in full or otherwise resolved. The payment of post-petition interest shall be subject to the approval of the Bankruptcy Court and shall be paid according to the priority of the claims established under the bankruptcy plan.”
Conclusion
Post-petition interest is a critical aspect of bankruptcy cases, affecting both creditors and debtors. It determines whether creditors can continue to accumulate interest on their claims during the bankruptcy process and, if so, at what rate. The bankruptcy court has discretion in determining whether post-petition interest will be allowed and can influence the overall outcome of the bankruptcy case. Both debtors and creditors must understand how post-petition interest can impact the resolution of the bankruptcy and the repayment of debts.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.