Coerced Loan Approach

One of the methods the bankruptcy courts use to set the cramdown interest rate that a plan must provide to a secured creditor that does not accept the plan. Under the coerced loan approach (also referred to as the “forced loan approach”), the court sets the cramdown interest rate at the rate that the creditor would receive if the creditor were permitted to liquidate its collateral and reinvest the proceeds in a new loan to a third party (free of any coercion), on terms comparable to the “forced loan” under the debtor’s plan in terms of duration and risk. The coerced loan approach is one species of the “market rate approach” (see Market Rate Approach), and was rejected by the United States Supreme Court (see Cramdown Interest Rate) in favor of the formula approach (see Formula Approach).

See also Cost of Funds Approach, Cramdown, Cramdown Interest Rate, Forced Loan Approach, Formula Approach, Market Rate Approach, Presumptive Contract Rate Approach, Prime Plus Formula Approach, Treasury Plus Formula Approach.

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