Walter J. Blum

Treatment of Interest on Debtor Obligations in Reorganizations under the Bankruptcy Code

Does interest run on unsecured interest-bearing obligations of the debtor after the filing of a petition for reorganization under the Bankruptcy Code? This question carries a lot of historical baggage. The pre-Code statute did not address it for either secured or unsecured obligations. The courts developed one rule for liquidations and another for reorganizations. They established early that in an ordinary bankruptcy liquidation no interest would run after the filing of the petition,2 except that interest at the applicable legal rate would be credited if something of value were left after the allowed principal claims of all creditors had been satisfied in full.3 Extrapolating from these rules, the courts later determined that postpetition interest would be allowed at the contract rate in reorganizations in two situations: (1) on secured claims, so long as the value of the collateral covered the enlarged sum, and (2) on unsecured claims,