Cure and Reinstatement of Defaulted Loan Under Chapter 11 Plan Requires Payment of Default-Rate Interest

Summary

This article discusses a recent bankruptcy case addressing the rate of interest to cure and reinstate a defaulted loan. Section 1124(2) of the Bankruptcy Code gives Chapter 11 debtors a valuable tool for use in situations where long-term prepetition debt carries a significantly lower interest rate than the rates available at the time of emergence from bankruptcy. Under this section, in a Chapter 11 plan, the debtor can cure any defaults under the relevant agreement and reinstate the maturity date and other terms of the original agreement, thus enabling the debtor to lock in a favorable interest rate in a prepetition loan agreement upon bankruptcy emergence.