negative amortization

Negative amortization (also called deferral of interest) arises most often in the context of a Chapter 11 reorganization plan under the Bankruptcy Code, 11 U.S.C. § 1129(b)(2)(A)(i)(II). It occurs when a plan permits all or part of the interest on a secured claim to go unpaid for a period of time, with the unpaid interest added to the principal balance. The debtor then pays the increased balance later, usually when income improves or upon the sale of collateral.

The degree of negative amortization depends on the difference between the “accrual rate,” meaning the interest that accrues on the claim, and the “pay rate,” meaning the interest actually paid currently. Courts scrutinize such plans closely and may reject them as infeasible if they shift excessive risk to secured creditors. See In re Apple Tree Partners, L.P., 131 B.R. 380 (Bankr. W.D. Tenn. 1991).

[Last reviewed in September of 2025 by the Wex Definitions Team] 

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