The US Bankruptcy Court in Massachusetts says default rates must be justified as a reasonable measure of damages at the time of the making of the loan and that a floating default rate that can exceed 5% will not be allowed as part of a creditors claim in the borrower's bankruptcy. The loan was made in 2006 with a contract rate equal to prime at a time when the prime rate was below 13 percent. The default rate was prime plus 5% with a floor of 18%. The bank filed a proof of claim that included a default rate of 18% and the debtor objected. The court says the default rate was not chosen for its merits as a reasonable measure of damages, but rather because the lender saw that others were setting the same 18% floor and thought that it could do the same. The lesson is that a default rate of greater than 5% is not likely to be approved in a bankruptcy case for inclusion in the claim calculation. The case is In re Charles Street Affican Methodist Episcopal Church of Boston decided earlier this year.