In a split decision, the majority on the Fifth Circuit panel are requiring chapter 13 debtors to accelerate the repayment of nondischargeable student loans when there is available disposable income. As Circuit Judge Priscilla Richman said in her dissent, the majority sided with the chapter 13 trustee by requiring “repayment of long-term, non-dischargeable student loan debt . . . before it is due in order for the debtors’ respective bankruptcy plans to be confirmed.”

When unsecured claims can be paid in full, the opinion appears to mean that chapter 13 debtors in the Fifth Circuit must accelerate repayment of unsecured terms loans if there is available disposable income.

For better cash flow, could a chapter 13 debtor avoid the result required in the Fifth Circuit by reaffirming an unsecured term loan?

Disposable Income Enough to Pay Unsecured Claims in Full

The appeal involved two chapter 13 debtors. Both were above median income with five-year plans, and both had nondischargeable student loans. For one debtor, the student loan was “in deferment.” The student loan for the other was “in forbearance.”

The debtors’ disposable income evidently was sufficient to pay the student loans and other unsecured debt in full over the terms of the plans. However, the plans only provided for full payment of other unsecured claims. As Judge Richman said in her dissent, the student loans would “be fully repaid under the terms of the loans, with interest,” after completion of plan payments.

Writing for the majority, Circuit Judge Irma Carillo Ramirez characterized the chapter 13 trustee as having objected to confirmation because the two plans did not commit to paying all unsecured claims in full over the course of the plans, “even though Debtors were projected to earn enough disposable income during the applicable commitment period to pay all allowed, unsecured claims.”

Taking sides with the debtors and overruling the trustee’s objections, the bankruptcy judge confirmed the plans. “[A]lthough Debtors’ student-loan obligations would not be paid in full during the Plans,” the bankruptcy judge reasoned, “§ 1325(b)(1)(A) was nevertheless satisfied because those obligations would be paid in full ‘according to their contractual terms as permitted under § 1322(b)(5).’”

After the district court affirmed, the chapter 13 trustee appealed to the circuit.

The Statutes

For herself and Circuit Judge Andrew S. Oldman, Judge Ramirez said that chapter 13 gives debtors “a significant amount of flexibility” in their plans, quoting circuit authority. However, the outcome of the appeal turned on the interrelationship between Section 1325(b)(1)(A)-(B) and Section 1322(b)(5).

“If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan,” Section 1325(b)(1) provides that

the court may not approve the plan unless, as of the effective date of the plan — (A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or (B) the plan provides that all of the debtor’s projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.

Although the plan was not devoting all disposable income to the payment of unsecured claims, the debtors contended they were entitled to confirmation by Section 1322(b)(5), which provides for “the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due.”

Judge Ramirez quoted the Collier treatise for saying that “‘the plan may not be confirmed unless the debtor proposes to pay into the plan all of the debtor’s “disposable income” for a specified period or until all allowed unsecured claims are paid in full, whichever is earlier.’” When all disposable income is not devoted to unsecured creditors, she went on to paraphrase Collier for saying “that the trustee’s § 1325(b)(1) objection may be overcome if the debtor proposes to pay the full value of the allowed, unsecured claims ‘under the plan.’”

In both cases, the debtors were neither paying all unsecured claims in full nor were they using all of their disposable income. The question then became whether Section 1322(b)(5) was a safety valve allowing confirmation.

For Judge Ramirez, the question turned on the meaning of “under the plan,” as used in both statutes. “In isolation,” she said that the debtors’ and the trustee’s interpretations were both “reasonable.”

‘13’ Means Paying as Much as You Can

Judge Ramirez found the answer in “Chapter 13’s statutory scheme.”

“On more than one occasion,” Judge Ramirez said that the “Supreme Court has made clear that ‘under the plan’ in § 1325(a)(5)(B)(ii) means the debtor must finish paying off the value of the allowed, secured claim by the end of the plan.” Citing the Fifth Circuit, she said that “provisions of Chapter 13 containing ‘under the plan’ show that the phrase means during the life of the plan.”

In terms of policy and quoting the House Report on the amendments that gave rise to chapter 13 as we know it today, Judge Ramirez said that “BAPCPA sought ‘to ensure that debtors repay creditors the maximum they can afford.’” “Section 1325(b) operates harmoniously with this purpose,” she said.

“Given that § 1325(b)(1)(A)’s use of the phrase ‘under the plan’ means by the end date of a Chapter 13 plan,” Judge Ramirez held that “the statute requires Debtors to pay in full all allowed, unsecured claims — including their student-loan obligations — within the life of the Plans.”

‘Shall’ in 1325(b) Beats Out ‘May’ in 1233(b)(5)

Judge Ramirez devoted the remainder of her opinion to rebutting the debtors’ arguments, beginning with the debtors’ idea that the payments on student loans were “under the plans” given that they were “provided for” in the plans. Because the debtors would not be entitled to discharges until having completed all payments under the plans, she said that the debtors’ contention would not allow them to have discharges until many years down the road when the student loans were paid in full, long beyond the five-year limit on chapter 13 plans.

While Section 1322(b)(5) says that the “plan may” cure and continue payments on a debt that finally comes due after the plan is over, Judge Ramirez noted that Section 1325(b) uses the word “shall.” She would not allow “a permissive provision [in § 1322(b)(5) to] trump[] a mandatory one [in § 1325(b)], which runs counter to ordinary meaning and standard interpretive practices.”

Judge Ramirez explained when debtors could employ Section 1322(b)(5): “Debtors may treat their student-loan obligations under § 1322(b)(5) as long as they are contributing 100% of their disposable income to paying off all allowed, unsecured claims (including the student loans).” In other words, a debtor may repay a student loan at the contract or deferral rate only when all disposable income is going to creditors.

Finding that the text in Section 1325(b)(1)(A) was “plain and unambiguous,” Judge Ramierz vacated the confirmation order while allowing the “Debtors to file new plans consistent with this decision.”

The Dissent

Judge Richman “respectfully” dissented, summarizing the facts as follows:

The plans provide that all unsecured debt other than the student loans will be repaid in full during the sixty-month duration of the bankruptcy plan. The student loans, however, will be fully repaid under the terms of the loans, with interest, beyond that sixty-month period and will be paid directly to the creditors. Each of the debtors has disposable income, after allowing for one hundred-percent payment of debts during the term of the plan, that could be used to repay the full amounts of the student loans during the sixty-month duration of the plan if that debt is accelerated.

The majority’s decision, Judge Richman said, meant that the “repayment of long-term, non-dischargeable student loan debt [would] be accelerated and repaid years before it is due in order for the debtors’ respective bankruptcy plans to be confirmed.”

Judge Richman disagreed about the interpretation of “under the plan.” She said,

The term “under the plan” as used in § 1325(b)(1)(A) is not limited to during the plan. The concept of during the plan is encompassed within, but not as broad as, “under” the plan. In other words, non-dischargeable debts can be provided for “under the plan” even though they will not be repaid during the plan.

Judge Richman went on to say that “§ 1322(b)(5) aids in understanding that bankruptcy plans may recognize that certain long-term debts are not discharged and will be repaid long after other debts are repaid and discharged under ‘the plan.’” Although the wording “is admittedly clumsy,” she read it to mean that “a ‘plan’ may recognize that a future payment or payments will continue to be due under long-term, non-dischargeable loans ‘after the date on which the final payment under the plan is due.’”

Judge Richman disagreed with the majority’s understanding that the debtors would not be entitled to discharges until paying the student loans in full, years after completion of the five-year plan. She explained:

Under 11 U.S.C. § 1328(a)(1), “as soon as practicable after completion by the debtor of all payments under the plan,” the court “shall grant the debtor a discharge of all debts provided for by the plan . . . except any debt . . . provided for under section 1322(b)(5).”

Judge Richman ended her opinion by taking sides with the First Circuit Bankruptcy Appellate Panel’s decision in In re Nieves, 647 B.R. 809 (B.A.P. 1st Cir. 2023). She read the BAP as holding that “§ 1322(b)(5) permits a plan to maintain contractual payments for the remaining term of the debt even though the final payment of the debt is to be paid after the three- or five-year term of a plan.” She read the BAP as saying that “the intent of Congress was clear and that requiring long-term contracts to be accelerated to be paid within a three- to five-year plan limitation would scuttle protections Congress intended to provide to homeowners and other borrowers under long-term contracts.”