Unfair discrimination against general unsecured creditors does not result automatically if a chapter 13 plan pays a larger percentage to a student loan lender.
Chief Bankruptcy Judge David R. Duncan of Columbia, S.C., seemed persuaded to confirm the plan because the debtors would have emerged from chapter 13 with more student loan debt than they owed at the outset unless the student loan lender were paid more than general unsecured creditors.
A couple with income above the median in South Carolina filed their chapter 13 petition owing some $64,000 on student loans. The monthly payment on the student loans was $476, including $200 a month in interest. In the six months before filing, they had been making payments on the student loans. In liquidation, general unsecured creditors would receive nothing.
The debtors proposed a plan placing the student loans in a separate class and continuing the pre-bankruptcy payments. Over the five-year life of the plan, the student loan lender would receive 44.5% of its claim while non-student loan unsecured creditors would recover 33.3% on their $90,000 in claims.
If the student loans were treated like other unsecured claims, payments would not begin until the 30th month of the plan, resulting in penalties and accrual of interest. Consequently, Judge Duncan said in his Nov. 1 opinion that the debtors would be saddled with more student loan debt on emerging from chapter 13 than they owed on filing, if the plan treated the student loans like other unsecured claims.
Although the debtors were contributing more than their disposable income, the chapter 13 trustee objected to confirmation, contending that the plan unfairly discriminated against non-student loan creditors.
Judge Duncan established through citation of authority that Section 1322(b)(1) allows discrimination so long as it is not unfair against any class. He then turned to the question of whether the discrimination was unfair.
Judge Duncan said that the voluntary contribution of more than the required amount of the debtors’ disposable income “indicates good faith” because unsecured creditors would receive 33.3%, “a significant percentage in a chapter 13 case.”
Since cutting down on student loan payments would have the debtors owing more on student loans than they did on filing chapter 13, Judge Duncan said that allowing higher payments would be consistent with providing the debtors a fresh start.
Under the “totality of the circumstances,” Judge Duncan confirmed the plan because higher payments on student loans would not unfairly discriminate against other unsecured creditors.