Two bankruptcy judges in the Seventh Circuit have held within the last three months that the court has discretion not to dismiss a chapter 13 case just because large student loans push the debtor above the statutory maximum of $394,725 in unsecured debt.
On December 27, Bankruptcy Judge Janet S. Baer of Chicago declined to dismiss the chapter 13 case of a debtor who had $570,000 in student loans but only $22,500 in other unsecured debt. Judge Baer denied the trustee’s motion to dismiss and confirmed the debtor’s plan. The trustee appealed, but Judge Baer denied a motion for a stay pending appeal. To read ABI’s discussion of In re Pratola, 578 B.R. 414 (Bankr. N.D. Ill. Dec. 27, 2017), click here.
The March 30 opinion by Chief Judge Catherine J. Furay of Madison, Wis., presented an even better case against knee-jerk dismissal.
The debtor scheduled some $150,000 in unsecured, nonpriority debt, including about $16,000 in student loans. The debtor listed other student loans in an unknown amount. The U.S. Department of Education filed a claim for more than $340,000 in student loans. The chapter 13 trustee counted $132,000 in student loans.
The trustee filed a motion to dismiss, contending that the debtor had more than the statutory limit of $394,725 in unsecured debt under Section 109(e). That section, entitled, “Who may be a debtor,” provides in subsection (e): “Only an individual with regular income that owes . . . noncontingent, liquidated, unsecured debts of less than [$394,725] . . . may be a debtor under chapter 13 of this title.”
First, Judge Furay took the majority view and concluded that compliance with Section 109(e) is not jurisdictional, thus meaning that the court had jurisdiction whether or not total unsecured debt exceeded the cap.
Next, she examined Section 1307(c), which includes a nonexclusive list of 11 grounds on which the court “may convert [to chapter 7] . . . or may dismiss” a chapter 13 petition “for cause.” None of the 11 grounds includes debt exceeding the amount in Section 109(e).
Although the Seventh Circuit has not decided whether excessive debt is “cause” for dismissal under Section 1307, Judge Furay conceded that several lower courts have held that the lack of Section 109(e) eligibility constitutes “cause.” Even if there is “cause,” she said, the court “may still decline to convert or dismiss.”
Judge Furay seemed persuaded by the “policy considerations” in Pratola, which she found “particularly persuasive.” She also cited cases for the proposition that conversion or dismissal in chapter 13 is “a matter of discretion,” with the decision “made on a case-by-case basis considering the best interest of creditors and the bankruptcy estate.”
Focusing on the facts at hand, Judge Furay said that the plan was feasible; the debtor could make plan payments, and no one aside from the trustee had objected to confirmation.
Reading the statute literally and dismissing “would lead to an absurd result,” Judge Furay said, because the “debtor has no other option.”
She was an above-median income debtor with disposable income and therefore would be ineligible for conversion to chapter 7. Chapter 11, she said, “would be absurd for this true consumer debtor.” In addition to being cumbersome and inordinately expensive, chapter 11 would reduce the recovery by creditors “by more than 20%,” Judge Furay estimated.
Judge Furay denied the motion to dismiss because holding “otherwise would effectively exclude this debtor from relief” because she could not “realistically obtain relief under any section of the Code.”
On appeal, a court could confirm on a narrow ground, because Judge Furay found that “the amount of unsecured debt is not clearly established.” If she were to accept the trustee’s allegation of $132,000 in student loans, the debtor would come in below the Section 109(e) threshold.