A district judge in Chicago reversed Bankruptcy Judge Janet S. Baer, who had ruled in December that having student loans exceeding the chapter 13 unsecured debt limit does not require dismissing an individual’s chapter 13 petition.
In his August 31 opinion, District Judge Robert M. Dow, Jr. held that the plain language of Section 109(e) makes a debtor with huge student loan debt ineligible for chapter 13 and provides “cause” to dismiss or covert the case under Section 1307(c). When a debtor is ineligible for chapter 13, failing to dismiss is an abuse of discretion, he held.
The chapter 13 debtor owed about $570,000 on student loans and another $22,500 on credit cards. He was living paycheck to paycheck, Judge Baer said. His monthly take-home pay of some $2,700 left him with about $475 in disposable income.
Under an income-based repayment plan, the debtor had been repaying his student loans at the rate of $268 a month. If he continued the payments for 25 years, any unpaid balance would be forgiven. The amount of his monthly payment would increase or decrease depending on a rise or fall in his income.
Section 109(e) provides that “[o]nly an individual with regular income that owes, on the date of filing of the petition, noncontingent, liquidated, unsecured debts of less than $394,725 . . . may be a debtor under chapter 13 of this title.” Section 1307(c) says that “the court may” may dismiss or convert a case “for cause.” The subsection lists 11 nonexclusive examples of “cause,” but excessive unsecured debt is not one of them.
Bankruptcy Judge Baer had rejected the debtor’s argument that his student loans were principally contingent debts because a large portion would likely be forgiven. However, Judge Baer said that nothing in Section 109(e) requires dismissal, and Section 1307(c) makes dismissal or conversion discretionary.
Judge Baer denied the motion to dismiss, explaining why chapter 13 was in the best interests of creditors and the debtor. In re Pratola, 578 B.R. 414 (Bankr. N.D. Ill. Dec. 27, 2017).
The chapter 13 trustee appealed. In district court, the debtor conceded that his student loans were not contingent.
Saying that he “respectfully disagrees” with Judge Baer, District Judge Dow reversed and remanded the case for the bankruptcy court to choose between dismissal or conversion. One by one, Judge Dow refuted the arguments made by Judge Baer. He said that Congress made a “bright-line rule” in Section 109(e).
Judge Dow said he was “not unsympathetic to the policy concerns raised by the Bankruptcy Court, . . . but the power to create such an exception to Section 109(e) lies with Congress rather than the courts.”
In March, Chief Judge Catherine J. Furay of Madison, Wis., agreed with Judge Baer and also declined to dismiss a chapter 13 petition when student loans along exceeded $394,725. Judge Furay concluded that creditors were better off in chapter 13. She also explained why the debtor was not eligible for chapter 7 and that chapter 11 would be infeasible. See In re Fishel, 17-14180, 2018 BL 113642 (Bankr. W.D. Wis. March 30, 2018). There was no appeal from Judge Furay’s decision.
If a student loan borrower is also ineligible for chapter 7, the debtor has no forum to test the dischargeability of student loans under Section 523(a)(8). In that circumstance, a debtor already in an income-based repayment program might argue that Judge Baer was wrong and that the debt is contingent and therefore does not count toward the chapter 13 debt limit.
To read ABI’s discussions of the decisions by Judges Baer and Furay, click here and here.
A district judge in Chicago reversed Bankruptcy Judge Janet S. Baer, who had ruled in December that having student loans exceeding the chapter 13 unsecured debt limit does not require dismissing an individual’s chapter 13 petition.