In six cases where neither the chapter 13 trustee nor creditors had lodged objections to confirmation of the plans, Bankruptcy Judge Diane Davis of Utica, N.Y., refused to approve four plans because the debtors proposed paying a larger percentage to holders of nondischargeable student loans than to general unsecured creditors.
In her February 4 opinion, Judge Davis confirmed two of the six plans. In one case, the debtor proposed paying student loan and unsecured creditors in full. In the other, the plan called for paying an identical 1% to all unsecured creditors, including the holder of student loans.
The opinion by Judge Davis is an admirable survey of what she called the “student loan crisis” in the U.S. In view of the nondischargeability of student loans, one partial solution to the crisis, she said, would allow a chapter 13 debtor to pay a larger percentage toward student loans than other unsecured claims.
In all six cases, the chapter 13 trustee importuned Judge Davis to confirm the plans and adopt a bright-line rule permitting confirmation so long as the student loan lender would not receive 20% more than other unsecured creditors would receive if there were no discrimination between the classes. One court, Judge Davis said, had permitted a 30% differential, while others have refused.
For Judge Davis, the problem was Section 1322(b)(1), which provides that a plan “may not discriminate unfairly” against a class of equal rank. Of course, the Bankruptcy Code does not define “discriminate unfairly.”
Judge Davis surveyed courts throughout the country that grappled with the notion of unfair discrimination. A majority of courts, she said, have adopted a four-factor test. Other courts have added up to three more factors. In her district, Judge Davis said the prevailing authority since 1995 had not permitted any discrimination in favor of student loans.
In view of the varying tests, Judge Davis said that uncertainty “is the only certainty that has developed in the extensive body of case law on this topic.”
To provide certainty in her court, Judge Davis adopted the approach crafted by the First Circuit Bankruptcy Appellate Panel and other courts that have adopted the BAP’s “baseline” test. See Bentley v. Boyajian (In re Bentley), 266 B.R. 229 (B.A.P. 1st Cir. 2001).
Fundamentally, the Bentley test is founded on two principles: (1) student loans are not priority claims and thus are not inherently entitled to better treatment than other unsecured claims; and (2) chapter 13 is based on the “expectation” that unsecured creditors will receive pro rata distributions from “the debtor’s mandatory contributions.” [Emphasis by Judge Davis.]
Based on those two precepts, Judge Davis deduced that greater payments toward student loans are permissible only “to the extent that debtors have excess or discretionary income beyond their projected disposable income.” In other words, she said, Bentley allows paying more on student loans only if the debtor is using discretionary income in excess of disposable income “to make additional voluntary payments to student loan creditors.”
Applying Bentley to the six cases, four failed confirmation because the debtors were not using discretionary income to enhance the payments toward student loans. One creditor earned confirmation by paying all creditors in full, and the sixth debtor confirmed a plan with 1% for all unsecured creditors.
Observations
Judge Davis’ opinion laudably argues that unfair discrimination should be more flexibly interpreted in chapter 13 than in chapter 11. However, her conclusion essentially bars greater payments toward student loans unless the debtor is prepared to live a more Spartan lifestyle than chapter 13 permits. Furthermore, a debtor’s ability to generate greater discretionary income will often result from idiosyncratic facts that enable a debtor to exploit loopholes in chapter 13. Thus, not all debtors will be able to enhance payments toward student loans.
Section 1322(b)(1) does not altogether bar discrimination in favor of student loan lenders or any other class of creditors. It therefore seems to this writer that courts should be entitled to develop standards that do not end up barring discrimination.
The problem is this: Courts have a natural fondness for rules, with bright-line rules being most preferred. However, the statute does not suggest what the rule should be, thus leaving the field open for judicial interpretation. Nonetheless, uniformity throughout the country, or even within the same district, is a laudable goal. Within a district, bankruptcy judges can agree among themselves. At the circuit level, it’s up to the court of appeals.
As interpreted by most courts, Congress made student loans exceptionally difficult to discharge in Section 523(a)(8). Perhaps the inability to discharge student loans and a statute that provides no guidance together suggest that courts may permit discrimination in favor of student loans.
Even if ordinary unsecured creditors receive less than student loan creditors, it’s likely they will receive more in chapter 13 than if the debtor were eligible for chapter 7. Thus, a discriminating chapter 13 plan would pass muster under the best interest test that underpins much of bankruptcy law. And if a chapter 11 corporate debtor can pay more to ongoing trade suppliers, why can’t a chapter 13 debtor pay more to a student loan lender who will be a millstone around the debtor’s neck for decades to come?
In six cases where neither the chapter 13 trustee nor creditors had lodged objections to confirmation of the plans, Bankruptcy Judge Diane Davis of Utica, N.Y., refused to approve four plans because the debtors proposed paying a larger percentage to holders of nondischargeable student loans than to general unsecured creditors.
In her February 4 opinion, Judge Davis confirmed two of the six plans. In one case, the debtor proposed paying student loan and unsecured creditors in full. In the other, the plan called for paying an identical 1% to all unsecured creditors, including the holder of student loans.
The opinion by Judge Davis is an admirable survey of what she called the “student loan crisis” in the U.S. In view of the nondischargeability of student loans, one partial solution to the crisis, she said, would allow a chapter 13 debtor to pay a larger percentage toward student loans than other unsecured claims.
In all six cases, the chapter 13 trustee importuned Judge Davis to confirm the plans and adopt a bright-line rule permitting confirmation so long as the student loan lender would not receive 20% more than other unsecured creditors would receive if there were no discrimination between the classes. One court, Judge Davis said, had permitted a 30% differential, while others have refused.
For Judge Davis, the problem was Section 1322(b)(1), which provides that a plan “may not discriminate unfairly” against a class of equal rank. Of course, the Bankruptcy Code does not define “discriminate unfairly.”