Summary
following Coonce to reject as unfairly discriminatory a plan that proposed to pay student loan creditor 50% of its claim while paying other unsecured creditors 2% of their claims
Summary of this case from In re BeldaOpinion
No. 00-84200
July 16, 2001
OPINION
This matter is before the Court for confirmation of the Chapter 13 Plan filed by Chad Lee Caruso and Lesley Anne Caruso (DEBTORS). The U.S. Trustee (TRUSTEE) has objected to confirmation on the basis that the Plan unfairly discriminates against general unsecured creditors by proposing to maintain regular monthly contract payments to the student loan creditor while proposing to pay general unsecured creditors two percent (2%) of their claims.
The DEBTORS scheduled unsecured claims in the amount of $25,753. The claims bar date has passed, and unsecured claims totaling $19,583, including the student loan claim of $11,674, have been filed. The Illinois Department of Revenue filed Claim No. 16, asserting a priority claim in the amount of $108 and an unsecured claim in the amount of $20.
The DEBTORS filed their Chapter 13 petition on December 29, 2000. On their schedule of creditors holding unsecured nonpriority claims they list the Illinois Student Assistance Commission (ISAC) for a student loan in the amount of $8,866.00. Their schedule of current expenditures shows a $170.00 per month deduction for payments on the student loan. The Chapter 13 Plan proposes to maintain the regular contract payments of $170.00 per month to ISAC, outside the Plan.
The Plan proposes that the DEBTORS will pay to the TRUSTEE the sum of $270.00 per month for thirty-six months. The Plan proposes to pay one secured claim through the Plan, to Dr. Kent Bryan in the amount of $6,280.00, plus interest at nine percent (9%), secured by a 1994 Dodge Caravan, and one priority claim to the Illinois Department of Revenue for $122.00. Following completion of the payments to the secured and priority creditors, unsecured creditors stand to receive only the minimal sum of $186.00, to be distributed in the thirty-sixth (36th) month of the Plan.
ISAC filed Claim No. 1 as an unsecured nonpriority claim for the student loan in the amount of $11,674.00. The DEBTORS and the TRUSTEE acknowledge that the student loan debt is nondischargeable pursuant to 11 U.S.C. § 523(a)(8) and 1328(a)(2). The parties also acknowledge that the contractual payments on the loan are $170.00 per month, that the loan was not in default when the bankruptcy petition was filed, and that the last contractual payment comes due after expiration of the proposed Chapter 13 Plan. Over the term of the Plan, the student loan would receive payments totaling $6,120.00, and general unsecured creditors would receive payments totaling $186.00 paid in the final month of the Plan.
According to the Court's calculation, the total distribution to unsecured creditors would be two percent (2%) of filed unsecured claims. The payments of $6,120.00 over the term of the Plan to the student loan creditor would be approximately fifty-two percent (52%) of the amount stated in ISAC'S proof of claim.
Since the last payment on the student loan is due after the date on which the final payment under the Plan is due, the DEBTORS are proposing to treat the student loan in accordance with the optional provision of 11 U.S.C. § 1322(b)(5), which provides as follows:
(b) Subject to subsections (a) and (c) of this section, the plan may —
. . . .
(5) notwithstanding paragraph (2) of this subsection, provide 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. . . .
The DEBTORS contend that their right to maintain current payments on a long-term debt is exempt from scrutiny under 11 U.S.C. § 1322(b)(1), prohibiting unfair discrimination, which provides as follows:
(b) Subject to subsections (a) and (c) of this section, the plan may —
(1) designate a class or classes of unsecured claims, as provided in section 1122 of this title, but may not discriminate unfairly against any class so designated, however, such plan may treat claims for a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims. . . .
A split of authority exists as to whether Section 1322(b)(1) applies with respect to a claim classified as a long-term debt under Section 1322(b)(5). The bankruptcy court in In re Colley, 260 B.R. 532(Bankr.M.D.Fla. 2000) collects cases on both sides of the issue. The Colley court characterizes as the majority view that plan provisions for long-term debts which qualify for Section 1322(b)(5) treatment must also pass Section 1322(b)(1) unfair discrimination scrutiny. Among the courts in the majority is the Bankruptcy Court for the Southern District of Illinois in In re Coonce, 213 B.R. 344 (Bankr.S.D.Ill. 1997). In Coonce, Judge Kenneth Meyers rejected the same argument raised by the DEBTORS, as follows:
A careful examination of Section 1322(b) reveals that its provisions are cumulative unless otherwise provided. An interpretation allowing preferential treatment of student loan debts so long as they are classified as long-term indebtedness under § 1322(b)(5) would render subsection (b)(1) superfluous. Taken to its logical conclusion, such an interpretation would require that any designation or plan provision made pursuant to a subsection of § 1322(b) would be per se exempt from the "fair discrimination" requirement of § 1322 (b)(1). Obviously, this was not Congress' intent when it drafted § 1322(b). 213 B.R. at 347.
This Court agrees with Judge Meyers and the majority. A Chapter 13 plan that proposes to maintain regular contract payments on a long-term student loan debt pursuant to Section 1322(b)(5) must still clear the Section 1322(b)(1) "unfair discrimination" hurdle.
The struggle that courts have engaged in with regard to discriminatory treatment in favor of nondischargeable student loans in Chapter 13 plans may be characterized as a conflict between the fundamental bankruptcy tenet that similarly situated creditors must be treated equally and the debtor's interest in obtaining a "fresh start" without the burden of a large amount of nondischargeable debt that must be repaid after bankruptcy. As is universally recognized, this issue must be decided on a case-by-case basis. In re Coonce, supra.
On the one hand, this Court recognizes that in most similar situations, the debtor's sole reason for specially classifying a nondischargeable student loan is because of the fact of its nondischargeability. Obviously, it is in the debtor's best interest to pay down as much as possible of nondischargeable debts with post-petition earnings that would otherwise be payable pro rata to general unsecured creditors. As this Court pointed out in In re Duggins, ___ B.R. ___, 2001 WL 672591 (Bankr.C.D.Ill., June 12, 2001), the Chapter 13 plans that are proposed and confirmed in this division are almost exclusively "pot plans." See, Matter of Witkowski, 16 F.3d 739 (7th Cir. 1994). How the dollars in the pot are allocated among various classes of creditors does not affect the amount that the debtor must pay into the plan.
Accordingly, all else being equal, the debtor naturally prefers to see as much of the pot as possible allocated to nondischargeable debts. The same rationale applies to plans where, as here, the nondischargeable student loan is paid outside the Plan with funds excluded from disposable income.
On the other hand, government made or insured student loans, although nondischargeable, are not accorded priority status under 11 U.S.C. § 507. They are properly classified as general unsecured claims. As such, their disparate treatment is presumptively unfair and the debtor has the burden of proving otherwise. In re Groves, 39 F.3d 212, 214 (8th Cir. 1994); McCullough v. Brown, 162 B.R. 506, 516 (N.D.Ill. 1993). It is well recognized that the nondischargeability of student loan debt, by itself, is not a sufficient ground to permit separate classification and more favorable treatment of such debt. In re Thibodeau, 248 B.R. 699 (Bankr.D.Mass. 2000); In re Coonce, supra at 346.
The DEBTORS argue that the proposed discriminatory treatment is a "good faith decision" based on the reality of the consequences if the payments are not maintained. If the regular payments are not permitted to be maintained, the DEBTORS suggest that a series of undesirable consequences will result, including post-bankruptcy collection efforts by the U.S.
Department of Education, negative credit reporting activity that will stay on the DEBTORS' credit report for seven years, the possibility of garnishment or setoff of income tax refunds, the addition of collection costs to the loan balance, possible ineligibility for additional government insured financial aid, and the possible suspension of professional licenses.
Although the Court can sympathize with some of these concerns, the focus on the benefit sought to be achieved by the DEBTORS via the discriminatory classification is misplaced.
This Court believes that the fairness inquiry under Section 1322(b)(1) must focus on the effect of the discriminatory treatment on the creditors who are disfavored. As pointed out by the district court in McCullough v. Brown, 162 B.R. 506 (N.D.Ill. 1993), a debtor, who has voluntarily submitted to Chapter 13 and who is the proponent of the plan, controls his own destiny with respect to the "fairness" of a plan, unlike his creditors:
Indeed, there is much to be said for a position that the only perspective from which the unfairness of a proposed differential in treatment should be evaluated is that of the disfavored class or classes of unsecured claimants. After all, the drafter of the plan decides whom to favor and whom not to favor in the first instance. Educated self-interest can thus be counted on to avoid any proposal that would operate "unfairly" against the drafter. And so a court's concern, in implementing what has been stated by Congress, should focus on whether the proposal deals unfairly as to the discriminated-against creditor class or classes.
As proposed, over the three-year term of the Plan, the student loan creditor would receive payments totaling $6,120.00 while the remaining unsecured claims would be paid a total of $186.00, in the last month of the Plan's term. On a percentage basis, the student loan creditor would be paid at least fifty-two percent (52%) of its claim during the life of the Plan while general unsecureds would be paid only two percent (2%).
The discriminatory impact upon the general unsecured creditors can best be measured by determining what they would receive were it not for the special classification of the student loan creditor. If the student loan creditor was lumped in with the other unsecureds, and the extra $170.00 per month paid to the TRUSTEE, the unsecureds would be paid a total of $5,863.00 for a distribution of thirty percent (30%) over thirty-six (36) months. Accordingly, if the proposed discriminatory classification is denied, the upside potential for general unsecured creditors is a distribution of thirty percent (30%) on the basis of filed claims. Since the Plan as proposed is a two percent (2%) Plan, general unsecureds are losing twenty-eight percent (28%) because of the special treatment of the student loan.
This calculation is based upon a TRUSTEE'S fee of 7.7% of the total amount paid to the TRUSTEE by the DEBTORS, calculated to be $1,220. This Court recognizes that its computations will not be exact, and the DEBTORS' focus should be upon the methodology, not the end result. Any error in the figures should be disregarded.
In order to pay the general unsecured creditors a distribution of thirty percent (30%), while leaving in place the favored treatment of the student loan creditor, the DEBTORS would have to increase the amount paid into the Plan by $2,187.00. This could be accomplished by leaving the monthly payment amount at $270.00 and extending the term of the Plan by nine (9) months, which would make it a forty-five (45) month Plan. Such a modification would allow the DEBTORS to remain current on (and still prefer by at least sixty-five percent (65%) to thirty percent (30%)) the student loan while, at the same time, giving general unsecured creditors the same percentage distribution that they would receive if the special classification was eliminated. Such "cause" would justify an extended term plan under 11 U.S.C. § 1322 (d). Such a plan would be fair to both the DEBTORS and to the disfavored class of unsecured claims. As stated by the district court in McCullough v. Brown:
If a plan affording such preferential treatment is to survive scrutiny under the statutory "discriminate unfairly" test, the debtor must place something material onto the scales to show a correlative benefit to the other unsecured creditors.
162 B.R. at 517. A nine (9) month extension of the Plan's term resulting in an increased distribution to general unsecureds equaling at least as much as they would have received absent the special student loan class, would meet that test.
The Court is not suggesting that this is the only plan that will withstand scrutiny under Section 1322(b)(1). Because the proposed Plan is for a term of thirty-six (36) months, however, an extension of the term is feasible and accommodates both the DEBTORS' interest in remaining current on the student loan and the interest of unsecured creditors in not suffering the effects of unfair discrimination. It also gives effect to both subsections (b)(1) and (b)(5) of Section 1322. Nor is this Court suggesting that a plan must always provide identical treatment for all unsecured claims. The Bankruptcy Code prohibits only "unfair" discrimination. In this particular case, however, where the student loan creditor is receiving such a disproportionate distribution during the term of the plan, it is this Court's view that the unsecured creditors must receive, at a minimum, the distributive share set forth above.
This Court holds that a Chapter 13 plan that classifies a nondischargeable student loan as a long-term unsecured debt to be paid in full according to the contract pursuant to Section 1322(b)(5) is still subject to the "unfair discrimination" prohibition of Section 1322(b)(1).
Here, the proposed Plan is for a term of thirty-six (36) months and proposes to pay only two percent (2%) of filed unsecured claims, while the favored student loan will receive payments during the Plan's term in excess of fifty percent (50%) of its petition date balance. The Court holds that the DEBTORS' Plan discriminates unfairly against the class of general unsecured creditors and may not be confirmed.
The Court cannot, however, rewrite a Chapter 13 plan. That must be left to the DEBTORS' discretion. The Court can only deny confirmation of the proposed plan because it discriminates unfairly against the disfavored class of general unsecured creditors in contravention of Section 1322(b)(1). A separate Order will be entered denying confirmation and giving the DEBTORS fourteen (14) days to file an Amended Plan.
This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
ORDER
For the reasons stated in an Opinion filed this day, IT IS HEREBY ORDERED that confirmation of the Chapter 13 Plan as filed by the DEBTORS, CHAD LEE CARUSO and LESLEY ANNE CARUSO, is DENIED. The DEBTORS shall have fourteen (14) days in which to file an Amended Plan.