Bankr. E.D.N.C.: In re Sutton- Separate Classification of Student Loans in Chapter 11

Summary:

The individual Chapter 11 plan proposed to pay approximately a 4% dividend to general unsecured claims, but separately classified his $235,871.00 in student loans, proposing to pay that class in full.  No impaired class accepted the plan.

Accordingly, the plan could only be approved by fulfilling the requirements of 11 U.S.C. § 1129(b), which provides that the bankruptcy court shall confirm a plan that “does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.”

The bankruptcy court held that a plan may discriminate in favor of nondischargable student loans, but only if such discrimination is not unfair under the four factor test from Ownby v. Jim Beck, Inc., 214 B.R. 305, 307 (W.D. Va. 1997), aff’d, 162 F.3d 1155 (Table) 1998 WL 546067 (4th Cir. 1998):

(1) whether there is a reasonable basis for the discrimination;

(2) whether the plan can be confirmed and consummated without the discrimination;

(3) whether the discrimination is proposed in good faith; and

(4) the treatment of the classes discriminated against.

The nondischargable nature of student loans is not enough alone to show a reasonable basis for discrimination.  The Debtor asserted that the future default on the student loans was a reasonable basis, but did not present evidence of what impact such default would have.  Further, the retention by the Debtor of $60,000 on completion of the plan, the large disparity between the dividends to student loans and general unsecured claims, and the inclusion of an insider in the general unsecured class, weighed against confirmation.

Commentary:

With both the continuing student loan debt crisis and the falling bankruptcy filings (with the threat to judicial positions), this would seem to be an issue where Chapter 13 Trustees could take a lighter approach and decline to object to plans that pay more to student loans.  This is not to argue that funds that would have been required to be paid to general unsecured creditors due to Equity Above Exemptions or under Means Test’  projected Disposable Monthly Income.  Instead, it would simply allow the Debtor to pay more than is otherwise required so that his or her student loans are not in worse shape following bankruptcy than before.  This would not prevent another unsecured creditor from objecting to the separate classification,  but such objections are rather rare.

For a copy of the opinion, please see:

Sutton- Separate Classification of Student Loans in Chapter 11.pdf

 

About

1. Bachelor of Arts degree in English Literature from Washington University, 1993. 2. Juris Doctor degree from George Washington University, 1996. Admissions to Practice of Law: North Carolina Bar, 1996. Federal District Courts for the Eastern and Middle Districts of North Carolina. Specialty Certification: North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy. Areas of Practice: Practice limited to consumer and business debtor bankruptcy law, 1998 to present. Memberships: National Association of Consumer Bankruptcy Attorneys (NACBA). North Carolina Academy of Trial Lawyers (NCATL). North Carolina Bar Association, Bankruptcy Section. Lectures prepared and presented: North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court - C.Y.A. Forms to Help 'Gird They Loins'; 2001. Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002. NACBA National Convention; Topic: Efficient Office Practices; 2003. NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004. Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004. Positions held: NACBA National Convention; Convention Chair; 2008. NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008. NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007. NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007. NACBA, Member of National Board of Directors, 2006 to present. NCATL, Chair of the Bankruptcy Section, 2003 to 2007. NACBA, Chair of the North Carolina Section, 2003 to 2007. NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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