The Prices, who are above median income debtors, but nonetheless have negative projected disposable monthly and no non-exempt assets, proposed an estimated 15% dividend to the class of dischargeable general unsecured creditors, which totaled $11,728.38. They also proposed to separately classify the $10,463.48 claim by Navient for non-dischargeable student loans. The Chapter 13 Trustee supported confirmation, but the Bankruptcy Administrator filed a limited objection to such treatment.
The bankruptcy court first addressed whether the prohibition in §1322(b)(1) against “unfair discrimination” in favor of one class of unsecured creditors was applicable as §1322(b)(5) allows the a plan to cure and maintain payments on “any unsecured claim … on which the last payment is due after the date on which the final payment under the plan is due.” While recognizing a split in opinions on this question, the court held that since §1322(b)(5) specifically applies despite the limitations in §1322(b)(2), it does not similarly explicitly override the “unfair discrimination” restrictions in §1322(b)(1). Instead, the two can be read in a consistent manner by applying both.
Turning to whether the separate classification was not unfair, the bankruptcy court held that the burden was on the debtor. Without direct precedent from the 4th Circuit, the bankruptcy court considered the factors from In re Wolff, 22 B.R. 510, 512 (B.A.P. 9th Cir. 1982) and In re Husted, 142 B.R. 72, 74 (Bankr. W.D.N.Y. 1992), but found such to be inadequate for the specific inquiry required under §1322(b)(1), preferring a consideration of the “totality of the circumstances.” See In re Crawford, 324 F.3d 539 (7th Cir. 2003). This would then include:
(1) Whether the discrimination has a reasonable basis;
(2) Whether the debtor can carry out a plan without the discrimination;
(3) Whether the discrimination is proposed in good faith;
(4) Whether the degree of discrimination is directly related to the basis or rationale for the discrimination;
(5) The difference between what the creditors being discriminated against will receive as the plan is proposed, and the amount they would receive if there was no separate classification;
(6) The importance of the “fresh start” to the honest but unfortunate debtor; and
(7) The importance of allowing creditors to equitably share in a distribution of the debtor’s assets.
Even though the Prices proposed to pay Navient not with “disposable income”, as defined by the Bankruptcy Code, but through “discretionary income”, resulting from belt-tightening, they had not provided “any extenuating factors justifying the separate classification of the student loan debt.” The frugality necessary to pay the student loan actually dissuaded the bankruptcy court as “ they might otherwise use that income for food and other necessary living expenses”, increasing the feasibility of the plan.
At the time of writing this, the Chapter 13 Trustee is holding $11,424.49. If the Prices were to convert their case prior to confirmation to Chapter 7, this amount would be refunded to them and they would, with no disposable income or non-exempt assets, very quickly receive a discharge of all of the other unsecured debts. The Prices could then immediately pay the student loan in full and file a second Chapter 13 plan to deal with secured and priority claims. The payment to Navient would not be preferential as it would not have received more than it would had the second case been a Chapter 7, since there would be no other remaining unsecured claims with which to share those funds. This shows some of the absurdity of refusing to allow separate classification of unsecured student loans, as every Chapter 7 case separately classifies non-dischargeable student loans.
For a copy of the opinion, please see: