A debtor who seeks to treat her student loan differently under section 1322(b)(5) must demonstrate that such treatment does not unfairly discriminate between unsecured creditors under section 1322(b)(1). Jordahl v. Burrell (In re Jordahl), No. 15-6009 (B.A.P. 8th Cir. Nov. 2, 2015).
The debtors, Kevin and Sarah Jordahl, sought to maintain full payments outside their chapter 13 plan on their three unsecured, non-priority students loans, while paying less to other non-priority unsecured creditors through the plan. The bankruptcy court found that such treatment of the debts violated section 1322(b)(1) by unfairly discriminating between unsecured creditors. The Jordahls filed a modified plan under which they would continue to pay the loan co-signed by one of their grandmothers in full, while paying the other two loans at the same pro-rata amount as other unsecured creditors. The trustee objected to the modified plan on the basis that it violated section 1322(b)(10) by paying interest on one loan while not paying off other unsecured loans in full. The bankruptcy court agreed and denied confirmation. In their final plan, the debtors excluded the interest payment on the co-signed loan, but otherwise proposed to pay it in full while paying all other loans on a pro-rata basis. The court confirmed this plan against the debtors’ objection. In re Jordahl, 516 B.R. 573 (Bankr. Minn. 2014). The Jordahls appealed.
Betraying its conclusion in its introductory sentence, the Bankruptcy Appellate Panel framed the issue as whether a “Chapter 13 debtor is permitted to pick and choose the subsections of 11 U.S.C. § 1322(b) with which he will comply.” The debtors argued that the use of the word “may” in section 1322(b) allowed the court to permit treatment of a debt under one paragraph to the exclusion of the other paragraphs in that subsection. The panel disagreed, finding instead that treatment of a particular debt must comply with all applicable paragraphs of section 1322(b). Therefore, while section 1322(b)(5) would permit the debtors’ proposed treatment of their student loans, the court found that the treatment must also satisfy sections 1322(b)(1) and 1322(b)(10).
Turning to the issue of separate treatment of their student loan debt the court cited Copeland v. Fink (In re Copeland), 742 F.3d 811, 813 (8th Cir. 2014) for its delineation of four factors relevant to fairness: “(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; and (4) whether the degree of discrimination is directly related to the basis or rationale for the discrimination.” The panel rejected outright the Jordahls’ argument that fairness is established as a matter of law based on their acting under section 1322(b)(5)’s cure and maintain provision. Where the debtors relied solely on their argument that paragraph (b)(1) was inapplicable, they failed to establish that the discrimination was reasonable. The court added that nondischargeability of a particular debt does not constitute justification for treating it differently. (Section 1322(b)(1) permits separate treatment of a co-signed debt, however, and that issue was not challenged on appeal).
The panel also found that paragraph (b)(10) applied to the Jordahls’ situation. That paragraph provides that a plan may provide for payment of interest accruing after the petition date on a nondischargeable debt “only to the extent that the debtor has disposable income available to pay such interest after making provision for full payment of all allowed claims.” Because the debtors’ original plan included making interest payments on the student loans, and the remaining unsecured creditors would not be paid in full, their proposed plan did not comply with section 1322(b)(10). The panel affirmed the decision of the bankruptcy court.
See also In re Lush, No. 10-15774 (Bankr. N.D. Miss. Oct. 1, 2015) (denying as unfairly discriminatory debtor’s proposal to pay unsecured creditors in full through the plan but remove student loan creditor from plan altogether with no expectation of paying that student loan debt).
In re Dyer, No. 14-11321 (Bankr. W.D. La. Jan. 30, 2015) (acknowledging “minority” view that student loans may be separately classified, but finding the better view is to read paragraphs 1322(b)(5) and (b)(1) in conjunction for unfair discrimination).
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