Court Lacks Discretion to Allow Ineligible Student Loan Debtor to Proceed in Chapter 13

Posted by NCBRC - October 9, 2018

A debtor who exceeds the debt limit specified in section 109(e) is ineligible for chapter 13 bankruptcy regardless of the nature of the debts and, therefore, there is cause for dismissal or conversion. Stearns v. Pratola (In re Pratola), No. 18-213 (N.D. Ill. Aug. 31, 2018).

Christopher Pratola filed a chapter 13 bankruptcy petition listing unsecured debts at less than the debt limit set forth in section 109(e). He later amended his schedules to include an additional federal student loan debt which he was repaying under an IBR at 10%. That loan raised his unsecured debt to above the debt ceiling.

The bankruptcy court found that Congress could not have intended to disqualify debtors from the more desirable form of bankruptcy relief found in chapter 13 when the only debt excluding them from that relief is educational. The court reasoned that the debt limit is intended to prevent businesses from using chapter 13 to escape its obligations under chapter 11: a problem not implicated when the debt is primarily educational. Also, the bankruptcy court noted that Congress has historically treated educational debt differently from other unsecured debt and, while debt limits have risen only gradually, student loan debt has skyrocketed over recent years. Based on these considerations, the bankruptcy court held that neither section 109(e) nor section 1307(c) mandated dismissal or conversion. It denied the trustee’s motion to dismiss.

On appeal, the district court looked to whether the bankruptcy court properly exercised its discretion by carving out an exception to section 109(e)’s debt limit when the debt at issue was an educational loan. It found that it did not.

(While the district court initially questioned whether denial of a motion to dismiss was a final, appealable order, the issue of jurisdiction was mooted by the bankruptcy court’s later order confirming Mr. Pratola’s plan, which both the trustee and Mr. Pratola appealed.)

Section 1307(c) provides a mechanism for the trustee to move for dismissal or conversion of a chapter 13 case for “cause.” The district court found that the bankruptcy court’s conclusion that it had discretion to find that the nature of the debt was relevant to a finding of cause, was based on a misreading of section 109(e)’s “gateway” provision. The plain text of that section renders any debtor whose unsecured debts are not less than $394,725 ineligible for chapter 13 bankruptcy.

While not unsympathetic to the policy considerations, the district court found that section 109(e) left no room for unlisted exceptions. Rather, it is up to Congress to create exceptions to the mandatory language of that section. The debt limit eligibility requirement, therefore, constrained the bankruptcy court’s discretion under section 1307(c). While section 1307(c) mandates that the bankruptcy court analyze the interests of the parties, it may do so only within the confines of the Code. Therefore, the court had the power to decide whether to dismiss or convert, but it did not have the power to decide that a statutorily ineligible debtor could pursue chapter 13 relief.

The district court reversed and remanded for a determination of whether the appropriate action is dismissal or conversion.

Pratola ND Ill Aug 2018

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