Plan’s Discriminatory Treatment of Student Lender not Unfair

Posted by NCBRC - November 3, 2022

Two chapter 13 plans providing for maintenance of the debtors’ student loans outside the plan satisfied section 1325(b)(1)(A)’s requirement that claims be paid at 100%, and did not unfairly discriminate against the class of student lenders even though they would receive smaller monthly payments than other unsecured claims and not be fully paid at the end of the plan. In re Durand-Day, No.22-40089 (Bankr. N.D. Tex. Oct. 26, 2022).

Both debtors in these separate chapter 13 cases proposed plans in which they would pay their non-dischargeable student loans outside the plan at the contract rate and timeline, and pay 100% of the unsecured claims within the plan. The trustee objected to confirmation arguing that the proposed plans would unfairly discriminate against the class of student lenders.

As an initial matter, the court observed that other courts routinely treat student loans differently from general unsecured loans. Further, section 1122 does not prohibit placement of similar claims into different classes so long as the different treatment is not unfair.

Here, the trustee argued that the debtors’ treatment of the student loans was unfair because, while all other claims would be paid in full during the course of the bankruptcy plans, the student loans would extend beyond the plan commitment period.

The court found that section 1322(b)(5) permits this. That section provides that a debtor may cure a default and maintain payments on a claim where the last payment on that claim is due after the date on which the final payment under the plan is due. The fact that section 1322(b)(5) provides for the very treatment proposed by the debtors led the court to conclude that the discrimination was not unfair.

The trustee pointed out that, under the proposed plan, the student lenders would receive a lower payout during the plan than other general unsecured creditors, despite the fact that the debtors’ disposable income would permit them to pay their student loans at a higher rate. But the court found the ability to pay more did not translate to an obligation to pay more. Where the debtors proposed to maintain their student loan payments at the contract rate, the court found no unfairness.

Finally, the trustee argued that the plans failed section 1325(b)(1)(A)’s 100% test for confirmation because, while the general unsecured claims would be paid at 100% at the end of the commitment period, the student loans would not be paid off at that time.

The court disagreed, finding that the 100% requirement does not mandate that the claims be paid in full during the course of the plan in cases where the loan does not come due until after plan completion. Rather, the court stated, section “1322(b)(5) permits the Debtors to treat the Student Loan Creditors—’under the plan’—by curing and maintaining their student loan payments with the Student Loan Creditors during the Commitment Period and for the period that extends beyond the Commitment Period in the Amended Plans.”

The court overruled the trustee’s objections and confirmed the plans.

Durand-Day Bankr ND Tex Oct 2022


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