By Ryan C. Wood
The following discusses listing and treating student loan claims in chapter 13 bankruptcy cases as a separate class and separate claim all by itself in a chapter 13 plan. By creating a separate class the treatment of the student loan claims will be different than NOT substantially similar general unsecured claims like credit cards or medical debts. The advantage of this is designating more of the plan payment to a not dischargeable debt, student loans, than debt that is dischargeable credit cards, medical debt or personal loans for the benefit of the bankruptcy filer. Arguably the plain, unambiguous language of the Bankruptcy Code allows this. “If the language has a plain meaning or is unambiguous, the statutory interpretation inquiry ends there.” CVS Health Corp. v. Vividus, LLC, 878 F.3d 703, 706 (9th Cir. 2017) (citation omitted).
First Let Us Talk Bankruptcy – Broadly Speaking That Is
The filing of bankruptcy is for debtors; the bankruptcy filers. Not creditors or other parties-in-interest. Bankruptcy proceedings are intended to give debtors a “fresh start.” Goudelock v. Sixty-01 Ass’n of Apartment Owners, 895 F.3d 633, 637 (9th Cir. 2018) (citing Grogan v. Garner, 498 U.S. 279, 286 (1991)); Dept. of Health Servs. v. Jensen (In re Jensen), 995 F.2d 925, 928 (9th Cir. 1993). Bankruptcy proceedings are intended to grant debtors a “fresh start,” Grogan v. Garner, 498 U.S. 279, 286 (1991), and, as a result, the Bankruptcy Code “is to be construed liberally in favor of debtors,” In re Devers, 759 F.2d 751, 754 (9th Cir. 1985).
It is less and less likely the Bankruptcy Code will be construed liberally in favor of debtors. This is a generalization and of course there are plenty of examples of liberal interpretation for the benefit of debtors. Just like in the real world in which corporations that do not live, breath or die dominate the argument for the almighty buck. A profit before people is the name of the game and it is pervasive. How can bankruptcy be immune from this when the largest financial institutions are the main creditor players? It cannot be. Interpretations are more and more in favor of large multi-billion conglomerates.
Model Chapter 13 Plans
Model chapter 13 plans were created and are universally used from jurisdiction to jurisdiction. Some vary widely while others mirror the national model chapter 13 plan. Unfortunately most model chapter 13 plans do not provide for a separate class listing for student loans. Some plans do include a section that provides language such as: Class 6 includes designated nonpriority unsecured claims, such as co-signed unsecured debts, that will be treated differently than the other nonpriority unsecured claims provided for in Class 7. The claim holder of each Class 6 claim and the treatment of each claim shall be specified in section 7, the Nonstandard Provisions. The low hanging fruit is a student loan that is co-signed. This article does not address this circumstance given there should be no argument that co-signed student loans may be listed in a separate class with different treatment then general unsecured creditors.
As always the time and money to make the argument student loans may be listed in a separate class and treated different than general unsecured creditors could be substantial. I cannot work for free and almost no client can afford to pay me to make this argument on their behalf. If it goes bad then the only option is to appeal requiring even more time and money. So what client of mine has the money to do that? Try none. There are always bigger fish to fry for bankruptcy filers and there are absolutely no moral victories. There is either food on the table or there is not food on the table.
Additional Provisions of a Model Plan
The additional provisions section of chapter 13 plans is where the terms of the chapter 13 plan can be varied based upon the bankruptcy filers circumstances. This section was created to bankruptcy attorneys could not sneak in provisions or treatment of claims that are not supported by the Bankruptcy Code. It is good and bad. The result is if there are any nonstandard or provisions you need to add to actually present your client well the language is front and center for scrutiny.
If you include language in the “Additional Provisions” section of your model chapter 13 plan the chapter 13 trustee’s office will most likely object to the language and not recommend confirmation of the chapter 13 plan. Sometimes judges will preapprove certain additional provision additions for issues that come up over and over again to streamline the process and allow chapter 13 trustee’s to recommend confirmation of a chapter 13 plan without a formal hearing. Otherwise, the trustee’s office will force there to be a confirmation hearing and the bankruptcy judge assigned to the case will make a decision as to whether the language in the additional provision can be confirmed as part of the plan. This will probably happen even though every creditor was served with the chapter 13 plan and no creditor objected to their treatment in the plan. What you say!? If a creditor does not accept their treatment they have to object right? You would think creditors should have to object to chapter 13 plans and not accept their treatment in a chapter 13 plan. No, no. Why hire and pay an attorney to file an objection to confirmation when the trustee and court will do it for you? At the same time chapter 13 trustees’ and the Court have a duty to uphold the law. Also, some creditor attorneys do things to just earn a buck that are not necessary and only increase costs of administration of bankruptcy cases. So I am torn on whether I want creditor participation in a chapter 13 case or not. I do believe creditors should have to object to their treatment in chapter 13 plans though.
The Bankruptcy Code
So this is all about interpreting the Bankruptcy Code as it exists. Arguably the plain language of the Bankruptcy Code provides student loans should be listed as a separate class with their own treatment. Let me explain.
Section 1322(b)(1) provides:
(b) Subject to subsections (a) and (c) of this section, the plan may— (1) designate a class or classes of unsecured claims, as provided in section 1122 of this title, but may not discriminate unfairly against any class so designated; however, such plan may treat claims for a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims;
The plain language provides designation of a class or classes of unsecured claims. So more than one class of unsecured claims can be part of a chapter 13 plan. Then it says as provided in section 1122.
Section 1122 Classification of Claims or Interests provides:
(a) Except as provided in subsection (b) of this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.
(b) A plan may designate a separate class of claims consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience.
Section 1122 as referenced in 1322(b)(1) only allows classes of claims of the same nature or character, substantially similar to the other claims or interests of such class. This is language is plain, taking the ordinary meaning of the words and is unambiguous right? Okay wonderful; moving on now to defining the key term in the language above. What is the definition of substantially similar? Might we have case law on the definition of “substantially similar?” Yup.
Various Courts have defined “substantial similarity” to mean the legal nature of the respective claims. See In re McKenzie, 4 B.R. 88 (Bkrtcy.W.D.N.Y., 1980, Creahan, B. J.); In re Iacovoni, 2 B.R. 256 (Bkrtcy.D.Utah, 1980, Mabey, B. J.); In re Montano, 4 B.R. 535 (Bkrtcy.D.D.C. 1980, Whelan, B. J.); In re Barnes, 7 B.C.D. 961 (D.D.C. 1981).
So for claims to be listed in the same class they must have the same legal nature of the respective claims. Student loans are not substantially similar to credit card, personal loans or medical debts in anyway and therefore should not be listed in the same class.
Student loans are really non-consumer debt given student loans are incurred to further ones education and seek higher income. Student loans are therefore incurred for income purposes or business purposes rather than consumer goods and services.
Student loans are by law are NOT dischargeable.
How can student loans possibly be in the same class as dischargeable general unsecured claims like credit card, personal loan or medical debts? There is nothing substantially similar as to the legal nature of the claims. So student loans must be listed in a separate class with their own treatment.
(a) Except as provided in subsection (b) of this section, a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class.
“…. in reliance of the 15th Ed. Collier’s comment on § 1122, the court held that all unsecured creditors with claims of the same nature or character have a similar right to the assets of the estate. See In re Iacovoni, 2 B.R. 256 (Bkrtcy.D.Utah 1980) Conversely claims of a different nature or character have different rights to assets of the estate.
Plain Language of Bankruptcy Code Is Clear
You have read it for yourself. How can a not dischargeable debt incurred for entirely different reasons be substantially similar to general unsecured claims like credit cards, medical debts or personal loans? Clearly the Bankruptcy Code says different types of claims should be listed in separate classes with arguably different treatment. Furthermore, if you propose a chapter 13 plan with a separate class for student loans and no creditor objects to the plan what is the problem? If a creditor does not object to their treatment they are accepting the terms of the chapter 13 plan.
Confirmation of A Chapter 13 Plan With Student Loans Listed As A Separate Class
As mentioned above the chapter 13 trustee’s office will most likely object to confirmation of the chapter 13 plan if the plan lists student loans as a separate class with a separate treatment in the additional provisions section. See below and Bankruptcy Code Section 1325(b)(1)(B). As long as the plan is paying all of the debtor’s projected disposable income to be received in the applicable commitment period to unsecured creditors the chapter 13 plan should be confirmed. A chapter 13 plan with student loans listed in a separate class will still meet the requirement for confirmation as provided in Section 1325(b)(1)(B).
Bankruptcy Code Section 1325(b)
(1) If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless, as of the effective date of the plan—
(A) the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or
(B) the plan provides that all of the debtor’s projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.
Of course there is more.
Unfair Discrimination
Bankruptcy Code Section 1322(b)(1) provides:
(b) Subject to subsections (a) and (c) of this section, the plan may— (1) designate a class or classes of unsecured claims, as provided in section 1122 of this title, but may not discriminate unfairly against any class so designated; however, such plan may treat claims for a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims;
Now that we have separate classes you may not discriminate unfairly against any class so designated. If you are bankruptcy attorney practicing in the Ninth Circuit undoubtedly the case of In re Wolff, 22 B.R. 510 (9th Cir. BAP 1982) will be cited. This is an absolutely horrible case that really should not be applied to listing student loans as a separate class with a separate treatment. In Wolf the debtor proposed to treat creditors with exactly the same types of claims and rights differently in the chapter 13 plan. In Wolf the plan proposed to pay just two general unsecured creditors while paying nothing to all other general unsecured creditors. Yeah, that is unfairly discriminating against creditors based upon those facts. In Wolf the debtor treated two creditors more or less as “Critical Vendors” but failed to provide evidence of why the debtor would fail without the different treatment of exactly same type of claim/creditor. In Wolf the Court provided: “We believe that the better result is that there will be occasions where unsecured claims might be classified and treated differently, even though the legal character of the claims is identical and the treatment is discriminatory, but not unfairly so.” In re Wolff, 22 B.R. 510, 512 (9th Cir. BAP 1982). Wolf brought us the following: In re Kovich, 4 B.R. 403 (Bkrtcy.Mich. 1980), and refined in In re Dziedzic, 9 B.R. 424 (Bkrtcy.Tex. 1981), more reasonably sets forth the interpretation to be placed upon § 1322. The test is (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.
So list student loans as a separate class with the exact monthly amount as general unsecured creditors receive and there will be no discrimination at all; just equal payments to separate classes paying unsecured creditors all of the debtor’s projected monthly disposable income. Done, chapter 13 plan confirmed leaving the debtor’s right to a fresh start intact and the Bankruptcy Code being liberally interpreted for the benefit of the bankruptcy filer.