In re Christophe

• Decision Date: 22 February 1993
• Docket Number: Bankruptcy No. 92 B 08939.
• Citation: 151 BR 475
• Parties: In re Yorlanda CHRISTOPHE, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

151 B.R. 475 (1993)

In re Yorlanda CHRISTOPHE, Debtor.

Bankruptcy No. 92 B 08939.

United States Bankruptcy Court, N.D. Illinois, E.D.

February 22, 1993.

Kofkin Keld & Korrub, Chicago, IL, for debtor.

MEMORANDUM OPINION ON THE CONFIRMATION OF DEBTOR'S PROPOSED CHAPTER 13 PLAN

JACK B. SCHMETTERER, Bankruptcy Judge.

Debtor Yorlanda Christophe has proposed her amended Chapter 13 plan for confirmation. No party has objected to this plan. However, the Court exercised its independent obligation to determine whether the proposed plan fulfilled the requirements of 11 U.S.C. §§ 1322 and 1325. There is a question concerning the proposed plan's treatment of an unsecured student loan obligation to IDAPP as a special class of unsecured creditors to be paid 100%.

The confirmation hearing was continued for debtor to offer evidence justifying the special treatment of IDAPP when other unsecured creditors will receive only 32% under the Plan. The issue is whether the Plan discriminates "unfairly" under 11 U.S.C. § 1322(b)(1).

Debtor waived her right to present evidence, and rested on the record (as found in the Order entered December 2, 1992). Debtor's counsel submitted only his Memorandum of Law in support of Debtor's Plan. For reasons stated herein, by separate order the Court will deny confirmation of Debtor's Chapter 13 plan, but allow time for an amended plan in accord with this ruling. If the Debtor again seeks to give IDAPP some form of preferential treatment as against other unsecured creditors, her counsel will again be afforded an opportunity to offer evidence in support to comply with § 1322(b)(1).

FACTUAL BACKGROUND

Debtor filed her Chapter 13 petition on April 19, 1992. Her scheduled debts consist of $11,100 of secured debt, $9,300 owed on the IDAPP unsecured student loan, and $6,960 of other unsecured debt. Also, Debtor estimates that she has $2,000 of administrative expenses (consisting of $800 in attorney's fees and about $1,200 in trustee's fees).

Debtor asserts that the student loan is non-dischargeable under 11 U.S.C. § 523(a)(8), and that assertion has not been questioned. However, none of the details of this loan were presented as evidence before the Court. The missing details that would be particularly relevant to the analysis below are the following: (i) what payments were due under the loan agreement; (ii) when is the last payment due under the loan agreement; (iii) whether any arrearages exist; (iv) whether the payments have been accelerated pursuant to the loan agreement before the bankruptcy petition was filed; and (v) whether or not the proposed 100% payout would accelerate payments under the loan agreement.

Debtor's proposed amended Chapter 13 Plan calls for 56 monthly payments of $440 a month. The questioned provision in that Plan is the division of the unsecured creditors into two classes. The general unsecured creditors would receive 32%, while the separately classified student loan creditor would receive 100%.

JURISDICTION

This matter is before the Court pursuant to 28 U.S.C. § 157 and is referred here by Local District Court Rule 2.33. Subject matter jurisdiction lies under 28 U.S.C. § 1334, and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L).

DISCUSSION

Bankruptcy Code § 1325(a), Title 11 U.S.C., provides that a Court shall confirm a Chapter 13 plan if:

(1) the Plan complies with the provisions of this chapter and with the other applicable provisions of this title;

. . . . .

(3) the plan has been proposed in good faith and not by any means forbidden by law;

. . . . .

11 U.S.C. § 1325(a). Section 1325(a)(1) relates to § 1322(b)(1) which provides,

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. . . .

11 U.S.C. § 1322(b)(1).

There is no question here that the student loan claimant is an unsecured, nonpriority creditor. However, Debtor has proposed in her Plan to place that creditor in a separate class, and proposes to treat it differently from all other unsecured, nonpriority creditors. Therefore, it must be determined whether this disparate treatment constitutes unfair discrimination under § 1322(b)(1) or bad faith under § 1322(b)(3). A bankruptcy judge may not confirm a Chapter 13 plan that is not presented in good faith or unfairly discriminates in violation of § 1322(b)(1) because such a plan would not fulfill the requirement of § 1325(a)(1) that it comply with the provisions of Chapter 13. In re Lawson, 93 B.R. 979, 981 (Bankr.N.D.Ill.1988).

This Court has an obligation to determine whether debtors carry their burden to show that all elements required of a Plan under Chapter 13 have been met by them, whether or not any party in interest objects. In re Rimgale, 669 F.2d 426, 431 (7th Cir.1982). See also In re Stein, 91 B.R. 796, 799 (Bankr.S.D.Ohio 1988); and In re Snider Farms, Inc., 83 B.R. 977, 986 (Bankr.N.D.Ind.1988) (both finding that courts have an independent duty to determine whether a Chapter 13 plan should be confirmed pursuant to § 1325(a)).

The statute provides no standards for determining when a plan discriminates "unfairly". Courts have recognized four issues relevant to determine whether discrimination is unfair:

(1) whether the discrimination has a reasonable basis; (2) whether the debtor can carry out a plan without the discrimination; (3) whether the plan is proposed in good faith; (4) whether the degree of discrimination is directly related to the basis or rationale for the discrimination.

In re Leser, 939 F.2d 669, 672 (8th Cir. 1991); In re Chapman, 146 B.R. 411, 417 (Bankr.N.D.Ill.1992).

Is there a reasonable basis for discriminating in favor of non-dischargeable student loan creditors?

Several courts have held that the non-dischargeability of student loans by itself does not constitute a reasonable basis for treating student loan creditors more favorably than other unsecured creditors. In re Chapman, 146 B.R. 411; In re Tucker, 130 B.R. 71 (Bankr.S.D.Iowa 1991); In re Scheiber, 129 B.R. 604 (Bankr.D.Minn. 1991); In re Cronk, 131 B.R. 710 (Bankr. S.D.Iowa 1990). Tucker, Scheiber, and Cronk found that the mere fact that a student loan creditor would have recourse against a debtor if the conditions of § 523(a)(8) are not satisfied is not enough, by itself, to justify discriminatory treatment in favor of that student loan creditor. See, e.g., Tucker, 130 B.R. at 73. In Chapman, Judge Ginsberg reasoned that allowing a Chapter 13 debtor to pay 100% of student loans while paying only 10% of the other unsecured debt is tantamount to equitable subordination of the other unsecured claims without complying with 11 U.S.C. § 510(c). Chapman, 146 B.R. at 418.

If a Chapter 13 plan pays 100% of student loans while paying only a small percentage of other unsecured debt, then money that could have been distributed pro rata to all unsecured creditors is being paid mainly to student loan creditors. The other unsecured creditors may thereby, in effect, be forced to finance the debtors' student loans by giving up part of the possible payment on their claims. This is what the earlier cited opinions found objectionable.

In the instant case, Debtor argues that she is not taking any repayment away from her unsecured creditors because she is adding 20 monthly payments on to the minimum required 36-month Plan period. Debtor's Memorandum at pp. 7-9. However, this argument fails because the amount of money available to creditors is still fixed as a set amount regardless of whether the Plan calls for 36 or 56 monthly payments. Debtor's plan would result in $9,300 being paid to the student loan creditor. That sum could have been distributed pro rata to all the unsecured creditors, and this aspect is not changed by the addition of 20 more payments to the Plan.

However, the special rights of student loan creditors may in some circumstances form a reasonable basis for allowing a debtor to treat such creditors favorably. Discrimination is considered to be reasonable and therefore fair when it is "related to the debtor's objective interest in completing the plan and obtaining a fresh start or maintaining a decent quality of life." Tucker, 130 B.R. at 73, citing Lawson, 93 B.R. at 984. A creditor holding a non-dischargeable student loan may sue to enforce a debtor's obligation in state court, and obtain a judgment against that debtor. See, e.g., Indiana University v. Canganelli, 149 Ill.App.3d 852, 103 Ill.Dec. 278, 280, 501 N.E.2d 299, 301 (1st Dist.1986) (affirming a judgment on a student loan entered against a debtor who had previously received a discharge in bankruptcy). Such action would often cause such a debtor to default on the Chapter 13 plan, and might thereby cause the Chapter 13 case to be dismissed or converted to a Chapter 7 liquidation case. 11 U.S.C. § 1307(c). Thus, a debtor's objective interest in completing a Chapter 13 plan may be advanced by allowing the full payment of what is actually due under the student loan agreement.

Such reasoning was applied in In re Boggan, 125 B.R. 533 (Bankr.N.D.Ill.1991), in which Judge Barliant confirmed a Chapter 13 plan that fully paid student loans but paid only 15% on other unsecured debt. Judge Barliant found that a reasonable basis for this disparate treatment will often (though not always) exist, because

the Chapter 13 debtor will nearly always have a valid interest in giving educational loans special treatment because the educational loan creditor will, unless the conditions in § 523(a)(8)(A) or (B) are met, always have recourse against the Debtor. Therefore, it will usually be proper for a Chapter 13 plan to specially classify student loans.

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