By: Honorable John P. Gustafson and Mark C. Leffler, Esq.
- If a student loan is only paid a percentage, in the plan, after the completion of the plan, is the loan considered “in default.” How can we address that issue while the case is pending to avoid a “default.”
If the loan is paid the same percentage as other unsecured debt, the student loan may very well be “in default” after the Chapter 13 Plan is completed.
One way to deal with this would be to have the arrearage paid in full through the Plan – to “cure” the arrearage. In some jurisdictions direct payments going forward on the student loan may be permitted. See e.g., In re Brown, 500 B.R. 255 (Bankr. S.D. Ga. 2013). In other jurisdictions, the regular monthly payments may have to go through the trustee.
The Code does present problems in trying to “cure” student loans while paying a lesser percentage to other general unsecured creditors. Some courts look at the statute that deals with “cure and maintain” – §1322(b)(5) – which states that “notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecure claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due[.]”
Based on §1322(b)(5), a significant minority of courts allow Chapter 13 debtors to “cure and maintain” their student loans in Chapter 13. However, that is not the majority rule. See, In re Precise, 501 B.R. 67, 71-72 (Bankr. E.D. Pa. 2013)(“And the majority of courts, see Hauser, Separate Classification of Student Loan Debt in Chapter 13, 32 Am. Bankr. Inst. J. 38, at 39 (April 2013), hold that paragraph (1) of section 1322(b) places a limit on paragraph (5), therefore allowing cure and maintenance of an unsecured long-term debt, such as a student loan, only if such a plan provision does not unfairly discriminate against other unsecured claims. See, e.g., In re Labib-Kiyarash, 271 B.R. 189 (B.A.P. 9th Cir. 2001); In re Kubeczko, 2012 Bankr. LEXIS 3081, 2012 WL 2685115, at *2-3; Hauser, at *39; but see In re Zeigafuse, 2012 Bankr. LEXIS 1463, 2012 WL 1155680, at *3 (Bankr. D. Wyo. Apr. 5, 2012) (minority view that paragraph (5) trumps paragraph (1)); In re Harding, 423 B.R. 568, 572, 574 (Bankr. S.D. Fla. 2010) (same).”).
There are several stumbling blocks to a preferred treatment of student loans – one problem is that while §1322(b)(5) states “notwithstanding paragraph (2)” of §1322(b) [the section that protects a mortgage on the debtor’s primary residence from modification], it does NOT state that a debtor may “cure and maintain” notwithstanding §1322(b)(1), which states that a debtor may not discriminate unfairly in separately classifying unsecured claims. “And these courts reason that if Congress had intended the two paragraphs to be independent of each other it would have drafted section 1322(b)(5) as stating “notwithstanding paragraphs (1) and (2)” rather than only “notwithstanding paragraph (2) of this subsection.” See, In re Precise, 501 B.R. 67, 72 (Bankr. E.D. Pa. 2013), citing, In re Labib-Kiyarash, 271 B.R. 189, 193 (9th Cir. BAP 2001).
Another problem with “cure and maintain”, as it applies to student loans, is a BAPCPA amendment which added §1322(b)(10). Section 1322(b)(10) provides that a Chapter 13 bankruptcy plan may provide for the payment of interest accruing after the date of the filing of a bankruptcy petition on unsecured claims that are nondischargeable under 11 U.S.C.S. § 1328(a), except that such interest may be paid only to the extent that a debtor has disposable income available to pay such interest after making provision for full payment of all allowed claims. See, In re Stull, 489 B.R. 217, 223 (Bankr. D. Kan. 2013). When a debtor is “maintaining” contractual mortgage payments, interest and principle are being paid according to the terms of the note. That appears to be prohibited under §1322(b)(10) unless other creditors are paid 100%.
One possible way around these problems – mentioned in the Webinar – is to make the argument that the student loan creditor is not receiving more than they would have received if they were treated as a general unsecured claim in the Chapter 13 case. Or, if they are receiving a little more, it is because the payment is being made directly, and the difference is the absence of a trustee fee. When debt that stretches out for 20 years is compressed into a 3 to 5 year repayment period, it can sometimes result in a student loan creditor receiving as much, or more, than the creditor would get if the default (if any) were cured, and payments were maintained under the terms of the note. Under those circumstances, some trustees would not object to a “cure and maintain” Chapter 13 Plan, although many Chapter 13 trustees would. There would be no “unfair discrimination” because the student loan creditor would be receiving no more (and perhaps less – the student loan creditor might have a valid objection!) than they would receive if they had been lumped in with the general unsecured pool.
This is not to say that student loans are not extremely difficult to deal with in bankruptcy. Absent a legislative fix, these are some techniques that may be available and relatively effective in dealing a very difficult financial problem.
- What if a debtor is mainly behind in student loan debt?
If the bulk of the debt is student loan debt, then the bulk of the money being paid through the Chapter 13 Plan is going to go to the student loan – while the debtor is protected by the automatic stay.
- Can you address student loans and strategies to avoid being hit with a much larger student loan (from compounded interest) at the end of the Chp. 13 case and when general unsecured creditors are not going to be paid (or only a little) through the plan?
One strategy would be to file a Chapter 7 first, if the debtor qualified, and get rid of all of the debt other than the student loan(s). This would permit all of the debtor’s projected disposable income to go to the student loan creditor. It would take longer, but filing (and completing) an initial Chapter 13 would also leave just the nondischargeable student loan debts (assuming there were no other non-dischargeable debts) to receive the entire amount being distributed under the Chapter 13 Plan.
Another strategy is to pay the amount required to be paid to general unsecured creditors, and use additional monies to cure the student loan. For example, a below median debtor could devote all of the funds required to general unsecured creditors for three years, and then use the additional time (up to 60 months) to pay only the student loan(s). See generally, In re Machado, 378 B.R. 14 (Bankr. D. Mass. 2007). Similarly, if the Means Test requires a payment of $500, but the debtor has more income available, direct the additional monies to curing the arrearage. The argument for allowing this type of discrimination is that unsecured creditors are getting what they are entitled to under the “disposable income” tests (the Means Test for above median debtors, I minus J for 36 months for below median debtors) so there is no “unfair” discrimination. See e.g., In re King, 460 B.R. 708 (Bankr. N.D. Tex. 2011)(applying the Simmons test); In re Abaunza, 452 B.R. 866 (Bankr. S.D. Fla. 2011); In re Sharp, 415 B.R. 803 (Bankr. D. Colo. 2009).
John was appointed Standing Chapter 13 Trustee for the Northern District of Ohio, Western Division on October 1, 2007
Mark C. Leffler has been with the Boleman Law Firm, P.C., where he is a shareholder, since July of 2000. Mr. Leffler has previous legal experience in real estate, business litigation, and corporate formation. He was recently a featured author for “Inside the Minds: Chapter 7 Consumer Bankruptcy Strategies, Leading Lawyers on Filing Chapter 7 Cases in Today’s Consumer Bankruptcy Climate” (2012 ed.), published by ThomsonReuters. Mark is a frequent speaker and author on bankruptcy matters for Virginia CLE programs, he is a co-author of “Bankruptcy Practice in Virginia”, a Virginia CLE Publication, and he is presently the Editor for the Virginia State Bar Bankruptcy Section’s Bankruptcy Law News. He has served as a panelist at annual conferences of the National Association of Chapter Thirteen Trustees in 2006, 2009, 2010, and 2011, as we as on numerous state and local bar association CLE programs. He has served on both the Local Rules Committee of the Bankruptcy Court for the Eastern District of Virginia and on the Richmond Bankruptcy Court’s Liaison Committee. From 2007 through 2011, he has been selected as a member of Virginia’s “Legal Elite” in the bankruptcy practice category published by Virginia Business magazine. Mr. Leffler received a Bachelor of Science from Eastern Mennonite College in Harrisonburg, Virginia, a Juris Doctor from Duquesne University School of Law in Pittsburgh, Pennsylvania. He is a member of the National Association of Chapter 13 Trustees, Virginia State Bar, Bankruptcy Section, Tidewater Bankruptcy Bar Association, Virginia Beach Bar Association, and the NACTT Academy. Mark lives in Norfolk with his wife, the lovely Leigh, and their two children, Jacob and Maggie. He is an avid martial artist who also enjoys snow skiing and fishing with his kids and traveling with his wife. He is also on the Board of Directors of Western Branch Community Church and Karate for Christ International, Inc.