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September 30, 2004.

In re: RONALD BELDA, Debtor. MARILYN O. MARSHALL, Trustee, Appellant,

The opinion of the court was delivered by: REBECCA PALLMEYER, District Judge


In this case, the court is asked to weigh in on an issue that has divided the bankruptcy courts: whether a Chapter 13 plan may discriminate between payments to cover long-term student loans and payments to other unsecured creditors. Appellant Marilyn O. Marshall, Bankruptcy Trustee, appeals an October 9, 2003 oral ruling and order*fn1 of the bankruptcy court confirming Debtor Ronald Belda's proposed Chapter 13 plan of reorganization. As part of the plan, Belda proposed that he continue making contractual student loan payments as he had been to the United States Department of Education (the "DOE") in the amount of $68.50 per month. This proposal would not accelerate payment on the student loan or result in full payment of that loan within the period of the plan. It would, however, allow the DOE to recover 62% of its loan during the term of the plan, while Belda's other unsecured creditors would receive only 10% of the amounts owed to them. The Trustee objected that the plan unfairly discriminated among unsecured creditors in violation of 11 U.S.C. § 1322(b)(1). The bankruptcy court disagreed and confirmed the plan, and the Trustee appealed. For the reasons set forth here, the decision of the bankruptcy court is reversed.


  The parties agree that there are no factual issues relevant to this appeal and that the court need only decide legal questions regarding the application of 11 U.S.C. § 1322(b)(1) to long-term student loans under 11 U.S.C. § 1322(b)(5). The court will nonetheless provide a brief factual background to place the legal dispute in context. The facts are drawn from the parties' submissions before the bankruptcy court and are assumed true solely for purposes of this appeal.

  Belda filed for bankruptcy under Chapter 13 of the Bankruptcy Code on May 20, 2003. On September 2, 2003, he filed an amended plan of reorganization proposing, among other things, that over the 60-month term of the plan, he would make monthly student loan payments to the DOE in the amount of $68.50.*fn2 As a result, Belda would pay $4,110.00 of the DOE's $6,661.09 general unsecured claim — an approximately 62% dividend. Because student loans are not dischargeable in bankruptcy,*fn3 Belda would pay the remaining $2,551.09 owed to the DOE after the plan term ended, also in monthly payments of $68.50. All other general unsecured creditors would receive a dividend of not less than 10% of their claims out of monthly payments totaling $2,022.00. If, however, Belda paid all general unsecured creditors, including the DOE, equally, each would receive a dividend of approximately 35%. In the case of the DOE, that would amount to $2,331.38 during the life of the plan.

  The Trustee objected to the plan, arguing that it violated § 1322(b)(1)'s prohibition against unfair discrimination:
the [Chapter 13] plan may — (1) designate a class or classes of unsecured claims . . . 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). According to the Trustee, it was unfairly discriminatory to pay the DOE 62% of its claim while paying other unsecured creditors only 10% of their claims.
  Belda responded that § 1322(b)(1) does not apply to his student loan because it constitutes a long-term debt under § 1322(b)(5). Under that provision,
the [Chapter 13] plan may — (5) notwithstanding paragraph (2)*fn4 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 unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due.
11 U.S.C. § 1322(b)(5). Belda observes that Congress intended Chapter 13 debtors to emerge from their plans debt-free, but student loans must always be paid in full. If Belda were to pay a smaller portion of the DOE's claim, he contends, he "would have to win a small lotto to pay the remaining balance of his student loan [at the conclusion of the plan] as it will accumulate over the years as the Debtor makes his payments to the Chapter 13 Trustee." (Debtor's Response to Trustee's Objection to Confirmation, at 5.) If § 1322(b)(1) did apply, Belda argued, the bankruptcy court needed to hold a hearing to determine whether the differential treatment of the DOE and the other unsecured creditors was "unfair." Belda proposed that the test should be whether the other unsecured creditors "[were] to receive as much as [they] would have received in a Chapter 7 bankruptcy." (Id. at 7.) Presumably, Belda believes that the unsecured creditors will receive at least as much under his plan as they would have received had he filed for bankruptcy under Chapter 7.

  The bankruptcy court held that § 1322(b)(1) does not limit § 1322(b)(5) and that the two provisions "are free-standing entitlements." (Tr. at 6, 7) (citing In re Banner, 156 B.R. 631 (Bankr. D. Minn. 1993), and In re Chandler, 210 B.R. 898 (Bankr. D.N.H. 1997).) The bankruptcy court found it significant that Belda was not seeking to accelerate payments under his student loan or to pay it off in full during the term of the plan; instead, he merely wanted to maintain his regular monthly payments. As Judge Doyle observed, "[m]any courts have acknowledged that this is entirely permissible under Section 1322(b)(5) and have applied the unfair discrimination test only when the debtor seeks not only to pay the regular monthly payments and arrearages but also to pay off the entire loan." (Tr. at 7) (citing In re Groves, 39 F.3d 212, 215 (8th Cir. 1994)) (noting that plans proposing 100% payment on student loans during the life of a plan of reorganization versus "at best, 40%" repayment of other unsecured claims "more than overbalance[d] the debtors' desire for a clean slate as against fairness to their general unsecured creditors").

  In reaching this conclusion, the bankruptcy court distinguished the Seventh Circuit's opinion in In re Crawford, 324 F.3d 539 (7th Cir. 2003). The debtor in Crawford proposed paying two-thirds of his child support obligation which, like student loans, is not dischargeable in bankruptcy, and nothing to his other unsecured creditors. Id. at 541. See also 11 U.S.C. § 523(a)(5)(A). The bankruptcy and district courts both refused to confirm the plan as unfairly discriminatory under § 1322(b)(1). The Seventh Circuit first rejected all of the tests for unfairness that had been articulated by other courts, stating:
We haven't been able to think of a good test ourselves. We conclude, at least provisionally, that this is one of those areas of the law in which it is not possible to do better than to instruct the first-line decision maker, the bankruptcy judge, to seek a result that is reasonable in light of the purposes of the relevant law, which in this case is Chapter 13 of the Bankruptcy Code; and to uphold his determination unless it is unreasonable (an abuse of discretion).
Id. at 542. The court recognized that nonpayment of child support is a serious matter and that such payments may be separately classified under § 1322(b)(1), but it also noted that "Chapter 13 is designed for the protection of creditors as well as debtors." Id. at 543, 544. The court held that the bankruptcy court did not abuse its discretion in rejecting the debtor's plan because he had provided no reasonable basis for "shift[ing] two-thirds of his nondischargeable debt to his other creditors, leaving them with nothing." Id. at 544.

  In dicta, the Seventh Circuit suggested that a reasonable basis for such discrimination might exist where a plan seeks to "carve-down" the debtor's nondischargeable debt upon a showing that doing so is necessary to avoid "a crushing load of undischarged debt [that would] make it inevitable or nearly so that he would soon be back in the bankruptcy court, this time under Chapter 7." Under such circumstances, the court said, it would presumably affirm the proposal, "especially if the unsecured creditors would do worse in Chapter 7 than they would do under [the debtor's] revised Chapter 13 plan." Id.

  In distinguishing Crawford from this case, the bankruptcy court noted that Crawford did not deal with a student loan or with § 1322(b)(5); "there were no arrearages to cure and no continuing long-term payments to be made." (Tr. at 9.)*fn5 In the bankruptcy court's view, "[t]he fact[s] of Crawford, a debtor attempting to pay most of the non-dischargeable debt while giving the rest of his creditors absolutely nothing are egregious and are not analogous to the facts in this case." (Id.) Even if § 1322(b)(5) did apply in this case, the bankruptcy court stated, Belda would find himself in financial trouble were he not allowed to continue his payments to the DOE:
[I]f he does not maintain his current payments to the department of education, he will be liable upon completion of his case for a substantial lump sum of past due payments. The lender would be free to initiate collection proceedings, thereby eliminating in large part the fresh start to which the debtor is entitled in bankruptcy.
(Tr. at 10.) In addition, the creditors "will receive the same return as they would in a Chapter 7 case, if not more." (Tr. at 11.) The bankruptcy court found the differential treatment reasonable and confirmed Belda's plan.


  I. Standard of Review and Jurisdiction

  This court has subject matter jurisdiction over the Trustee's appeal from the bankruptcy court pursuant to 28 U.S.C. § 158(a). The district court functions as an appellate court when reviewing bankruptcy court decisions. Bielecki v. Nettleton, 183 B.R. 143, 145 (N.D. Ill. 1995) (citing FED. R. BANKR. P. 8013). In a bankruptcy appeal, the court examines the "bankruptcy court's factual findings for clear error and its legal conclusions de novo." Meyer v. Rigdon, 36 F.3d ...

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