The opinion of the court was delivered by: REBECCA PALLMEYER, District Judge
MEMORANDUM OPINION AND ORDER
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
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
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 ...