In re Belton

IN RE: Dorothy Marie Belton, Debtor(s).

C/A No. 16-03040-JW

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF SOUTH CAROLINA

October 13, 2016

Order Overruling Objection to Confirmation

The relief set forth on the following pages, for a total of 17 pages including this page, is hereby ORDERED.

FILED BY THE COURT

10/13/2016

/s/_________

US Bankruptcy Judge

District of South Carolina

Entered: 10/13/2016

Chapter 13

ORDER OVERRULING OBJECTION TO CONFIRMATION

THIS MATTER comes before the Court for a hearing on the Trustee's Objection to confirmation of the Chapter 13 Plan filed by Dorothy Marie Belton ("Debtor") on June 29, 2016 ("Plan"). After considering the matters before the Court, including the Debtor's testimony, the Plan, the parties' Amended Joint Statement of Dispute, and the applicable code sections and case law, the Court overrules the Trustee's objection and makes the following findings of fact and conclusions of law:¹

FINDINGS OF FACT

1. The Debtor filed a chapter 13 bankruptcy case pro se on June 17, 2016. She thereafter retained counsel, who filed the Plan and other documents on her behalf.

2. The Debtor's schedules indicate that she is a below median debtor with a current monthly income of $2,999.81, all of which is presently derived from voluntary family contributions.

3. The Debtor testified that she lives with her husband and adult son. The Debtor's son contributes $650 per month and her husband contributes a gross of $2,740.21 per month. Her schedules I and J show a Disposable Monthly Income ("DMI") of $587.51 per month.

4. The Debtor is currently unemployed due to past health issues. However, as she isnow medically fit for employment, she has been looking for a job as a paralegal.

5. The Debtor has four (4) long-term federal student loans - one (1) Stafford Loan, serviced by Navient, and three (3) federal student loans serviced by ECMC. Each servicer has filed a proof of claim indicating a balance owed of $5,312.64 and $17,435.22, respectively.

6. The Debtor has $0 in nonexempt equity, so in a hypothetical liquidation there would be no distribution to any unsecured creditors.

7. The Plan provides for a monthly trustee payment of $575 for the maximum term of sixty (60) months.

8. The Plan provides for separate classification of each of the Debtor's student loans. Specifically, the Plan proposes to pay the Navient loan, which the Debtor believes is not in default and in deferment, by applying for enrollment in "any applicable income-driven or income-based repayment" program.² The Plan proposes to pay the ECMC serviced loans, whichare long-term, unsecured loans and in default, by using the provisions of 11 U.S.C. § 1322(b)(3) and/or (5) to cure her default.³

9. Other unsecured creditors are treated in section IV(E) of the Plan:

E. General Unsecured Creditors: General unsecured creditors shall be paid allowed claims pro rata by the trustee to the extent that funds are available after payment of all other allowed claims. The debtor does not propose to pay 100% of general unsecured claims.

(emphasis original).

10. The Plan also provides for payment of the Debtor's two secured creditors, and the Debtor's attorney fees in this case.

11. The Plan was properly served on all creditors and parties in interest.

12. On July 18, 2016, the Trustee filed his Objection, contending the Plan's proposed treatment of the defaulted student loan debt unfairly discriminated against the unsecured creditors who are not to be paid in full and therefore the Plan is not proposed in good faith. At the confirmation hearing, the Trustee represented that the Plan was otherwise confirmable.

13. No creditor (including any general unsecured creditor or student loan creditor or servicer) filed an objection to the Plan.

14. At the confirmation hearing, the Debtor testified that she is a paralegal by training and trade, having worked in this field for approximately twenty years. She was forced to quit her job and take medical leave in August 2015 due to a health issue. The Debtor has since been released from medical care and is free to resume employment.

15. The Debtor incurred the majority of her student loans while enrolled at Midlands Technical College's paralegal program.

16. The Debtor has been looking for a job in her field in both the private and public sector (state and federal agencies), as either a paralegal or administrative assistant, but has thus far been unsuccessful in her search efforts. She attributes this lack of success to her defaulted student loans—which she understands disqualifies her from many positions that involve thehandling of money. She believes that the filing of her Chapter 13 case and confirmation of the Plan will help with her job prospects as it will allow the cure of her default under her student loans.

17. The Debtor presently has no income and is relying on contributions from her husband and adult son to make payments under the Plan. The family's motivation for making contributions to the Debtor to fund the Plan appears to be primarily to assist the Debtor's desire to cure her default under the student loans and improve her employment opportunities.

18. The Debtor and her husband fell behind on their payments to their creditors when the Debtor fell ill. Because of her unemployment and the family's financial issues, the Debtor and her family have cut back on their household budget.

19. The Debtor's husband, who has not filed bankruptcy, is a co-debtor on one of her secured loans and on her tax debt owed to Fairfield County, but is not a co-debtor on any of the student loans. The husband is solely responsible for the debt on the parties' residence (which is in default) and he is attempting to obtain a loan modification with his mortgage lender.

20. The parties advised the Court that if confirmed, the Plan as currently filed would provide for an 11.3% distribution to the general unsecured creditors class (IV(E) of the Plan). If all of the general unsecured creditors, including all student loan debts, were put in one class and the Debtor's family maintained their contributions to the Debtor, the distribution to all general unsecured creditors would be 42.8%. If all of the general unsecured creditors were put into one class and the Debtor received no contributions from her family, the distribution to general unsecured creditors would be 2% in a 36 month plan, and 3% in a 60 month plan.⁴ If the Debtorfiled a Chapter 7 case, it appears that the general unsecured creditors would receive no payment or dividend.

ISSUE

Does the Debtor's separate classification of unsecured student loan debts in order to cure the default unfairly discriminate against the general unsecured creditor class so as to warrant denial of confirmation?⁵

CONCLUSIONS OF LAW

Unlike subsection (a) of 11 U.S.C. § 1322,⁶ which sets forth what a plan "shall" contain, subsection (b) contains a list of eleven (11) provisions that a plan may contain. Section 1322(b)(3) of the Code provides that a chapter 13 plan may, "provide for the curing or waiving of any default." While this subsection is usually used by debtors as a means to cure or waive defaults in short-term, secured debts, the power to use (b)(3) to cure or waive a default is not limited to any particular kind or term of debt. Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, § 171.1, at ¶ 14 (4th Edition, 2d Rev. June 17, 2004).

Although normally used in the context of addressing long-term mortgage debt, the Code explicitly contemplates the Debtor's use of § 1322(b)(5) to resolve defaults in long-term unsecured debt. Specifically, this section provides that a plan may:

provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured 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). A number of jurisdictions routinely approve plans that provide for "cure and maintain" treatment for student loan debt. See, e.g., In re Carrillo, 421 B.R. 540, 545 (Bankr. D. Ariz. 2009) (noting that debtors are permitted to maintain regular student loan payments as part of a Chapter 13 plan); In re Pageau, 383 B.R. 221, 229 (Bankr. D.N.H. 2008) ("In this district, student loan debts may be paid directly and separately during a debtor's chapter 13 plan in accordance with § 1322(b)(5) as long as payments are to maintain and keep current long-term student loan debt, i.e., loans that mature after plan completion, with no acceleration of [payments on] that debt."); In re Delbecq, 368 B.R. 754, 759 and n.8 (Bankr. S.D. Ind. 2007) ("In this jurisdiction, the Court has historically allowed debtors to classify separately student loan indebtedness pursuant to 11 U.S.C. § 1322(b)(5)."); In re Machado, 378 B.R. 14, 16 (Bankr. D. Mass. 2007) ("It is clear the debtor may employ cure and maintain treatment under Section 1322(b)(5) for her student loan debt given the occurrence of prepetition defaults and original loan maturity dates after the final Plan payment date.").

While it appears clear that a debtor may use subsection (b)(3) or (b)(5) to separately classify student loan debt for purposes of curing a default, in some courts there is a question whether, if a plan separately classifies the debt for purposes of curing a default, the unfair discrimination prohibition of § 1322(b)(1) would apply. Subsection (b)(1) provides in relevant part that a plan may:

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 . . . .

11 U.S.C. § 1322(b)(1). The case law on the use of § 1322(b)(3) in this context is scarce, and there appears to be little or no discussion of the interplay between § 1322(b)(1) and (b)(3). See Lundin, supra. In contrast, there is a split of authority on the issue of whether a debtor whoutilizes subsection (b)(5) to separately treat long-term unsecured...