In re Quinn

586 B.R. 1

IN RE: Robert QUINN and Lea Quinn, Debtors.

Case No. 17–32180–dof

United States Bankruptcy Court, E.D. Michigan, Southern Division, Flint.

Signed June 5, 2018

George E. Jacobs, Bankruptcy Law Offices, Caralyce M. Lassner, Flint, MI, for Debtors.

OPINION SUSTAINING TRUSTEE'S OBJECTION TO CONFIRMATION OF AMENDED CHAPTER 13 PLAN

Daniel S. Opperman, United States Bankruptcy Judge

Introduction

Before the Court is the objection raised by the Chapter 13 Trustee in this case, Carl L. Bekofske, to confirmation of Debtors Robert and Lea Quinn's proposed Amended Chapter 13 Plan. Debtors' proposed plan treats their student loan debt favorably—too favorably according to the Trustee who argues this treatment constitutes unfair discrimination under 11 U.S.C. § 1322(b)(1). The Court agrees and sustains the Trustee's objection to Debtors' Amended Chapter 13 Plan.

Facts

Debtors filed their voluntary petition under Chapter 13 of the Bankruptcy Code on September 21, 2017. Unsecured creditors filed claims in the amount of $227,193.33. Of that amount, $192,936.15 is owed to the federal government for student loans incurred by Debtor Lea Quinn. Debtors filed their Amended Chapter 13 Plan on November 29, 2017. The plan proposes a sixty month term with payments of $1,200 per month. Debtors propose separately classifying their student loan debt as a Class 4 continuing claim, while the remaining unsecured creditors are classified as Class 9. Debtors' plan also states that the Class 4 creditor will receive a minimum of $850.00 per month and "shall be paid all available funds prior to disbursements on any subsequent level."

The Court held a hearing regarding confirmation of the plan on January 16, 2018. The Trustee objected to the special treatment given to the student loan debt in the plan. No creditors objected to the plan. Because there was some uncertainty regarding there possibly being a co-debtor, the case was set for a status conference on February 7, 2018. On that date, the absence of a co-debtor was confirmed, but the Court required briefing regarding Debtors' separate classification of their student loan debt. Debtors filed their brief on March 2, 2018, arguing that their plan should be confirmed due in part to the unique nature of student loans. They pointed to the fact that the contractual obligation on their student loan claim is $1,894.00 per month. Under their proposed plan, they estimate that they would pay $56,800.00 on this claim.¹ However, because of the accumulating interest and penalties, at the end of the sixty month term, they would still owe $192,720.37 in student loan debt, which is $215.78 less than what they owed on the date they filed their bankruptcy petition. In contrast, if Trustee's objection is sustained, Debtors argue that they will owe at least $6,006.22 more on their student loan debt after their Chapter 13 plan is completed. The Trustee filed his brief on March 30, 2018, arguing that Debtors' proposed plan violates § 1322(b)(1) and § 1322(b)(10). The Trustee suggested several ways to amend the plan so that it would no longer be unfairly discriminatory. The first suggestion was to remove the language from the plan requiring the Class 4 creditor be paid "all available funds prior to disbursements on any subsequent level."² According to the Trustee's calculation, this would allow the student loan creditor to receive $56,950.00 or a 29% dividend on its claim and the remaining unsecured creditors a 34% dividend. The other suggestion was to place the student loan creditor in Class 9 along with the remaining creditors. Based on the Trustee's calculations, this would allow the student loan creditor to receive approximately $58,423.91 and the remaining unsecured creditors would receive a 30.3% dividend. In their reply brief filed on April 6, 2018, Debtors disputed the Trustee's calculations because they are based on the amounts owed as of the date of the bankruptcy filing and do not take into account the interest that would continue to accumulate during the term of the plan.

After reviewing the briefs, the Court requested further briefing on specific issues of fact regarding the education Debtor Lea Quinn received as a result of her student loan debt and the employment obtained as a result of that education. Debtors filed their supplemental brief on May 25, 2018. Debtors noted that Debtor Lea Quinn had a bachelor's degree in social work and a master's degree in public administration. Since 2008, she has been a director at a non-profit organization and earns $71,000 per year. The Trustee filed his supplemental brief on June 1, 2018. A confirmation hearing is set for June 12, 2018.

Jurisdiction

This Court has subject matter jurisdiction over this proceeding under 28 U.S.C. § 1334(b), 28 U.S.C. § 157, and E.D. Mich. LR 83.50(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(L) (confirmation of plans).

Law and Analysis

In what has been termed a "crisis" for our country, the national student debt has tripled in the past decade to more than $1.3 trillion. See In re Engen , 561 B.R. 523, 544–45 (Bankr. D. Kan. 2016) (citations omitted). There is no statute of limitations for student loans, and thus the government can pursue debtors " ‘to the grave.’ " Id. at 546 (citation omitted). Moreover, student loans are generally excepted from discharge. Under 11 U.S.C. § 523(a)(8), educational loans, scholarships and stipends are nondischargeable, "unless excepting such debt from discharge ... would impose an undue hardship on the debtor and the debtor's dependents." If a debtor does not affirmatively secure an undue hardship determination, the discharge order will not include a student loan debt. Tenn. Student Assistance Corp. v. Hood , 541 U.S. 440, 450, 124 S.Ct. 1905, 158 L.Ed.2d 764 (2004) (citation omitted). Congress enacted this exception to discharge " ‘to prevent indebted college or graduate students from filing for bankruptcy immediately upon graduation, thereby absolving themselves of the obligation to repay their student loans.’ " Barron v. Tex. Guaranteed Student Loan Corp. (In re Barron) , 264 B.R. 833, 838–39 (Bankr. E.D. Tex. 2001) (quoting Tenn. Student Assistance Corp. v. Hornsby (In re Hornsby) , 144 F.3d 433, 436–37 (6th Cir. 1998) ). Moreover,

because student loans are generally unsecured and recent graduates often have few or no assets, these debtors have an incentive to try to discharge their educational loans in bankruptcy. If successful, they can then enjoy the higher earning power the loans have made possible without the financial burden that repayment entails. Congress enacted § 523(a)(8) because there was evidence of an increasing abuse of the bankruptcy process that threatened the viability of educational loan programs and harm to future students as well as taxpayers. Congress recognized that this is an instance where a creditor's interest in receiving full payment of the debt outweighs the debtor's interest in a fresh start.

Cazenovia College v. Renshaw (In re Renshaw) , 222 F.3d 82, 86–87 (2d Cir. 2000) (citations omitted).

This treatment of student loan debt by the Code presents a quandary for Chapter 13 debtors. Not only will the student loan debt survive the debtor's discharge, but the amount owed in student loans may be more after completion of the plan than it was on the date of the bankruptcy filing. Thus, more and more debtors are proposing that their student loan creditor be paid a greater amount than the other unsecured creditors in their Chapter 13 plan. Many courts allow debtors to do so,³ reasoning that such treatment is consistent with the Code for a number of reasons:

(1) a debtor will not be afforded a fresh start in bankruptcy if the debtor is defaulting on student loan payments over the term of a 3–5 year plan, considering that on-going monthly plan payments are likely to be less than the amount owed on the student loan debt, interest is accruing, and the debts survive the debtor's discharge; (2) strong public policy supports the repayment of education loans; (3) Congress prefers Chapter 13 over Chapter 7, and debtors in Chapter 7 fare better with making post-bankruptcy payment on student loans debts because a Chapter 7 debtor will not have been in forced default of student loan debt obligations for 3–5 years; and (4) other unsecured creditors in Chapter 13 are not harmed by the preferential treatment for student loan debt because unsecured creditors must receive a return in Chapter 13 that is equivalent to what they would receive in Chapter 7 pursuant to 11 U.S.C. § 1325(a)(4).

In re Mason , 456 B.R. 245, 248 (Bankr. N.D. W. Va. 2011) (citing Seth J. Gerson, Note: Separate Classification of Student Loans in Chapter 13 , 73 Wash. U.L.Q. 269, 290–92 (1995) ). In other words, not only does the favorable treatment of student loans help debtors, but it is also consistent with the Congressional intent to protect the fiscal health of our country's student loan programs. Engen , 561 B.R. at 541–42. The Court finds these reasons persuasive and agrees that student loan debt may be given favorable treatment in a Chapter 13 plan.

Under § 1322(b)(1), a Chapter 13 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; 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[.]

While a minority of courts have held that a long term nondischargeable student loan claim under § 1322(b)(5) is not subject to the unfair discrimination requirement of § 1322(b)(1), see, e.g. , In re Williams , 253 B.R. 220, 227 (Bankr. W.D. Tenn. 2000) (inclusion of unsecured creditors in (b)(5) indicates that it is a type of discrimination that is expressly contemplated and sanctioned by the Code), a majority of courts agree that a debtor may use § 1322(b)(5) to maintain...