JOHN E. WAITES, Bankruptcy Judge.
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. 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 is now 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.
9. Other unsecured creditors are treated in section IV(E) of the Plan:
(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 the handling 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.
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?
Unlike subsection (a) of 11 U.S.C. § 1322,
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:
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:
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 who utilizes subsection (b)(5) to separately treat long-term unsecured debt is also required to comply with the anti-discrimination provisions of § 1322(b)(1).
A minority of Courts addressing this issue have ruled that a debtor's use of subsection (b)(5) to deal with long-term unsecured debt supersedes the provisions of subsection (b)(1). See, e.g., In re Truss, 404 B.R. 329, 332 (Bankr. E.D. Wis. 2009) ("Because section 1322(b)(5) is specific and clear in its language, statutory construction principles dictated that it trump the more general terms of section 1322(b)(1). In other words, if the provisions of section 1322(b)(5) for the cure of arrearages and maintenance of regular payments on long-term student loan indebtedness apply, then the specific provisions of section 1322(b)(5) supercede [sic] the general unfair discrimination provisions of section 1322(b)(1)."); 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); In re Hanson, 310 B.R. 131, 134 (Bankr. W.D. Wis. 2004) (specific statutory provision of § 1322(b)(5) trumps the general provisions of (b)(1)); In re Johnson, 446 B.R. 921, 925 (Bankr. E.D. Wis. 2011) (citing with favor Truss analysis, supra).
In contrast, a majority of courts hold that each part of § 1322(b) must be harmonized with the others; therefore, a debtor who proposes to separately classify long-term student loan debt using § 1322(b)(5) must also satisfy subsection (b)(1) and prove to the court's satisfaction that the separate classification does not unfairly discriminate. See, e.g., In re Brown, 500 B.R. 255, 265 (Bankr. S.D. Ga. 2013) (separate student loan classification must undergo unfair discrimination analysis); In re Pracht, 464 B.R. 486, 490 (Bankr. M.D. Ga. 2012) (subsection (b)(5) does not "trump" subsection (b)(1)); In re Harding, 423 B.R. 568, 571 (Bankr. S.D. Fla. 2010) (subsection (b)(5) cannot be read in isolation); In re Edmonds, 444 B.R. 898, 900 (Bankr. E.D. Wi. 2010) (same); In re Webb, 370 B.R. 418, 423 (Bankr. N.D. Ga. 2007) (without declaring the majority position correct, court finds it appropriate to make a determination of whether the proposed plan unfairly discriminated); In re Simmons, 288 B.R. 737, 743 (Bankr. N.D. Tex. 2003) (code does not contain an exception to § 1322(b)(1), which must be considered when evaluating treatment of a debt under (b)(5)); In re Chandler, 210 B.R. 898, 904 (Bankr. D.N.H. 1997) (separate classifications under § 1322(b)(5) are subject to unfair discrimination prohibition of § 1322(b)(1)); In re Coonce, 213 B.R. 344, 347 (Bankr. S.D. Ill. 1997) (same).
To address this split, and in consideration of the Trustee's objection, the Court must therefore analyze the general requirements of § 1322(b)(1).
On the specific issue of discrimination, a debtor who has proposed a separate classification has the burden of proving by a preponderance of the evidence that the separate classification does not unfairly discriminate. In re Moore, 31 B.R. 12, 16 (Bankr. D.S.C. 1983); In re Prachet, 464 B.R. at 489; In re Kalfayan, 415 B.R. 907, 909 (Bankr. S.D. Fla. 2009). "A debtor must be able to articulate a reason why the discriminatory treatment is being proposed, and be able to demonstrate that a lesser discriminatory means of treatment is not advisable." In re Mason, 456 B.R. 245, 252 (Bankr. N.D. W. Va. 2011).
The Code does not define either the term "discriminate"
Historically in this district, the Court has utilized a five (5) factor test to determine whether a plan's classification is unfairly discriminatory:
In re Moore, 31 B.R. at 17 (internal citations omitted); In re Girardeau, 35 B.R. 9 (Bankr. D.S.C. 1983);
Despite a desire for a bright line test, even in those courts that employ a more formulistic approach, ultimately the analysis in each case is fact intensive. In re Crawford, 324 F.3d 539, 543-43 (7th Cir. 2003) (After failing in its efforts to identify a satisfactory bright line test, the court counseled "if without classification the debtor is unlikely to be able to fulfill the Chapter 13 plan and the result will be to make his creditors as a whole worse off than they would be with classification, then classification will be a win-win outcome."); In re Groves, 39 F.3d 212, 214 (8th Cir. 1994) (recognizing that the application of the "discriminate unfairly" standard may "involve little more than exercise of the bankruptcy court's broad discretion"); In re Pracht, 464 B.R. 486, 491 (Bankr. M.D. Ga. 2012) (recognizing that "the inevitable consequence of any multi-factored test . . . is that it devolves into a `totality of the circumstances' or `case-by-case' analysis, thereby running the risk of being depicted as an ad hoc, potentially purely subjective determination").
In this case, as a result of the separate classification for the purpose of curing a default, the Debtor is proposing to pay the separately classed student loan creditors more than what is being paid to other unsecured creditors. "By its very nature, this treatment is discriminatory; however, just because treatment is discriminatory does not mean that it is unfairly discriminatory." In re Mason, 456 B.R. at 249-50. The critical issue under § 1322(b)(1) is not merely the difference in payment amount, but the reason for the difference in treatment.
While the undersigned is unwilling to abandon the framework established by my predecessors on the Court, it appears that factor five, the difference in payment percentage, has been unduly emphasized in prior cases. Therefore, in my view, the following streamlined test better reflects the balance of factors pursuant to which a debtor must submit evidence to enable the Court to analyze the separate classification of unsecured debt:
Applying this test to the facts before the Court, the Court finds that the Plan's separate classification of the Debtor's student loans is permissible and that the proposed classification does not unfairly discriminate.
The evidence before the Court is that there is a good faith, rational basis for the proposed classification, with the reason being to cure the student loan default and to improve the Debtor's prospects for reemployment as a paralegal. The Debtor's uncontroverted testimony was that despite her twenty-year career as a paralegal, she has not been employed since August 2015 and that, while her initial job loss was health related, her efforts to obtain new employment as a paralegal have been stymied by the default status of her student loans. The Debtor testified that she cannot obtain either a state or federal job as a paralegal or administrative assistant while her student loans are in default because as a paralegal, this default status is perceived by employers to impact her reliability in the handling of funds.
Additionally, while the Debtor is currently unemployed with no income from wages with which to make payments to creditors, the Debtor, through her family's voluntary contribution, has proposed the Plan to enable the Debtor to pay a dividend to all creditors with a primary goal of curing the default in her student loans.
The evidence indicates that a continuation of the default status on the Debtor's student loans impairs her ability to regain employment and meet her and her family's financial needs. The rehabilitation proposed in the Plan would enable her to both cure her default in her student loans and enable her to address her debts for which her non-filing spouse is a co-debtor. Merely filing Chapter 7 will not resolve the Debtor's current difficulties with her student loan creditors and may limit her family's ability to retain essential secured property.
It is undisputed that under the Plan, the separately classed general unsecured creditors will receive 11.3%. This is a meaningful distribution, and more than general unsecured creditors would receive either in a Chapter 7 liquidation case or in many of the typical Chapter 13 cases filed in this district. Although the Trustee has indicated that if the separate classification were eliminated, general unsecured creditors would receive 42.8%, this calculation does not take into consideration the fact that if the Plan is not confirmed, the assistance from the Debtor's family will likely be withdrawn. Without the family's contribution, the combined class of general unsecured creditors would receive only 2% over 36 months.
Although the Plan does not propose to pay the separately classed general unsecured creditors the same dollar amount as the student loan creditors, it is clear that the Plan is paying all general unsecured creditors more and in a better manner than they would receive if the Plan were not confirmed. The financial differential resulting from the separate classification and treatment is not excessive, and the benefit to the general unsecured creditors is meaningful.
Based on the facts presented, the Court finds that the discrimination caused by the separate classification of student loans proposed by the Debtor is not unfair and is proposed in good faith. The Plan uses the funds contributed to the Debtor by her family to fund 100% of the Plan, to remedy the student loan default so she can apply for state and federal jobs in her field, and to provide creditors with more than they would receive in a hypothetical chapter 7 case or a chapter 13 case without her family's contribution. The proposed Plan promotes the policy of paying student loans and curing student loan default so the Debtor can achieve a fresh start and her goals of reorganization, of obtaining employment, and of paying her creditors to the best of her ability.
THEREFORE, this Court holds the plan does not unfairly discriminate and meets the requirements of § 1322. The Trustee's objection is overruled.
Finally, according to the undersigned's Chambers Guidelines, inasmuch as Counsel has expended additional time and effort to represent the Debtor in this contested matter, Counsel is hereby awarded an additional $1,500 in attorney's fees to be paid through the Debtor's plan by the Trustee or directly by the Debtor.
Bentley v. Boyajian (In re Bentley), 266 B.R. 229, 237 (1st Cir. B.A.P. 2001) (internal citations omitted).
