Cite as: Keith M. Lundin, Lundin On Chapter 13, § 106.4, at ¶ ____, LundinOnChapter13.com (last visited __________).
Student loans have attracted more than their fair share of good-faith problems in Chapter 13 cases. A large number of good-faith decisions involve Chapter 13 plans paying less than 100 percent of student loans. Changes in the dischargeability of student loans have had odd effects on the good-faith fortunes of these plans.
Prior to the 1990 amendments, ordinary student loans were dischargeable in a Chapter 13 case after completion of all plan payments.1 In 1990, Congress amended § 1328(a)(2) to make student loans non-dischargeable in Chapter 13 cases except as indicated in § 523(a)(8).2 Amendments to § 523(a)(8) since 1990 have narrowed the exceptions to the nondischargeability of student loans.3 The 1990 (and later) amendments concerning the nondischargeability of student loans made no changes to the standards for confirmation in § 1322 or § 1325.
If the plan treats educational loans the same as other unsecured debts, it is not obvious that any special good-faith considerations enter the confirmation calculus. That the balance of the student loan will survive discharge is not a reason to require a Chapter 13 debtor to treat the student loan more (or less) favorably than other unsecured claims.4 The student loan claim holder gets automatic favoritism in the form of a nondischargeable debt. If Congress intended special status during the plan, Congress would have amended § 1322(a)(2) or the priorities in § 507 the way it did with respect to alimony and support in 1994.5
After the 1990 amendments, debtors often try to separately classify student loans for as much payment as possible to reduce the debt that survives discharge, including the accumulation of (nondischargeable) postpetition interest.6 Less favored unsecured claim holders can challenge the fairness of this discriminatory classification under § 1322(b)(1).7
Once again it is not obvious that good faith in § 1325(a)(3) adds anything to this picture. The unfair-discrimination test in § 1322(b)(1) is a substantial barrier to exotic classifications that favor nondischargeable student loans. But for a long history of good-faith decisions addressing the treatment of student loans in Chapter 13 plans, it would be tempting to say that good faith has no content in this context.
It must be that student loan defaults especially gall some judges. Many reported decisions, mostly before the 1990 amendments, punish Chapter 13 debtors for lack of good faith in plans that compromise student loans.8 One court denied confirmation of a plan proposing partial repayment of student loans that enabled the debtor to attend veterinary school on the theory that the debtor could move from New York to Maine, practice veterinary medicine in Maine for four years, and receive relief from the student loans.9 The court observed that a four-year stay in Maine was “not unreasonably long” and the debtor’s parents resided in Maine; thus, “this is not a case where a debtor is being asked to separate herself from her family in order to make a good faith effort to pay her debt.”10
Some of the good-faith cases dealing with student loans fixated on the percentage of total unsecured debt that was student loans.11 As the percentage of student loan debt increased, the likelihood of a finding that good faith was lacking also increased. There was more math than logic in these cases.
Other decisions recognized that student loans had no special character in Chapter 13 cases prior to 1990, and thus composition of student loans was addressed at confirmation without any more (or less) good-faith scrutiny than the composition of other unsecured debts.12 Curiously, this view prevailed with respect to a narrow class of student loans to health care providers that were nondischargeable in Chapter 13 cases even prior to 1990: Bankruptcy courts routinely confirmed plans paying less than 100 percent of Health Education Assistance Loans (HEAL loans) without the good-faith hassles inflicted on ordinary (dischargeable) student loans.13
Now that most student loans are nondischargeable in Chapter 13 cases, there are few, if any, reported decisions applying good faith as the measure of the treatment of student loans during the plan. This is an interesting commentary on what was going on before 1990.
Prior to 1990, when student loans were dischargeable in Chapter 13 cases, many bankruptcy courts used the good-faith test to force debtors to provide more favorable treatment to student loan creditors—this at a time when the congressional choice was that student loans were ordinary dischargeable unsecured claims.
After 1990, when Congress declared student loans nondischargeable in Chapter 13 cases, the bankruptcy courts retreated from the use of good faith in student loan cases. Most of the post-1990 Chapter 13 cases dealing with student loan claims are classification cases in which the unfair-discrimination test is used by the bankruptcy courts to prohibit debtors from favorably treating student loans through the plan.14
Why were bankruptcy courts so inclined to erect a good-faith shield around dischargeable student loans when Congress wasn’t? Is there any sense in which declaring student loans nondischargeable in Chapter 13 cases was a congressional signal for less good-faith scrutiny at confirmation? Is it just irony that the unfair-discrimination test in § 1322(b)(1) has the opposite effect of the good-faith test when applied to the treatment of student loans?15
The pre-1990 good-faith student loan cases are a scary precedent for a conception of good faith that is divorced from the choices that legislatures make, not judges. When Congress treated student loans as ordinary claims, too many bankruptcy judges used the good-faith test to give student loans special status and entitlements. Once Congress crowned the status of student loans, the court have resisted any treatment better than equal treatment. This is confusing because it is confusing.
1 See § 346.1 [ Student Loans ] § 158.2 Student Loans.
2 See 11 U.S.C. § 1328(a)(2). See § 346.1 [ Student Loans ] § 158.2 Student Loans.
3 See § 346.1 [ Student Loans ] § 158.2 Student Loans.
4 The legislative history to the 1990 amendments that made drunken driving and criminal restitution claims nondischargeable in a Chapter 13 case indicates that Congress contemplated that these new nondischargeable claims would participate with other claims under the plan, and any unpaid portion would survive discharge. See H.R. Rep. No. 101-681, at 164–165 (1990), discussed in §§ 154.1 [ Restitution, Fines and Other Criminal Problems ] § 88.7 Restitution, Fines and Other Criminal Problems, 155.1 [ Driving While Intoxicated ] § 88.8 Driving, Boating or Flying while Intoxicated, 347.1 [ Driving While Intoxicated ] § 158.3 Driving while Intoxicated and 348.1 [ Criminal Restitution and Criminal Fines ] § 158.4 Criminal Restitution and Criminal Fines. Although no similar legislative history appears with respect to the 1990 amendment making educational loans nondischargeable in Chapter 13 cases, an argument by analogy is not unreasonable.
5 See §§ 152.2 [ Alimony, Maintenance and Support ] § 88.4 Alimony, Maintenance and Support and 301.1 [ Alimony, Maintenance and Support in Cases Filed after October 22, 1994 ] § 136.20 Alimony, Maintenance and Support in Cases Filed after October 22, 1994.
7 See §§ 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1 Power to Classify Unsecured Claims: Tests for Unfair Discrimination, 153.1 [ Student Loans ] § 88.6 Student Loans and 155.1 [ Driving While Intoxicated ] § 88.8 Driving, Boating or Flying while Intoxicated.
8 See, e.g., In re Sanabria, 52 B.R. 75 (N.D. Ill. 1985) (Court denies confirmation of 10%, 60-month plan when bulk of debts are student loans, debtor is a doctor and debtor filed Chapter 13 within one month of completion of medical school.); In re Cordes, 147 B.R. 498 (Bankr. D. Minn. 1992) (Debtor’s proposal to defer payment on educational loans for a substantial portion of the plan is indicative of bad faith.); In re Dillon-Bader, 131 B.R. 463, 466 (Bankr. D. Kan. 1991) (Applying Flygare v. Boulden, 709 F.2d 1344 (10th Cir. 1983), it is bad faith to compromise non-dischargeable student loan debt. Student loans made up 94% of debtor’s unsecured debt. Debtor proposed to pay 100% of a portion of those student loans (40%) because they were HEAL loans that would be nondischargeable under 42 U.S.C. § 294f(g). Plan would pay 10% of other student loans. “The magnitude of student loan debt in relation to the debtor’s total debt and the low percentage of repayment are factors that weigh considerably against confirmation. . . . This court finds that the primary purpose of this Chapter 13 plan is to discharge otherwise nondischargeable student debts.”); In re Smith, 130 B.R. 102, 104 (Bankr. D. Utah 1991) (36-month plan is not in good faith when substantial portion of unsecured debt is student loans and debtor could pay substantially more than 30% if debtor extended the plan to 60 months. “The good faith requirement for confirmation of a Chapter 13 plan cannot be met if the debtors are not putting forth their best efforts to repay creditors. The court must find that the length of the plan is a relevant consideration. . . . [A] 60-month plan is imperative in order for these debtors to meet the good faith requirement for confirmation.”); In re Dotson, 124 B.R. 836 (Bankr. N.D. Okla. 1991) (Court denied confirmation of 9.58% plan when debtor converted to Chapter 13 from Chapter 7 after dischargeability complaint was filed, 60% of debtor’s payments would go to pay for a luxury motor vehicle, debtor filed bankruptcy to discharge student loans before the first installment was due on the student loans, debtor took an expensive Caribbean cruise on the eve of bankruptcy and there was no evidence of any prepetition effort to pay unsecured creditors.); In re Sieg, 120 B.R. 533 (Bankr. D.N.D. 1990) (It is bad faith when debtor reopened Chapter 7 case after discharge and converted to Chapter 13 to compromise student loan claims that survived discharge in the Chapter 7 case. Plan would pay less than 13% of the student loans, student loan claims were the only unsecured debt remaining after discharge in the Chapter 7 case and the only purpose in converting to Chapter 13 was to wipe out the student loan debts.); In re Castonguay, 119 B.R. 256, 258 (Bankr. D. Kan. 1990) (Court denies confirmation of 10%, 36-month plan when 94% of the debt is student loans. “[T]he student loan creditor is entitled to at least as much, if not more, protection than any other unsecured creditor because [the student loan creditor], and ultimately the taxpayer, cannot protect itself in this situation.”); In re Carpico, 117 B.R. 335 (Bankr. S.D. Ohio 1990) (Court denies confirmation of 8% 47-month plan when 30% of unsecured debt is educational loans and plan ignores potential future income increases that the debtor might receive as a pharmacist.); In re McKinney, 93 B.R. 135 (Bankr. S.D. Ohio 1988), aff’d, 118 B.R. 968 (S.D. Ohio 1990) (It is appropriate to refuse confirmation of 20% plan that would discharge student loans that approximated 81% of unsecured debt.); In re Geehan, 59 B.R. 600, 601, 603 (Bankr. S.D. Ohio 1986) (Court denies confirmation of 10% plan when debtor “has not offered evidence of hardship to demonstrate that he is unable to pay . . . the student loan as he originally contracted.” Court indicates it is “particularly desirous of preventing debtors from avoiding the obligation incurred by loans for educational purposes when debtors have the means, potential, and ability to repay student loans which have permitted them to prepare themselves for well-paying positions in business and professions.”); In re Vance, 49 B.R. 973 (Bankr. D. Minn. 1985) (Court denies confirmation of 60-month plan paying 31% of student loans totaling $77,000 for medical training.); In re Nkanang, 44 B.R. 955 (Bankr. N.D. Ga. 1984) (Court denies confirmation of deep composition plan where debtor has two masters degrees, has a “middle class income” and proposes to discharge substantial student loans.); In re Williams, 42 B.R. 474 (Bankr. E.D. Ark. 1984) (Court denies confirmation of 36-month plan paying 37% of student loans, noting that debtor could extend plan to 60 months and make a more meaningful repayment.); In re Johnson, 36 B.R. 67 (Bankr. S.D. Ill. 1984) (Debtor has committed all available monthly income, but confirmation is denied when debtor proposes to pay only 10% of educational loans constituting 84% of unsecured debt.); In re Canda, 33 B.R. 75, 77 (Bankr. D. Or. 1983) (Debtor with 80% of unsecured debt owed for student loans is “presently judgment proof,” and thus “there is no need for the debtor to obtain relief . . . in Chapter 13. . . . [S]ince it appears the debtor presently has no need for bankruptcy relief it would appear that the principal purpose is to obtain a discharge of the student loan obligations.”).
9 In re Hawkins, 33 B.R. 908 (Bankr. S.D.N.Y. 1983).
10 33 B.R. at 913.
11 See, e.g., Colorado Student Obligation Bond Auth. v. Thompson (In re Thompson), 116 B.R. 794 (D. Colo. 1990) (Court confirms 2% plan when 70% of debt is student loans.); In re Stewart, 109 B.R. 998 (D. Kan. 1990) (80% of unsecured debt is student loan.); In re Dillon-Bader, 131 B.R. 463, 466 (Bankr. D. Kan. 1991) (Student loans were 94% of debtor’s unsecured debt. Plan proposed to pay 100% of a portion of those student loans, because they were HEAL loans, and 10% of other student loans. “The magnitude of student loan debt in relation to the debtor’s total debt and the low percentage of repayment are factors that weigh considerably against confirmation.”); In re Smith, 130 B.R. 102 (Bankr. D. Utah 1991) (36-month plan was not in good faith when substantial portion of unsecured debt was student loans and debtor could pay substantially more than 30% if debtor extended plan to 60 months.); In re Sieg, 120 B.R. 533 (Bankr. D.N.D. 1990) (Court denied confirmation of 13% plan when student loan claims were the only unsecured debts remaining after discharge in a prior Chapter 7 case and the only purpose in converting to Chapter 13 after discharge in the Chapter 7 case was to manage the nondischargeable student loan debts.); In re Castonguay, 119 B.R. 256 (Bankr. D. Kan. 1990) (Court denies confirmation of 10% plan when 94% of debt is student loans.); In re Carpico, 117 B.R. 335 (Bankr. S.D. Ohio 1990) (Court denies confirmation of 8% plan when 30% of unsecured debt is educational loans.); In re Selden, 116 B.R. 232 (Bankr. D. Or.) (Court confirmed 4% plan when all the unsecured debt was student loans.), aff’d, 121 B.R. 59 (D. Or. 1990); In re McKinney, 93 B.R. 135 (Bankr. S.D. Ohio 1988) (Court denies confirmation of 20% plan when student loans are 81% of unsecured debt.), aff’d, 118 B.R. 968 (S.D. Ohio 1990); In re Ellenburg, 89 B.R. 258, 263 (Bankr. N.D. Ga. 1988) (Court rejects good-faith objection to 15%, 50-month plan compromising student loans totaling $34,595. “The cases in which courts have denied confirmation on the basis that the primary motive in filing Chapter 13 was to discharge nondischargeable student loan debt typically involved situations where the student loan debt comprised 50% or more of the unsecured claims. Here, [nondischargeable] student loans comprise only 19% of the unsecured debt.”).
12 See, e.g., Wisconsin Higher Educ. Corp. v. Bear, 789 F.2d 577 (7th Cir. 1986) (Court affirms confirmation over good-faith objection of 6% plan compromising substantial educational loans.); In re Porter, 102 B.R. 773 (B.A.P. 9th Cir. 1989) (45–50% plan passes good-faith analysis notwithstanding the discharge of otherwise nondischargeable student loans. Though the debtors are not changing their lifestyle, there is no evidence of extravagance.); Colorado Student Obligation Bond Auth. v. Thompson (In re Thompson), 116 B.R. 794, 796–97 (D. Colo. 1990) (Court confirms three-year, 2% plan when 70% of debt is student loans. “[T]he ability to pay test of § 1325(b) eliminates the need to reconsider such factors as . . . employment history, the term of the plan, or any special circumstances affecting . . . financial condition.” The bankruptcy court finding that the debtor was sincere in her efforts was not clearly erroneous.); In re Selden, 116 B.R. 232, 236, 237 (Bankr. D. Or.), aff’d, 121 B.R. 59 (D. Or. 1990) (Court confirms 4% plan when all of the unsecured debt is student loans that enabled the debtor to complete law school. Debtor is a deputy district attorney, the plan is a 36-month plan, the debtor agreed to file quarterly reports of income and expenses, and debtor agreed to pay income tax refunds during the life of the plan. 1984 amendments eliminate the amount of repayment and length of the plan as factors in determining good faith under Goeb v. Heid (In re Goeb), 675 F.2d 1386 (9th Cir. 1982). The debtor’s omission of a child support arrearage was explained. A $30-per-month overstatement in the average monthly electrical expense was de minimis. “The Code does not require that Chapter 13 debtors live in abject poverty.” That student loans are the only debts is “a strong evidence of good faith. . . . If the debtor intended to manipulate the Bankruptcy Code . . . one could logically expect to see evidence that the debtor took advantage of the availability of credit to the fullest extent. That is not the case here as shown by the lack of any debt other than student loans.” The only evidence of bad faith was the purchase of a $790 stereo—“the primary source of entertainment for [the debtor’s] children.”); Holiday v. Tennessee Student Assistance Corp. (In re Holiday), 75 B.R. 265 (M.D. Tenn. 1986) (Court affirms confirmation of 1% plan when 80% of unsecured debt is student loans.); In re Castello, 98 B.R. 523 (Bankr. D. Or. 1989), vacated, 123 B.R. 466 (B.A.P. 9th Cir.), on remand, 127 B.R. 257 (Bankr. D. Or. 1991) (Court confirms plan paying 100% of restitution obligation and nothing to general unsecured claims, including claims for student loans and an unliquidated claim for assault that would probably be nondischargeable in a Chapter 7 case.); In re Winthurst, 97 B.R. 457 (Bankr. C.D. Ill. 1989) (Court confirms 1% plan discharging substantial student loans. “Undue hardship” standard for discharge of student loans does not apply in Chapter 13 cases.); In re Owens, 82 B.R. 960 (Bankr. N.D. Ill. 1988) (Court confirms 15% plan compromising substantial student loans, including HEAL loans that may survive discharge.); In re Sutliff, 79 B.R. 151 (Bankr. N.D.N.Y. 1987) (Debtor made a good-faith effort when 80% of debt is student loans, plan will run 60 months and plan will pay approximately 20%.); In re Gathright, 67 B.R. 384 (Bankr. E.D. Pa. 1986), aff’d, 71 B.R. 343 (E.D. Pa. 1987) (Court rejects good-faith objection to 40% plan compromising large student loan obligations.); In re Williams, 66 B.R. 646 (Bankr. C.D. Ill. 1986) (Court confirms 15% plan when approximately one-half of unsecured debt is educational loans.); In re Rushton, 58 B.R. 36 (Bankr. M.D. Ala. 1986) (Court confirms 10% repayment of student loans.); In re Peterson, 53 B.R. 339 (Bankr. D. Or. 1985) (Court confirms 25% plan in which student loans constitute 43% of unsecured debt); In re Dos Passos, 45 B.R. 240 (Bankr. D. Mass. 1984) (Court rejects good-faith objection to 10% plan when 65% of debt is student loans and the debtor is a skilled professional, a dentist.); In re McAloon, 44 B.R. 831 (Bankr. E.D. Va. 1984) (Court confirms 25% plan when 77% of unsecured debt is student loans.); In re Vensel, 39 B.R. 866 (Bankr. E.D. Va. 1984) (It is not bad faith to pay small dividend when 53% of debt is student loans.); In re Ali, 33 B.R. 890 (Bankr. D. Kan. 1983) (Court confirms 0% plan, including no payment of student loans totaling $20,000.); In re Martini, 28 B.R. 932 (Bankr. S.D.N.Y. 1983) (It is not bad faith to pay substantially less than 100% of student loans declared nondischargeable in a prior liquidation case.).
13 See United States v. Cleveland, 89 B.R. 69, 72 (B.A.P. 9th Cir. 1988) (42 U.S.C. § 294f(g)(2) controls the dischargeability of HEAL loans in a Chapter 13 case. In Chapter 13 cases, “a HEAL loan would be treated as any other unsecured debt and receive the same pro rata payment under a Chapter 13 plan as other unsecured creditors. Then, after the statutory five-year period has passed, the bankruptcy court can make a determination under § 294f(g) as to whether ‘nondischarge of such debt would be unconscionable.’”); United States v. Williams (In re Williams), 96 B.R. 149 (Bankr. N.D. Ill. 1989) (42 U.S.C. § 294f(g) does not permit a final resolution of the dischargeability of HEAL loans in a Chapter 13 case until debtor is eligible for a discharge—at the completion of all payments or at debtor’s request for a hardship discharge. Potentially nondischargeable unsecured debts such as a HEAL loan can be included in the Chapter 13 plan, and the holder of the loan is bound by the terms of the confirmed plan. Notwithstanding that debtor proposed to pay only 1% of unsecured claims, the holder of the HEAL loan is precluded from seeking to collect its claim until the plan has been completed.); United States v. Dunevitz (In re Dunevitz), 94 B.R. 190 (Bankr. D. Colo. 1988). But see In re Battrell, 105 B.R. 65, 67 (Bankr. D. Or. 1989) (Court denied confirmation of plan calling for discharge of HEAL loan at completion of payments under the plan. “The court cannot find that nondischarge of the obligation would be unconscionable when the circumstances existing at the time of the discharge are not known.”). See also In re Johnson, 787 F.2d 1179 (7th Cir. 1986) (HEAL loans are not subject to discharge pursuant to 42 U.S.C. § 294f(g).); United States v. Lee, 71 B.R. 833 (Bankr. N.D. Ga.), rev’d, 89 B.R. 250 (N.D. Ga. 1987); In re Gronski, 65 B.R. 932 (Bankr. E.D. Pa. 1986) (HEAL loan is not dischargeable in a Chapter 13 case unless the conditions of 42 U.S.C. § 294f(g) are met.).
14 See § 153.1 [ Student Loans ] § 88.6 Student Loans.
15 See also § 187.1 [ Separate Classification of Nondischargeable Claims and Good Faith ] § 106.5 Separate Classification of Nondischargeable Claims and Good Faith.