Cite as: Keith M. Lundin, Lundin On Chapter 13, § 87.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
The statutory authority for classification of unsecured claims is poorly worded, contains confusing cross-references to other chapters of the Code and has been amended several times to increase the confusion—all with the result that the power to classify unsecured claims in Chapter 13 cases is of uncertain extent and is a source of much litigation.
11 U.S.C. § 1322(b)(1) starts with the generous proposition that a Chapter 13 plan “may . . . designate a class or classes of unsecured claims.” This general power is then modified with the phrase “as provided in section 1122 of this title.” A quick cross-reference to § 1122 tells us two things: (1) in Chapter 11 cases a plan may place an unsecured claim in a class “only if such claim . . . is substantially similar to the other claims . . . of such class,”1 and (2) a plan may designate a separate class of unsecured claims “consisting only of every unsecured claim that is less than or reduced to an amount that the court approves as reasonable and necessary for administrative convenience.”2 Section 1322(a)(3) adds the qualifier “if the plan classifies claims, [the plan must] provide the same treatment for each claim within a particular class.”3
That only substantially similar claims can be placed in a class tells us nothing about whether substantially similar claims must be placed in the same class or can be placed in separate classes or whether separate classes, each containing substantially similar claims, can be treated unequally in a Chapter 13 plan. The authorization for an administrative convenience class in § 1122(b) is essentially useless in Chapter 13 cases. It is improbable, in this age of computerized Chapter 13 trustees’ offices, that a Chapter 13 case would fit the jurisdictional limits for eligibility and contain so many creditors holding small claims that administrative convenience becomes an issue in classification.4 That small unsecured claim holders have fewer rights in a Chapter 11 case because of the cumbersome mechanics of participation5 simply isn’t of much moment in Chapter 13 cases where there is always a trustee and where unsecured claim holders can easily flex their muscles by objecting to confirmation.
Section 1322(b)(1) contains a further limitation—classification “may not discriminate unfairly against any class so designated.”6 The unfair- discrimination standard has been much litigated. Discrimination is not defined, and the use of the subjective, “unfairly,” leaves much to the discretion of the bankruptcy court.
In a final stroke of almost complete indirection, the 1984 amendments to § 1322(b)(1) added a wonderful “however” clause: a Chapter 13 plan “may treat claims for a consumer debt . . . if an individual is liable on such consumer debt with the debtor differently than other unsecured claims.”7 It seems that Congress intended to permit Chapter 13 debtors to separately classify co-signed consumer debts for different treatment in a Chapter 13 plan. However, because Congress appended this power to a section already overflowing with cross-references and dependent clauses, the extent of the power to separately classify co-signed claims may not be completely detached from the unfair-discrimination standard to which it is an exception. All this confusing language produces too much grist for the litigation mill.
The principal battlefields in the reported cases are the separate classification of co-signed claims, of claims that are or may be nondischargeable in a Chapter 7 case, and of creditors with continuing relationships with the debtor—medical providers, landlords and the like. Counsel must be familiar with local practice and the inclinations of particular judges: there are few useful appellate decisions.
If there is a trend in the reported classification cases, it is the search for factors to apply to determine whether a proposed classification satisfies § 1322(b)(1). Many courts have adopted four- or five-part tests along these lines:
Whether the discrimination has a reasonable basis
Whether the debtor can carry out a plan without the discrimination
Whether the discrimination is proposed in good faith
Treatment of the class discriminated against8
Difference between what the creditors discriminated against will receive as the plan is proposed and the amount they would receive if there was no separate classification.9
A former bankruptcy judge now on the district court in the Western District of Tennessee gave this insightful account of the lack of meaning and of meaningful differences in the four- and five-factor tests for unfair discrimination:
Most bankruptcy courts have chosen to use the four-part test originally articulated in In re Kovich, 4 B.R. 403 (Bankr. W.D. Mich. 1980). . . . 1) whether the discrimination has a reasonable basis; 2) whether the debtor can carry out a plan without such discrimination; 3) whether such discrimination is proposed in good faith; and 4) the treatment of the class discriminated against. . . . [T]he [In re Husted, 142 B.R. 72 (Bankr. W.D.N.Y. 1992),] court applied the following test in determining whether debtor’s plan violated § 1322(b)(1): 1) Whether there is a rational basis for the classification; 2) Whether the classification is necessary to the debtor’s rehabilitation under Chapter 13; 3) Whether the discriminatory classification is proposed in good faith; 4) Whether there is a meaningful payment to the class discriminated against; 5) The difference between what the creditors discriminated against will receive as the plan is proposed, and the amount they would receive if there was no classification. . . . [T]he court finds very little difference in the [Kovich] and Husted tests. . . . [T]he term “rational basis” used in the Husted test is no more enlightening on the matter of unfair discrimination than the [Kovich] test’s use of “reasonable basis.” . . . [T]he first three factors of both tests are the same. . . . [T]he fourth and fifth factors of the Husted test simply identify more specific inquiries that are already covered under the broader umbrella of examining the treatment of the class discriminated against. . . . The court agrees with the [McCullough v. Brown (In re Brown), 162 B.R. 506 (N.D. Ill. 1993),] court when it said that “the fact that a debtor has the ability to formulate an alternative nondiscriminatory plan should not alone be sufficient to render it unfair.”10
Other decisions question or modify the four-part and five-part tests for unfair discrimination.11
In a refreshingly frank opinion, the U.S. Court of Appeals for the Seventh Circuit looked at the proliferation of multifactor tests for unfair discrimination and found them all lacking. In In re Crawford,14 the Seventh Circuit concluded that most of the factors in the four- and five-factor tests were “empty.” Pushing to offer a substitute test, the court confessed, “We haven’t been able to think of a good test ourselves.”15 The Seventh Circuit then embraced the inevitable subjectivity of a test based on “unfair discrimination” and recorded its vote for the exercise of reasonable discretion with respect to classification of unsecured claims in Chapter 13 cases:
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 discretion). . . . Chapter 13 is designed for the protection of creditors as well as debtors. . . . [I]f without classification that debtor is unlikely to be able to fulfill a 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. Suppose the debtor is a truck driver and one of his creditors is the state driver’s license bureau which unless paid in full will yank his license. . . . Or suppose the creditor is a supplier of the tools of the debtor’s trade, and unless paid in full will cut him off and thereby prevent him from plying his trade . . . . The creditor might be the supplier of the bottled gas that the debtor uses to heat his home, and if not paid in full will refuse to sell him more gas. . . . All these are substantial cases for a classification that will permit one creditor or class of creditors to be paid disproportionately to the rest because the creditors as a whole will be better off and so will the debtor. . . . At the other extreme is a nondischargeable debt consisting of a fine imposed, or restitution ordered, in respect to a criminal fraud that the Chapter 13 debtor committed, . . . and he proposes a classification under which the nondischargeable debt will be paid in full and the other creditors will receive nothing at all. Approval of such a plan would be unreasonable. . . . The effect of the plan if approved in such a case would be to make the debtor’s other unsecured creditors pay his fine or restitution!16
With a hearty exception for the Seventh Circuit, the reported classification decisions seem lost in the (hopeless) search for a universal definition of “unfair.” Good arguments can be made that the quest for magic factors to substitute for “unfair discrimination” in § 1322(b)(2) should be abandoned in favor of simpler rules.17
In most jurisdictions, debtors can create separate classes of unsecured claims notwithstanding that the separated claims have similar rights against the debtor or the estate. Older cases holding that separate classification of unsecured claims is prohibited because the creditors have similar rights against the estate have not proven persuasive.18
The requirement in § 1322(a)(3) that the plan “provide the same treatment for each claim within a particular class”19 is perhaps less straightforward than first appears. The section has popped up in reported classification cases in odd ways.
In contrast to the unfair-discrimination test in § 1322(b)(1), § 1322(a)(3) is not restricted to classification of unsecured claims—if the plan classifies secured claims, each claim within a designated class must be provided the same treatment.20 Although not without controversy, it is conventional wisdom that each secured claim is its own class because collateral is unique and the plan must make separate provision for value, interest rate, monthly payment and term with respect to each secured claim.21 It has been said that § 1322(a)(3) mandates that each secured claim be separately classified so that the unique provision for monthly payment, interest rate and valuation with respect to each secured claim will not violate the same-treatment requirement.22 A plan that proposes to pay all lienholders in full during the life of the plan provides the same treatment for all claims in the class of lienholders and satisfies § 1322(a)(3).23
On the other hand, when the plan compresses all secured claims into one class, the plan must provide the same interest rate for each claim within the class—providing postpetition interest to some secured claims and not others violates the same-treatment requirement in § 1322(a)(3).24 It has been held that distributions to one secured claim holder through the Chapter 13 trustee and to another secured claim holder directly by the debtor violates the same-treatment requirement in § 1322(a)(3).25 But § 1322(a)(3) does not require comparing the treatment of secured claims to the treatment of unsecured claims. The separate classification of a fully secured debt does not violate § 1322(a)(3) when the treatment of that secured claim is not the same as the treatment of either other separately classified secured claims or the treatment of unsecured claims.26
Sometimes it is not obvious whether the debtor is proposing different treatment for claims within the same class or a separate classification. A plan that pays a partially secured claim holder its regular monthly payment until the debt is paid in full has the effect of paying the unsecured portion of the claim in full without specifying a class separate from other unsecured claims. If the plan does not pay all unsecured claims in full, the provision for contract payments to the undersecured lienholder is either a different treatment for one claim within the unsecured class—a violation of § 1322(a)(3)—or it is a separate classification of the lienholder’s unsecured claim—which implicates § 1322(b)(1), but not § 1322(a)(3). The economic effect is the same: the holder of one unsecured claim receives better treatment than the holders of other unsecured claims.
The same sort of discrimination results when the plan allows an undersecured creditor to retain its lien after payment of the allowed secured portion of its claim. Though there is much disagreement, better reasoned decisions conclude that a Chapter 13 plan can require the release of a lien by a partially secured creditor when the allowed secured portion of the claim has been paid through the plan.27 In a new twist on this debate, the bankruptcy court in In re Castro28 insightfully observed that allowing an undersecured car lender to retain its lien after payment of the allowed secured portion of its claim implicates § 1322(a)(3). The unsecured portion of an undersecured claim is an unsecured claim that falls in the same class as other general unsecured claims. Under § 1325(a)(5)(B)(i), the Chapter 13 plan typically must provide that the undersecured creditor retains its lien with respect to the secured portion of its claim.29 When the allowed secured claim is paid in full through the Chapter 13 plan, the lien is satisfied and what remains of the collateral is free of that lien. If the plan allows the lien to remain in place after full payment of the allowed secured claim, the lien then “secures” the unsecured claim, giving that unsecured claim a special attribute—a lien—that has different collection rights than other unsecured claims in its class. Extending to one member of the class of general unsecured creditors violates the requirement in § 1322(a)(3) that the plan provide the “same treatment for each claim” within the class.
From a technical reading of the Code, failing to separately classify the unsecured portion of the undersecured debt subjects the plan to the absolute prohibition against disparate treatment in § 1322(a)(3); separately classifying the unsecured portion is tested against the (perhaps) less rigorous “unfair discrimination” standard in § 1322(b)(1). It has been held that the unsecured portion of an undersecured claim that has been bifurcated must be treated the same as other unsecured claims else the plan violates § 1322(a)(3).30
In the typical Chapter 13 plan, the debtor intends for all unsecured claims to be in the same class. Most plans make provision for general unsecured claims in only one place using a collective reference such as payment of a percentage or a “base” or both.31
When the plan departs from unified treatment of the general unsecured class, § 1322(a)(3) is implicated. It has been held that a plan that does not provide the same treatment for claims within the general unsecured class does not satisfy § 1322(a)(3) and cannot be confirmed.32 When the debtor proposes no payment to one member of the general unsecured class and other unsecured claim holders will receive payments, the plan violates § 1322(a)(3).33 A provision to pay some unsecured claim holders through the Chapter 13 trustee and others directly by the debtor runs afoul of § 1322(a)(3).34 A plan that places all unsecured claims in one class but proposes to pay child support arrearages in full while paying nothing to other members of the class fails the same-treatment requirement in § 1322(a)(3).35 A plan that pays $1 on account of each unsecured claim fails the same-treatment requirement in § 1322(a)(3) because the per capita distribution does not provide payment of the same percentage of each claim within the class.36 When the debtor surrenders collateral so that the creditor becomes an unsecured claim holder, § 1322(a)(3) prohibits continued payments to the creditor as if it were still secured—the deficiency is an unsecured claim that must be afforded the same treatment as other unsecured claims.37
The power to classify is attractive to debtors who are not financially able to pay all unsecured claims in full during the life of the plan. By separate classification, the debtor can pay a larger percentage of some claims and a smaller percentage of other claims with the same total funding of the plan. The alternative is a plan paying the same percentage of all unsecured claims.
Debtors have many different incentives to prefer some unsecured claims over others. The motivation may be as personal as paying in full the doctor who is continuing to treat the debtor’s children or as compelling as paying in full a criminal restitution order to avoid going to jail. Debtor’s counsel’s task is to convince the court that the classification does not unfairly discriminate against any nonpreferred class of creditors.
A creditor may challenge a proposed classification of claims by motion in advance of confirmation under Bankruptcy Rule 3013,38 or by written objection to confirmation.39 An objection to classification is lost if not asserted before confirmation by motion or by objection to confirmation.40
1 11 U.S.C. § 1122(a).
2 11 U.S.C. § 1122(b).
3 11 U.S.C. § 1322(a)(3).
4 The closest thing to administrative inconvenience in a reported Chapter 13 case is the possibility that widespread separate classification of secured claims for payment directly by the debtor could create monitoring problems for the Chapter 13 trustee. See In re Genereux, 137 B.R. 411, 413 (Bankr. W.D. Wash. 1992) (Applying the 13-factor test from In re Pianowski, 92 B.R. 225 (Bankr. W.D. Mich. 1988), debtor is not permitted to make car payments directly to lender. “Monitoring [the debtor’s] payments will impose some additional burden on the trustee; monitoring potentially hundreds of debtors’ direct payments would necessitate a substantial effort. The burden of valuing all personal property collateral in hundreds of Chapter 13s would be great, as would the potential for abuse . . . because of the difficulties the trustee would have in the monitoring and valuation process. Finally, . . . allowing payments outside plans on any large scale would directly affect the source of the trustee’s compensation, and might indirectly affect the U.S. Trustee’s funding.”).
5 See In re Harris, 62 B.R. 391 (Bankr. E.D. Mich. 1986).
6 11 U.S.C. § 1322(b)(1).
7 11 U.S.C. § 1322(b)(1) (emphasis added).
8 See Mickelson v. Leser (In re Leser), 939 F.2d 669 (8th Cir. 1991); Labib-Kiyarash v. McDonald (In re Labib-Kiyarash), 271 B.R. 189 (B.A.P. 9th Cir. 2001) (Four-part test from AMFAC Distribution Corp. v. Wolff (In re Wolff), 22 B.R. 510 (B.A.P. 9th Cir. 1982), is applied to determine whether direct payment of student loans at contract rate violates unfair-discrimination test.); McDonald v. Sperna (In re Sperna), 173 B.R. 654, 658–60 (B.A.P. 9th Cir. 1994) (applying four-part test from In re Wolff, 22 B.R. 510 (B.A.P. 9th Cir. 1982)); AMFAC Distribution Corp. v. Wolff (In re Wolff), 22 B.R. 510 (B.A.P. 9th Cir. 1982); Crawford v. Chatterton (In re Crawford), 268 B.R. 832, 836 (W.D. Wis. 2001) (“Courts have developed a four-part test to determine the fairness of the classification of unsecured claims . . . . In this case, the Chapter 13 trustee advocates a five-part test . . . adding an inquiry into whether the class discriminated against receives meaningful payment. . . . [T]his factor is used to determine cause for classification rather than unfair discrimination. . . . I will apply the four-part test.”), aff’d on other grounds, 324 F.3d 539 (7th Cir. 2003); In re Brigance, 234 B.R. 401 (W.D. Tenn. 1999) (applying four-part test from In re Kovich, 4 B.R. 403 (Bankr. W.D. Mich. 1980)); In re Thibodeau, 248 B.R. 699 (Bankr. D. Mass. 2000) (Adopting four-part test from Mickelson v. Leser (In re Leser), 939 F.2d 669 (8th Cir. 1991).); In re Tennis, 232 B.R. 403 (Bankr. W.D. Mo. 1999) (applying four-part test from Mickelson v. Leser (In re Leser), 939 F.2d 669 (8th Cir. 1991)); Groves v. LaBarge (In re Groves), 160 B.R. 121 (E.D. Mo. 1993), aff’d, 39 F.3d 212 (8th Cir. 1994) (Court applies four-part test from In re Storberg, 94 B.R. 144 (Bankr. D. Minn. 1988).); In re Regine, 234 B.R. 4 (Bankr. D.R.I. 1999) (applying four-part test); In re Janssen, 220 B.R. 639, 643–46 (Bankr. N.D. Iowa 1998) (applies four-factor test); In re Ponce, 218 B.R. 571 (Bankr. E.D. Wash. 1998) (applying four-factor test from In re Wolff, 22 B.R. 510 (B.A.P. 9th Cir. 1982)); In re Burns, 216 B.R. 945 (Bankr. S.D. Cal. 1998) (applying test from AMFAC Distribution Corp. v. Wolff (In re Wolff), 22 B.R. 510 (B.A.P. 9th Cir. 1982)); In re Games, 213 B.R. 773 (Bankr. E.D. Wash. 1997) (applying four-part test from AMFAC Distribution Corp. v. Wolff (In re Wolff), 22 B.R. 510 (B.A.P. 9th Cir. 1982)); In re Anderson, 173 B.R. 226, 230 (Bankr. D. Colo. 1993) (applying four-part test); In re Ross, 161 B.R. 36 (Bankr. C.D. Ill. 1993) (applying the four-factor test), probably overruled by In re Crawford, 324 F.3d 539 (7th Cir. 2003); In re Tucker, 159 B.R. 325 (Bankr. D. Mont. 1993) (Although acknowledging some controversy, court cites and applies the four-part test.); In re Benner, 156 B.R. 631, 634 (Bankr. D. Minn. 1993) (“Although the four-part test enunciated in [Mickelson v. Leser (In re Leser), 939 F.2d 669 (8th Cir. 1991),] has been criticized, it is the law in this Circuit.”); In re Christophe, 151 B.R. 475 (Bankr. N.D. Ill. 1993) (Court applies four-part test discussed by the Eighth Circuit in Mickelson v. Leser (In re Leser), 939 F.2d 669 (8th Cir. 1991).), probably overruled by In re Crawford, 324 F.3d 539 (7th Cir. 2003); In re Chapman, 146 B.R. 411 (Bankr. N.D. Ill. 1992), probably overruled by In re Crawford, 324 F.3d 539 (7th Cir. 2003); In re Benner, 146 B.R. 265 (Bankr. D. Mont. 1992); In re Keel, 143 B.R. 915 (Bankr. D. Neb. 1992); In re Riggel, 142 B.R. 199 (Bankr. S.D. Ohio 1992); In re Foreman, 136 B.R. 532 (Bankr. S.D. Iowa 1992); In re Saulter, 133 B.R. 148 (Bankr. W.D. Mo. 1991); In re Harris, 132 B.R. 166 (Bankr. S.D. Iowa 1991); In re Cronk, 131 B.R. 710 (Bankr. S.D. Iowa 1990); In re Tucker, 130 B.R. 71 (Bankr. S.D. Iowa 1991); In re Rivera Echevarria, 129 B.R. 11 (Bankr. D.P.R. 1991); In re Whittaker, 113 B.R. 531 (Bankr. D. Minn. 1990); In re Harris, 62 B.R. 391 (Bankr. E.D. Mich. 1986); In re Perkins, 55 B.R. 422 (Bankr. N.D. Okla. 1985); In re Dziedzic, 9 B.R. 424 (Bankr. S.D. Tex. 1981); In re Kovich, 4 B.R. 403 (Bankr. W.D. Mich. 1980).
9 In re Husted, 142 B.R. 72, 74–75 (Bankr. W.D.N.Y. 1992) (Court confirms plan separately classifying delinquent child support for payment in full while paying other unsecured creditors 25%. Discusses four-part test, adding fifth factor, “the difference between what the creditors discriminated against will receive as the plan is proposed and the amount they would receive if there was no separate classification.” However, “because of the uncertainty in the application of this four-part test this court is prepared, in the absence of a showing of bad faith or specific valid objections by creditors or the trustee, to confirm Chapter 13 plans which propose to separately classify unsecured claims and provide different treatment for the separate classes when it is clearly demonstrated that: (1) there is a good faith rational basis for the separate classification . . . especially if the debts being separately classified would otherwise be nondischargeable under §§ 523 or 1328; and (2) the class being discriminated against is receiving a meaningful distribution. . . . The separate classification of nondischargeable debts . . . will enable the debtor to meet Congress’ clear policy of having these claims paid in full, and will allow the debtor to obtain a true ‘fresh start.’”). Accord In re Applegarth, 221 B.R. 914 (Bankr. M.D. Fla. 1998) (Court applies five factors from In re Strausser, 206 B.R. 58 (Bankr. W.D.N.Y. 1997).); In re Strausser, 206 B.R. 58, 60–61 (Bankr. W.D.N.Y. 1997) (“Many courts have adopted a fairness standard that has evolved from the analysis of Judge Howard in In re Kovich [, 4 B.R. 403 (Bankr. W.D. Mich. 1980),] . . . . [T]his test looks to the following four factors . . . . In addition, Judge Ninfo urges consideration of a fifth factor, namely ‘[t]he difference between what the creditors discriminated against will receive as the plan is proposed, and the amount they would receive if there was no separate classification.’ . . . This Court agrees fully that these five factors are a useful starting point for an analysis of the fairness of a discriminatory classification of claims. . . . Fairness dictates that a discriminated class derive some compensation for the denial of whatever greater distribution is to be accorded to the members of a different class of similarly entitled creditors. . . . [T]he substituted benefit must be at least proportional to the scope of discrimination.”).
10 Cash in a Flash v. Brown (In re Brown), 229 B.R. 739, 743–46 (W.D. Tenn. 1999).
11 See, e.g., Bentley v. Boyajian (In re Bentley), 266 B.R. 229, 239 (B.A.P. 1st Cir. 2001) (BAP rejects four-part test from Mickelson v. Leser (In re Leser), 939 F.2d 669 (8th Cir. 1991), and rejects “legitimate interest of the debtor” test from In re Brown, 152 B.R. 232 (Bankr. N.D. Ill.), rev’d, 162 B.R. 506 (N.D. Ill. 1993), in favor of the approach in In re Colfer, 159 B.R. 602 (Bankr. D. Me. 1993). “[F]airness of proposed discrimination requires analysis of ‘the impact of the discrimination on Congress’ chosen statutory definition of the legitimate interests and expectations of parties-in-interest to Chapter 13 proceedings,’ including distributional priorities, fresh start, expressly permitted classifications, availability of subordination, extent of the estate, and amounts available for distribution under the plan.”), aff’g In re Bentley, 250 B.R. 475, 477 (Bankr. D.R.I. 2000) (“These four factors are not exclusive of all other considerations, however. . . . ‘No single test or formula provides a satisfactory structure for all contexts . . . . [A]s Judge Ginsberg recognized in [In re Chapman, 146 B.R. 411 (Bankr. N.D. Ill. 1992), the question] boils down to whether the plan reflects a reasonable balance in “the relative benefits allocated to the debtor and creditors from the proposed discrimination.”’ . . . We also believe that the determination should be made based on the totality of circumstances, including balancing the relative benefits to the debtor and creditors from the proposed discrimination. . . . [T]he Debtors have the burden to demonstrate by a preponderance of the evidence that their proposed classification of creditors does not discriminate unfairly.”); Spokane Ry. Credit Union v. Gonzales (In re Gonzales), 172 B.R. 320, 329–30 (E.D. Wash. 1994) (Unfair discrimination test with respect to separate classification of a co-signed debt is restated in terms of whether the co-signed debt benefited the debtor or the nondebtor cosigner.); McCullough v. Brown (In re Brown), 162 B.R. 506, 509, 510, 511–18 (N.D. Ill. 1993) (Rejecting four-part test, it is unfair discrimination to separately classify nondischargeable student loans for payment in full with 10% payment to other unsecured creditors. With respect to the first two steps of the four-part test, “the ‘reasonable basis’ formulation is no more useful than the undefined statutory concept of ‘discriminate unfairly.’” With respect to the third factor—necessity for the plan’s viability—“debtors could almost always design plans that do not discriminate. One way to do so would be simply to treat student loans as long term debt under Section 1322(b)(5). . . . [I]t is not clear why the test should be phrased in such a way as to make necessity a required element of fairness to begin with. To be sure, necessity may have a place in the analysis. But the fact that a debtor has the ability to formulate an alternative nondiscriminatory plan should not alone be sufficient to render it unfair.” Observing that the four-part test would require a ruling of “unfair discrimination at the outset,” the court then criticizes the new approach of Judge Wedoff and offers alternative analysis: “Judge Wedoff advocates a solely debtor-oriented ‘legitimate interest’ test. . . . [Judge Wedoff’s] analysis invokes the rubric and phraseology of equal protection jurisprudence. . . . If a state government were to design a bankruptcy plan and propose some type of discriminatory treatment, perhaps such a rational interest test would be appropriate. But it is readily apparent that individual Chapter 13 debtors cannot properly be viewed as ranking on a parity with a sovereign charged with maximizing its citizens’ welfare. . . . Judge Wedoff’s equal-protection-based test . . . also goes well beyond the Equal Protection Clause’s approach by regarding the situation solely from the perspective of the actor and not at all from the perspective of those being acted upon. . . . [W]hile the interests of the debtor may not be wholly ignored, this Court concludes that Section 1322(b)(1) is ultimately intended as a creditor protection device. . . . [T]he normal meaning of ‘unfairly against any class’ measures the unfairness of the difference in treatment . . . in terms of unfairness to the victim . . . rather than unfairness to the person who elects to impose the discriminatory treatment. . . . [I]f Congress had intended debtors to be able to prefer the holders of their student loan obligations at the expense of other creditors, it could have done so explicitly by granting a statutory priority. . . . Congress has expressly decided that a debtor who has not paid off 100% of [student] loans will not emerge from Chapter 13 washed clean of the indebtedness. It is thus ironic (to say the least) to point to the generalized bankruptcy goal of a fresh start as the claimed ‘justification’ for a plan that is skewed in favor of paying debts that will have to be paid in all events. . . . By creating a widely disparate treatment for other unsecured claims vis-a-vis their student loans, they are indeed choosing to shift part of the burden for payment of their student loans: not to taxpayers generally or to the lending institutions or other prospective loan recipients, but to their other unsecured creditors. . . . There may well be factors that would not satisfy the Section 523(a)(8)(B) standard for the full dischargeability of student loan debt, but could yet justify some discriminatorily favorable treatment of such debts. But no such factor has been identified by any Debtor in this case. . . . Nor does this Court find itself persuaded by any parallel sought to be drawn between the current situation and the cases that have approved preferential treatment for a Chapter 13 debtor’s obligations to provide child support. . . . [W]hat remains clear is that no Chapter 13 plan can be approved that treats unpaid student loans more favorably than other unsecured debts solely because they are student loans. If a plan affording such preferential treatment is to survive scrutiny under the statutory ‘discriminate unfairly’ test, the debtor must place something material onto the scales to show a correlative benefit to the other unsecured creditors.” The court quotes extensively with approval from Judge Ginsberg’s opinion in In re Chapman, 146 B.R. 411 (Bankr. N.D. Ill. 1992).), overruled by In re Crawford, 324 F.3d 539 (7th Cir. 2003); In re Davis, 209 B.R. 893, 895–96 (Bankr. N.D. Ill. 1997) (“Some courts have applied a four-part test for determining whether a discrimination is unfair. . . . [T]his test has been criticized . . . . A recent trend, favored by several judges, is to look at fairness from the creditor’s perspective. . . . However, any analysis of whether a Chapter 13 plan discriminates unfairly must be fact driven.”), probably overruled by In re Crawford, 324 F.3d 539 (7th Cir. 2003); In re Alicea, 199 B.R. 862, 866 (Bankr. D.N.J. 1996) (Court adopts the test from In re Furlow, 70 B.R. 973 (Bankr. E.D. Pa. 1987), “different treatment is permissible if and only if the debtor is able to prove a reasonable basis for the degree of discrimination contemplated by the Plan.”); In re Kolbe, 199 B.R. 569, 571–75 (Bankr. D. Md. 1996) (Reviewing four different tests for separate classification of student loans, adopts In re Husted, 142 B.R. 72 (Bankr. W.D.N.Y. 1992), and denies separate classification of student loans for 100% payment and 10% payment of other unsecureds. “The [Mickelson v. Leser (In re Leser), 939 F.2d 669 (8th Cir. 1991),] test is a four part test. . . . [I]t has many deficiencies. . . . [T]he term ‘reasonable basis’ in the first prong lacks precision. . . . [T]he concept of necessity to the plan’s success that is inherent in the second prong of the test is not an element of fairness or unfairness to creditors. . . . [T]he good faith requirement in the third prong of the Leser test has been criticized as adding little to the test because every Chapter 13 plan must be made in good faith to be confirmed. . . . Under the [In re Lawson, 93 B.R. 979 (Bankr. N.D. Ill. 1988),] test ‘discrimination is “fair,” and therefore permissible, to the extent that it rationally furthers an articulated, legitimate, interest of the debtor’. . . . [T]he Lawson test has frequently been criticized. . . . [T]he Lawson test focuses on whether a proposal is unfair to the debtor, but it is the debtor who is proposing the discriminatory classification. . . . A third test, first used in [McCullough v. Brown (In re Brown), 162 B.R. 506 (N.D. Ill. 1993)] is that student loans cannot be specially classified simply because they are student loans, and ‘the debtor must place something material onto the scales to show a correlative benefit to the other unsecured creditors.’ . . . [I]t is possible that a special classification would not offer a correlative benefit to the other unsecured creditors, and yet not discriminate unfairly. . . . A fourth test was adopted . . . in In re Husted, 142 B.R. 72, 74 (Bankr. W.D.N.Y. 1992). The court developed a five factor test. . . . [T]his court finds that the Husted test, provides the best guidance for determining § 1322(b)(1) classification issues . . . . The factors to be considered include the answers to the following five questions: 1. Is there a rational basis for the discriminatory classification? 2. Is the particular disparate treatment necessary to the debtor’s plan under Chapter 13? 3. Has the discriminatory classification been proposed in good faith? 4. Is there a meaningful payment to the class of unsecured creditors that have been discriminated against? 5. Is the degree of difference between what the creditors discriminated against will receive under the proposed plan and the amount they would receive if there was no separate classification excessive under the facts of the case?”); In re Thompson, 191 B.R. 967, 971–73 (Bankr. S.D. Ga. 1996) (“Due to the changes in the Bankruptcy Code, the four part [AMFAC Distribution Corp. v. Wolff (In re Wolff), 22 B.R. 510 (B.A.P. 9th Cir. 1982),] test for unfair discrimination is no longer of any significant assistance in the case of codebtor claims, and yet no consensus has emerged on an approach to replace the test. . . . Of particular importance is the requirement that the debtor pursue the separate classification in a good faith effort to reorganize, and not simply as a means of preferring certain creditors at the expense of others. . . . [A] separate classification may cause an otherwise confirmable plan to run afoul of one or more of the Kitchens factors. . . . Whether the reason for denying confirmation is unfair discrimination or failure to comply with section 1325 is irrelevant as a matter of practice. The elements of the various tests applied by courts may be collapsed as a matter of application into the requirements of good faith and compliance with legislative intent. In this light, unfair discrimination does not exist as a separate inquiry to be undertaken in addition to the other elements of confirmation.”); In re Eiland, 170 B.R. 370, 378 (Bankr. N.D. Ill. 1994) (Retreating somewhat from In re Christophe, 151 B.R. 475 (Bankr. N.D. Ill. 1993), the new test for fairness of discrimination is “[t]he reasoning of Judge Shadur, [in McCullough v. Brown (In re Brown), 162 B.R. 506 (N.D. Ill. 1993),] which looked to fairness from the creditor’s perspective. . . . This Court will not, however, necessarily find Judge Shadur’s ‘correlative benefit’ test of creditor fairness to be the only test of fairness from the creditor’s perspective. In each case, debtors have the burden to demonstrate fairness from the creditor’s perspective, and the Court is not so foresighted as to anticipate all circumstances that may demonstrate fairness.”), probably overruled by In re Crawford, 324 F.3d 539 (7th Cir. 2003); In re Colfer, 159 B.R. 602, 605, 607–11 (Bankr. D. Me. 1993) (It is unfair discrimination to separately classify nondischargeable educational loans for 100% dividend and substantially less to other general unsecured claims. “I accept the general proposition that Chapter 13 provides debtors flexibility to classify unsecured claims in order to enhance their ability to propose and complete a feasible plan. . . . No single test or formula provides a satisfactory structure for all contexts. The question . . . boils down to whether the plan reflects a reasonable balance in ‘the relative benefits allocated to the debtor and creditors from the proposed discrimination.’ . . . [T]he burden rests on the debtors to persuade the court, by a preponderance of the evidence, that the classification and treatment they propose does not discriminate unfairly. . . . The debtors rest on the assertion that the nondischargeability of educational loans, by itself, provides a sufficient basis to justify discrimination in their favor. To the contrary, more is required. If nondischargeability alone were sufficient reason to establish that discrimination on the order of that proposed by these debtors is ‘fair,’ the result would be at odds with significant aspects of the Code’s overall Chapter 13 framework. . . . [I]f Congress had intended to give educational loan obligations a distributional priority, it could have done so by including them in the list of statutory priorities. . . . [I]f it considered that their character alone justified preferential classification, Congress could have amended § 1322(b)(1) to provide expressly that such obligations, like cosigned consumer debt, may be separately classified. . . . In the absence of such legislative action, I cannot conclude that Congress intended that educational loans should be paid ahead of other nonpriority unsecured claims. . . . The courts should not approve as ‘fair’ discriminatory classification schemes ‘needed’ only for the purpose of mitigating the consequences of statutory discharge exceptions. . . . Although the support and alimony cases are analogous . . . they are not persuasive. . . . [N]ondischargeability does not by itself provide grounds sufficient to declare that proposed discrimination is fair under § 1322(b)(1). Instances may arise in which Chapter 13 is advantageous to the general unsecured creditors and in which the debtor’s circumstances militate in favor of disparate classification and treatment of like claims if a plan is to be effectuated. Such instances can only be evaluated on a case by case basis.”); In re Whitelock, 122 B.R. 582 (Bankr. D. Utah 1990) (100% payment of unsecured claim secured by debtor’s mother’s property on an accelerated basis during the 60 months of the plan and 30% payment of other unsecured debt is unfair discrimination, applying modified four-factor test from AMFAC Distribution Corp. v. Wolff (In re Wolff), 22 B.R. 510 (B.A.P. 9th Cir. 1982). That real property owned by the debtor’s mother secures the claim is not itself a reasonable basis. Discrimination based “upon purely personal grounds” fails the unfair-discrimination test. The debtor introduced no evidence that a plan could not be carried out without the proposed discrimination. Accelerating the contract terms of the co-signed debt for full payment in 60 months, to the disadvantage of other unsecured creditors, is abuse of Chapter 13. Although there is no bright-line test, “a grossly disproportionate percentage repayment” is an indicator of unfairness.); In re Lawson, 93 B.R. 979, 984, 990 (Bankr. N.D. Ill. 1988) (Critical of four-factor test, articulates new test for discrimination: “a discrimination is ‘fair,’ and therefore permissible, to the extent, and only to the extent, that it rationally furthers an articulated, legitimate interest of the debtor.” Denies confirmation of amended plan proposing to pay student loans in full and 10% of other unsecured claims: “a plan proposing to pay [all] unsecured creditors on a pro rata basis would not have been in bad faith, . . . accordingly, [the debtor] had no interest in making disproportionately large payments to the [student loan creditor]. The discrimination . . . is thus unfair.”), overruled by In re Crawford, 324 F.3d 539 (7th Cir. 2003); In re Green, 70 B.R. 164 (Bankr. W.D. Ark. 1986) (Questioning the four-factor test in AMFAC Distribution Corp. v. Wolff (In re Wolff), 22 B.R. 510 (B.A.P. 9th Cir. 1982), In re Perkins, 55 B.R. 422 (Bankr. N.D. Okla. 1985), In re Dziedzic, 9 B.R. 424 (Bankr. S.D. Tex. 1981), In re Kovich, 4 B.R. 403 (Bankr. W.D. Mich. 1980), etc., it is “unfair discrimination” for debtors to pay directly 100% of an unsecured claim secured by property belonging to the debtor’s mother where other unsecured claim holders will receive approximately 25% through the plan. Classification would “preserve a valuable future asset” for the debtors rather than “maximizing payment on the just claims of their current creditors.”).
12 See, e.g., In re Simmons, 288 B.R. 737, 751 (Bankr. N.D. Tex. 2003) (Citing In re Chacon, 202 F.3d 725 (5th Cir. 1999), and In re Ramirez, 204 F.3d 595 (5th Cir. 2000), court adopts new two-step test for measuring the fairness of discrimination among classes of unsecured claims in a Chapter 13 case: “Chacon and Ramirez appear to establish a two-prong test for fair discrimination in treatment between classes. First, the discrimination must serve a rational, legitimate purpose of the debtor. Second, the discrimination may not over-favor the advantaged class. . . . [F]or discrimination to be fair, the amount to be received by the class discriminated against must not be less than the class would have been entitled to receive had there been no discrimination among classes.” This test rules out long-term treatment under § 1322(b)(5) with respect to student loans and prohibits confirmation of any Chapter 13 plan that favorably classifies a student loan when the amount to be paid to general unsecureds is less than they would receive if all unsecureds were paid pro rata.).
13 In re Mason, 300 B.R. 379, 387 (Bankr. D. Kan. 2003) (Citing In re Bentley, 266 B.R. 229 (B.A.P. 1st Cir. 2001), “the baseline test is most loyal to the objective goals and motivations of Chapter 13 . . . . [I]t would require courts to determine (1) whether the preferred debt is accorded statutory priority; (2) whether the unsecured creditors would receive at least as much as they would receive without the debt being preferred; (3) whether the unsecured creditors would receive a fair pro rata share of the debtor’s mandatory contribution of disposable income . . . and whether the preferential treatment of one creditor somehow furthers the debtor’s fresh start.”).
14 324 F.3d 539 (7th Cir. 2003).
15 324 F.3d at 542.
16 324 F.3d at 542–43.
17 See § 159.1 [ A Proposal: Simpler Rules for Classification of Unsecured Claims ] § 89.10 A Proposal: Simpler Rules for Classification of Unsecured Claims.
18 The leading older decision neutralizing the power to separately classify similar unsecured claims is In re Iacovoni, 2 B.R. 256 (Bankr. D. Utah 1980). See also In re Hiner, 161 B.R. 688, 689 (Bankr. D. Idaho 1993) (Court denies confirmation of plan that separately classified insufficient funds checks for payment of all available funds in advance of distributions to general unsecured claim holders. “While there are varying interpretations of the effect of 11 U.S.C. § 1322(b)(1), the decision in In re Iacovoni, 2 B.R. 256 (Bankr. D. Utah 1980) makes the most sense. The Iacovoni decision takes the position chapter 13 prohibits all discrimination between unsecured creditors who have claims of equal legal status except where the statutes specifically authorize discrimination, as in 11 U.S.C. § 1112(b) and 11 U.S.C. § 1322(b)(1). In the instant case, discrimination between unsecured creditors to whom the debtor delivered insufficient fund checks and other creditors who were not delivered insufficient fund checks is not authorized by statute and is not fair discrimination. As holders of unsecured claims, all unsecured creditors hold the same legal rights against the debtors.”).
19 11 U.S.C. § 1322(a)(3).
20 See also § 103.1 [ Classification of Secured Claims ] § 74.7 Classification of Secured Claims.
21 See § 103.1 [ Classification of Secured Claims ] § 74.7 Classification of Secured Claims.
22 In re Rimmer, 143 B.R. 871 (Bankr. W.D. Tenn. 1992).
23 In re Harmon, 72 B.R. 458 (Bankr. E.D. Pa. 1987).
24 In re Jones, 101 B.R. 593 (Bankr. W.D. Mo. 1989) (Provision for 8% interest on all secured claims except the claim of the Small Business Administration violates § 1322(a)(3).).
25 First Bank & Trust v. Gross (In re Reid), 179 B.R. 504 (E.D. Tex. 1995).
26 See In re McNichols, 249 B.R. 160 (Bankr. N.D. Ill. 2000) (Plan does not violate the same-treatment requirement in § 1322(a)(3) because objecting creditor’s claim is secured, thus the propriety of the treatment of the claim is not measured against the treatment of unsecured claim holders.); In re Genereux, 137 B.R. 411 (Bankr. W.D. Wash. 1992) (When pickup truck’s value exceeds debt, proposal to pay car loan in full “outside the plan” does not violate the equal treatment requirement of § 1322(a)(3).).
27 See § 104.2 [ Lien Retention ] § 74.12 Lien Retention before BAPCPA.
28 285 B.R. 703 (Bankr. D. Ariz. 2002).
30 See, e.g., In re Marshall, 111 B.R. 325 (Bankr. D. Mont. 1990) (Section 1322(a)(3) requires that the unsecured portion of a mortgage after bifurcation under § 506(d) be treated the same as other unsecured claims, notwithstanding Montana law that prohibits collection of a deficiency after sale under a deed of trust.).
31 See § 170.1 [ Methods of Paying Unsecured Claims ] § 101.3 Methods of Paying Unsecured Claims.
32 In re Maloney, 25 B.R. 334 (B.A.P. 1st Cir. 1982).
33 In re Madill, 65 B.R. 729 (D. Mont. 1986).
34 See §§ 59.1 [ Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise ] § 53.10 Make Payments to Creditors Unless Plan or Confirmation Order Provides Otherwise and 157.1 [ Direct Payments by Debtor ] § 89.1 Direct Payments by Debtor. See, e.g., In re Veasley, 204 B.R. 24, 25 (Bankr. E.D. Ark. 1996) (Requirement that the plan provide equal treatment for claims in the same class prohibits postconfirmation modification to pay six municipal fines directly to the municipal court notwithstanding that “the Judge of the Sherwood Municipal Court has ordered Debtor . . . to pay these fines directly or he will order that she be incarcerated. . . . The mere fact that a particular creditor desires to be treated differently is not grounds to ignore the mandates of federal law.”).
35 In re Warner, 115 B.R. 233 (Bankr. C.D. Cal. 1989).
36 In re Jewell, 75 B.R. 318 (Bankr. S.D. Ohio 1987).
37 In re Johnson, 247 B.R. 904, 908 (Bankr. S.D. Ga. 1999) (That § 1322(a)(3) requires the same treatment for each claim within a class is one reason why the deficiency must be treated as an unsecured claim when a debtor surrenders collateral after confirmation. “After surrender of collateral, the deficiency portion of the claim is no longer actually secured. A claim simply cannot be secured when nothing secures it. Any deficiency debt is therefore by definition unsecured. That reality can and should be reflected in the allowance of claims in the bankruptcy case. Otherwise, the plan is not in accord with the Bankruptcy Code requirement that the plan must provide the same treatment for each claim within a particular class. 11 U.S.C. § 1329(b)(1), § 1322(a)(3). The Johnson’s confirmed Chapter 13 plan, like many Chapter 13 plans, classifies all unsecured claims together. The unsecured deficiency claim must be treated as all other unsecured claims allowed by the plan. To allow the claim as secured fails to treat all claims equally within a particular class. Section 502(j) is available to redress that inequity.”).
38 Bankruptcy Rule 3013 provides: “For the purposes of the plan and its acceptance, the court may, on motion after hearing on notice as the court may direct, determine classes of creditors and equity security holders pursuant to §§ 1122, 1222(b)(1), and 1322(b)(1) of the Code.” See § 67.4 [ Preconfirmation Classification Disputes ] § 57.7 Preconfirmation Classification Disputes.
39 See discussion of objecting to confirmation beginning at § 116.1 Standing to Object.
40 See the discussion of effects of confirmation in § 229.1 [ 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors ] § 120.2 11 U.S.C. § 1327(a): Binding Effect on Creditors and Debtors. See also In re Klevorn, 181 B.R. 8 (Bankr. N.D.N.Y. 1995) (Plan does not unfairly discriminate because the holder of the disfavored claim does not object to confirmation.).