§ 87.3     Co-signed Debts
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 87.3, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

In 1984, Congress added to § 1322(b)(1) this authorization for the separate classification of co-signed debts: “[h]owever, 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.”1

[2]

Use of the introductory word “however” signals that the power to separately classify co-signed consumer debts is intended to be an exception to the classification power immediately preceding it in § 1322(b)(1). Because the preceding grant is broad, subject only to the statutory proscription against unfair discrimination, it is not clear as a matter of sentence construction what the word “however” is intended to convey. Is “however” intended to except separate classification of co-signed debts from the unfair discrimination limitation on classification? Does the “however” validate all separate classifications of co-signed debts without regard to the effects on other creditors? Several courts have gone almost that far by holding that the 1984 amendment “automatically sanctions different and favored treatment for a debtor’s consumer debts which are co-signed by another individual and constitutes a ‘carve out’ to the ‘unfair discrimination’ standard.”2

[3]

A strong majority of courts, including the U.S. Court of Appeals for the Fifth Circuit, apply the unfair discrimination standard to plans that separately classify co-signed consumer debts.3 One court says it doesn’t really matter whether the unfair discrimination standard applies to the separate classification of co-signed debts because the good faith test for confirmation in § 1325(a)(3)4 certainly applies and subjects any separate classification of co-signed debt to fairness scrutiny.5

[4]

This split of authority makes a big difference in Chapter 13 practice. If the “however” in § 1322(b)(1) means that the separate classification of a co-signed debt is not subject to the unfair discrimination test, then the Bankruptcy Code arguably imposes no particular limit on the separate classification of co-signed unsecured debts. Typically, a Chapter 13 debtor wants to separately classify a co-signed unsecured debt for payment in full to protect the co-signer from collection. In any Chapter 13 case in which the debtor is unable to pay all unsecured debts in full, the separate classification of a co-signed debt for more favorable treatment means that the rest of the unsecured creditors are subsidizing the payment of the co-signed creditor.

[5]

A review of the many cases cited above reveals that separate classification of co-signed debts almost always fails when measured against the unfair discrimination standard. Put another way, the unfair discrimination test is a substantial barrier to favorable classification of a co-signed debt.

[6]

It is not obvious why Congress used the word “differently” to describe the permitted treatment of a separately classified co-signed claim. “Differently” must be given content separate from the unfair-discrimination standard in the immediately preceding clause. If “differently,” coupled with the introductory “however,” was intended to validate all separate classifications of co-signed debts, then a multitude of clearer ways to say so were available to Congress. Arguably, the power to treat co-signed consumer debts “differently” does not automatically authorize all discriminations in favor of co-signed claims.6 But the meaning of differently is obscure if it was intended to permit some separate classifications of co-signed debts but not others.

[7]

The first predicate for different treatment under § 1322(b)(1) is “an individual . . . liable on such consumer debt with the debtor.”7 Authority to treat a co-signed debt differently through the plan fails if there is no codebtor. In In re Hill,8 the bankruptcy court confirmed a plan that favorably classified three debts that the debtor incurred using her mother’s credit cards. The Bankruptcy Appellate Panel for the Ninth Circuit reversed, finding no codebtor for purposes of separate classification under § 1322(b)(1):

[T]he phrase “liable on such consumer debt with the debtor” . . .  suggests that there be some form of shared liability. . . . [T]hat the co-obligor must be both “liable on” the debt and “liable with” the debtor, implies that the debtor and the co-obligor must both be liable to some third party. . . . In the absence of evidence that the creditors were parties to the arrangement between mother and daughter regarding the use of the mother’s credit cards, the debtor’s mother does not qualify as an individual who is “liable on [the] debt with the debtor” within the meaning of § 1322(b)(1).9
[8]

To qualify for the special codebtor classification rules, the co-signed claim must be a consumer debt. Consumer debt is defined in 11 U.S.C. § 101(8) to mean “debt incurred by an individual primarily for a personal, family, or household purpose.” This same language limits the protection of the codebtor stay in 11 U.S.C. § 1301.10 In the § 1301 context, there is much dispute whether consumer debt includes taxes or a mortgage lien on real property.11 It has been held that a loan secured by the debtor’s mother’s real property is a consumer debt when the loan was used to pay off a prior loan that was originally incurred to pay the debtor’s tax liability.12 The court reasoned that the definition of consumer debt in § 101(8) is broad enough to include claims secured by real property and resort to arguably inconsistent legislative history was inappropriate. Given that husbands and wives are almost always jointly liable for income taxes, if taxes are not consumer debts, the basis for separate classification when only one spouse files will have to be the special treatment of priority claims, in § 1322(a)(2),13 not the power to separately classify co-signed consumer debts in § 1322(b)(1). It has been held that a government-guaranteed student loan is not a co-signed consumer debt of the sort contemplated by § 1322(b)(1).14 A loan to buy a truck and a loan to pay “householder expenses, schooling, and child care expenses” are consumer debts for purposes of both the codebtor stay in § 1301 and separate classification under § 1322(b)(1).15

[9]

Cosigners are often coworkers, family members or close friends with special relationships to the debtor that justify the protection from leverage by creditors in the codebtor stay in § 1301.16 The 1984 amendments to § 1322(b)(1) complement or work contrary to the codebtor stay in § 1301, depending on your perspective. Debtors are protected by the codebtor stay from indirect collection actions, to the extent the plan proposes to pay the co-signed claim;17 creditors with cosigners typically get more favorable treatment through the plan because of § 1322(b)(1). The 1984 amendments reward the creditor that demanded a cosigner at the time of the original loan and somewhat balance the extraordinary injunction in § 1301.

[10]

Debtors typically want to prefer the holders of co-signed claims because to the extent the plan does not propose payment of a co-signed debt, the creditor is entitled to relief from the codebtor stay to collect immediately from the cosigner.18 If the debtor can separately classify the co-signed claim for payment in full, notwithstanding that the debtor is not financially able to pay all unsecured claim holders 100 percent, the debtor accomplishes continuing protection of the cosigner while retiring the co-signed debt in full through the plan.

[11]

A recurring problem with full payment of co-signed claims by separate classification is paying the interest that accrues after the petition. Nothing in the Bankruptcy Code interrupts a creditor’s contract right to accrue and ultimately collect from the nonfiling codebtor all interest and other charges due after the petition. The codebtor stay in § 1301 delays collection from the codebtor, but eventually the creditor gets all of its postpetition interest from someone—either through the plan or from the codebtor after the § 1301 stay is gone. To prevent exposing the codebtor to accruing postpetition interest, Chapter 13 debtors want to separately classify co-signed debts for payment in full with postpetition interest at the contract rate.

[12]

A few courts have held that § 1322(b)(1) permits separate classification of a co-signed consumer debt to be paid in full with contract interest to preclude the holder from collecting postpetition interest from the codebtor.19 This is an aggressive outcome. Except in the rare situation when all unsecured claim holders would be paid in full in a Chapter 7 case, unsecured claim holders are not entitled to postpetition interest in Chapter 13 cases.20 Unmatured postpetition interest is not allowable as part of an unsecured claim.21 One reported decision finds that the codebtor stay in § 1301 “by implication” authorizes the payment of postpetition interest to co-signed claim holders notwithstanding the disallowance of unmatured interest by § 502.22 Most reported decisions under both §§ 1301 and 1322(b)(1) have refused efforts by Chapter 13 debtors to pay postpetition interest to creditors holding co-signed consumer debts.23

[13]

But how else can a Chapter 13 debtor maximize the protection of the codebtor stay when the debtor is financially unable to pay all unsecured claims in full? It is a logical corollary to the codebtor stay that debtors will separately classify co-signed claims for payment with postpetition interest. If it is not unfair discrimination to separately classify co-signed claims for some different (more favorable ?) treatments, then maybe it is not so unfair that different treatment includes payment of postpetition interest.

[14]

Prior to the 1984 amendments to § 1322(b)(1), the courts were dramatically split on the question whether separate classification of co-signed unsecured claims was permitted in Chapter 13 cases.24 The 1984 amendments clearly allow some separate classifications of co-signed debts; but the surviving disagreement whether the unfair discrimination test applies has reproduced the pre-1984 split in the case law. A substantial number of decisions reported after 1984 approve separate classifications of co-signed debts;25 at least as many courts have rejected similar classifications, usually on a finding of unfair discrimination.26

[15]

One court, struggling to apply the unfair-discrimination test to several different co-signed debts in the same Chapter 13 case, concluded that some could be separately classified and others not, depending on whether the debt benefited the debtor or the nondebtor cosigner.27 The court explained:

Underlying the assumption that a debtor will feel a great need to pay in full a co-signed debt between the debtor and a friend or relative is the additional assumption that the co-debt benefited the debtor, not the friend or relative. The obligation to repay arises because the friend or relative extended his or her credit to help the debtor acquire credit. In return for the help, a debtor will feel a moral obligation to repay the loan in full to protect the co-signer. However, the same is not true where the debtor extends his or her credit to help the co-signer. No moral obligation exists to repay the loan since no help was given to the debtor. On the contrary, it was the debtor that helped the co-signer. Without the moral obligation to repay the loan in full, irrespective of the plan, there is little chance this type of co-debt will impede completion of the plan. Therefore, no reason justifies the classification of unsecured co-signed debt, acquired for the benefit of the co-signer, separately from other general unsecured debt. To do so would be unfair to the general unsecured creditors. Accordingly, this court finds that § 1322(b)(1) is limited to co-signed debt acquired for the benefit of the debtor, not the co-signer.28
[16]

Applying this “benefit to the debtor” test, the court held that a co-signed car loan could be separately classified for more favorable treatment because the cosigner was the debtor’s employer, and the debtor benefited by keeping his job. The court hypothesized that if the car loan had been co-signed by the debtor’s girlfriend and if the car was driven by her, it would have been unfair to the general unsecured creditors to separately classify the car loan. In this same vein, a co-signed debt for dental work performed on the girlfriend could not be fairly classified for more favorable treatment because only the girlfriend “benefited from this debt.”

[17]

This benefit-to-the-debtor formulation of the fairness test for classification of co-signed debt seems similar to the ground for relief from the codebtor stay in § 1301(c)(1)—relief from the codebtor stay is required to the extent that “as between the debtor and the [codebtor] . . . such [codebtor] received the consideration for the claim.”29 This formulation may be an effort to accommodate the limitation on the codebtor stay in § 1301(c)(1) and the power to separately classify co-signed consumer debts in § 1322(b)(1): if the creditor would be entitled to relief from the codebtor stay because the codebtor actually received the consideration for the debt, then it would be unfair discrimination for the debtor to separately classify that co-signed debt for more favorable treatment through the plan.

[18]

In contrast to the benefit-to-the-debtor analysis, one court found the cosigner’s good financial condition to be the deciding factor in a codebtor classification case. In In re Thompson,30 the debtor separately classified co-signed claims for 100 percent payment and no payment to other unsecured claim holders. The cosigner was the debtor’s mother, and the bankruptcy court found she was financially able to pay the co-signed claims without suffering. The court found support for this focus on the cosigner’s financial condition in legislative history:

A debtor’s ability to separately classify co-signed debts is conditioned upon the debtor satisfying the basic elements of section 1322(b)(1) while staying within the constraints of the Code as a whole, to wit: a consumer debt, co-signed for the debtor’s benefit, the separate classification of which does not jeopardize other required elements for confirmation as contained in section 1325. . . . If the application of the good faith requirement causes the debtor to be unable to protect the codebtor from financial ruin, the prospect for such an occurrence is suggested in the legislative history to be one of the considerations for allowing the codebtor claim to be treated “differently.” That factor is not present in this case . . . codebtor has ample financial resources to fund the payment of the portion of the codebtor claim which would remain unpaid if all unsecured creditors were treated equally in this case. . . . If a debtor is going to propose full payment of a co-signed debt and a zero distribution to other unsecured creditors, absent other factors, the fact that the classification is not necessary to prevent the cosigner’s financial ruin weighs heavily against the debtor’s good faith.31
[19]

Consideration of the financial condition of the cosigner suggests that the power to separately classify co-signed claims is broader in concept than the codebtor stay in § 1301. As discussed elsewhere,32 the codebtor stay is intended to protect debtors and only incidentally benefits the co-obligor. Thompson cites legislative history from the 1984 amendment of § 1322(b)(1) for the proposition that financial benefit or detriment to the co-obligor is relevant to the fairness of a separately classified co-signed debt. The financial condition of the cosigner is logically irrelevant to the scope of the codebtor stay in § 1301; Thompson indicates that it may be outcome determinative of the fairness of discrimination in favor of a co-signed debt under § 1322(b)(1).

[20]

Another court has suggested that a Chapter 13 debtor can buy the right to separately classify a co-signed debt by providing balancing compensation for other unsecured claims. In In re Strausser,33 the debtor separately classified a debt co-signed by her uncle for 100 percent payment and a 5 percent distribution to other unsecured claim holders. The bankruptcy court searched without finding fairness in this proposal using this construct:

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. . . . [T]his decision will not attempt to define the extent or type of additional benefit that would compensate a class of unsecured creditors for a reduction of distribution to a percentage less than would be received without the separate classification. . . . [I]t suffices to note that Ms. Strausser’s plan offers no meaningful recompense for the burden that it seeks to impose upon the class of general unsecured creditors.34
[21]

The Strausser court surely ducked the hard question: What does a Chapter 13 debtor have to offer the disfavored class in compensation for separate classification of a co-signed debt? Would it be enough that the debtor testifies, “Either you let me protect my uncle or I will convert to Chapter 7”? Is 5 percent “at least proportional to the scope of discrimination” if the alternative is nothing in a Chapter 7 case? If proportional means “equal to,” then the Strausser test defeats all separate classifications for different treatments except in the odd case when equality emerges from different payment provisions.

[22]

In a jurisdiction that has not embraced the view that all separate classifications of co-signed debts are permitted by § 1322(b)(1),35 the debtor has the burden to present evidence to support preferred treatment of co-signed debts.36 When a debtor proposed 100 percent payment of co-signed debt and less than full payment of other debt, the failure to offer evidence of justification is fatal to confirmation.37 The burden to prove that a classification is not “unfair discrimination” was carried by the debtor who offered evidence that the cosigner of the only claim to be paid 100 percent was the debtor’s street partner on the police force.38 The desire of parents to protect their children from the claims of creditors is insufficient to justify discriminatory treatment of co-signed educational loans.39 Discrimination based “upon purely personal grounds” was insufficient to justify 100 percent payment of debt secured by the debtor’s mother’s property, when other unsecured claim holders would receive only 30 percent payment.40 Paying 100 percent of a claim co-signed by the debtor’s spouse is not fair discrimination when the spouse did not join in the Chapter 13 petition and her income was not figured into the debtor’s commitment to fund the plan.41

[23]

In contrast, one debtor’s strong desire to maintain a continuing relationship with her father was found to be a reasonable basis for separate classification and payment in full of debts co-signed by the father.42 Another debtor convinced a court that it was fair discrimination to pay all of an undersecured claim for the purchase of a recreational cabin and only 9 percent of other unsecured claims when the cabin was financed by the debtor’s employer and the debtor proved that his ability to fund the plan depended on paying for the cabin.43

[24]

The separate classification of co-signed claims unfairly discriminates if classification violates another provision of the Bankruptcy Code—for example, the requirement in § 1325(a)(4) that unsecured claim holders receive not less than the amount that would be paid if the estate were liquidated under Chapter 7.44 Some courts have held that the authority to treat co-signed claims differently does not permit separate classification of a co-signed claim for less favorable treatment.45

[25]

If the debtor has more than one co-signed debt, it has been held that the plan cannot separately classify some co-signed debts for preferred treatment and leave other co-signed debts in the same class as general unsecured claims.46 This holding is questionable unless “differently” in § 1322(b)(1) means that all separate classifications of co-signed claims are fair discriminations.47 If unfair discrimination has other content in this context, then it has to be possible that some separate classifications of co-signed claims will be fair discriminations and others will not. At least one reported decision concludes that a debtor with more than one co-signed debt is permitted to favorably classify some of the co-signed debts but not others, the fairness of discrimination turning on whether the debt benefited the debtor or the nondebtor cosigner.48

[26]

The Code could have said that all separate classifications of co-signed claims are permitted if Congress intended that the existence of a cosigner justified all different treatments. Because the statute does not say that, it is fair to infer that some justification is required. Nonpreferred claim holders can easily police classification by objecting to confirmation. If classifying all unsecured claims in a single class increases the dividend to all non-co-signed claim holders, it will be difficult to justify classifications that produce disparate treatment. Put another way, if the co-signed claim is large relative to all unsecured claims, debtor’s counsel will have a more difficult time justifying separate classification. If the co-signed claim is small and thus its separate classification has less effect on payment of other unsecured claim holders, separate classification is more likely to survive whatever test a court applies under § 1322(b)(1).49


 

1  11 U.S.C. § 1322(b)(1) (emphasis added).

 

2  In re Dornon, 103 B.R. 61 (Bankr. N.D.N.Y. 1989). Accord In re Monroe, 281 B.R. 398, 400–02 (Bankr. N.D. Ga. 2002) (Separate classification of co-signed undersecured car lender is not subject to the unfair discrimination test. “[T]he language of § 1322(b)(1) creates an exception to the unfair discrimination test in cases involving a co-signed debt. . . . [I]f co-debtor claims were to remain subject to the unfair discrimination test, Congress would have had no reason to amend the statute. . . . [S]o long as a debtor’s Chapter 13 plan complies with the requirements of § 1322(b)(1) with regard to other debts and the mandatory requirements of § 1325, the Court will not deny confirmation on the ground that the debtor proposes to treat unsecured co-debtor claims differently than other unsecured claims.”); In re Hill, 255 B.R. 579, 580 (Bankr. N.D. Cal. 2000) (“The statute clearly exempts co-debtor debt from the fairness requirement. The use of the word ‘however’ creates an unambiguous exception to the general requirement of fairness. . . . [A] fairness inquiry is not required where the basis of a separate classification is the existence of a co-debtor.” Court confirms plan that pays in full three credit card debts that the debtor incurred using her mother’s cards and no payment to other unsecured debt.), rev’d on other grounds, 268 B.R. 548 (B.A.P. 9th Cir. 2001); In re Chapman, 146 B.R. 411 (Bankr. N.D. Ill. 1992) (Section 1322 was amended in 1984 to allow for separate classification and disparate treatment of co-signed consumer debt “without regard to unfair discrimination.” Any other separate classification is permissible, by implication, only if the discrimination is fair.); In re Riggel, 142 B.R. 199 (Bankr. S.D. Ohio 1992) (Applying four-part test, a reasonable basis for separate classification is demonstrated if the separately classified claims are afforded special treatment by the Code. Co-signed claims are provided special treatment by § 1322(b)(1) and thus can be separately classified. “This section excepts such claims from the ‘unfair discrimination’ test.” In the absence of proof by the debtor that a co-signed obligation exists, a proposed separate classification for co-signed obligations is improper.).

 

3  Ramirez v. Bracher (In re Ramirez), 204 F.3d 595 (5th Cir. 2000) (Based on Chacon v. Bracher (In re Chacon), 202 F.3d 725 (5th Cir. 1999), unfair discrimination test in § 1322(b)(1) applies to the separate classification of a co-signed consumer debt; separate classification of co-signed debt for payment in full with interest before distribution of 20% to other unsecured claims was not supported by any evidence of fairness.); Spokane Ry. Credit Union v. Gonzales (In re Gonzales), 172 B.R. 320 (E.D. Wash. 1994) (Unfair-discrimination test applies to separate classification of co-signed debts, and fairness will depend on whether the co-signed debt benefited the debtor or the nondebtor cosigner. The debtor has the burden of proving that any discrimination in favor of a co-signed claim is fair.); In re Beauchamp, 283 B.R. 287, 288 (Bankr. D. Minn. 2002) (Student loans co-signed by the debtors’ children are subject to the unfair discrimination test and cannot be separately classified for payment in full. “Not all cosigned consumer unsecured debts can be treated more favorably than other unsecured debt under the statute. Favorable treatment of cosigned debt still depends on its not being unfairly discriminatory.”); In re Regine, 234 B.R. 4, 5 (Bankr. D.R.I. 1999) (“[W]e believe the better view is to apply the unfair discrimination standard equally to all consumer debts, whether or not they are co-signed.”); In re McKown, 227 B.R. 487, 492–94 (Bankr. N.D. Ohio 1998) (“[T]his Court joins the interpretation of numerous courts which have determined that the option of providing ‘different’ treatment to a co-signed, unsecured consumer obligation does not mean that a debtor has been dealt a wild card that automatically permits the debtor to discriminate unfairly against his or her general unsecured creditors when doing so. . . . In this case, the proposed discrimination . . . does not appear to further the goals of the amendment to section 1322(b)(1). First, the favorable treatment . . . appears unnecessary to prevent the Debtors from making out-of-plan payments to the co-signed obligation. . . . [T]he Debtors have failed to demonstrate that the codebtor cannot afford to make the payments . . . . It is simply unreasonable to allow the Debtors to preserve property at which they do not reside at the expense of their general unsecured creditors.”); In re Markham, 224 B.R. 599, 601 (Bankr. W.D. Ky. 1998) (“[A] Chapter 13 Plan which treats a co-signed claim that is in default less favorably than other unsecured claims unfairly discriminates against the creditor.”); In re Chacon, 223 B.R. 917, 921, 922 (Bankr. W.D. Tex. 1998) (Although Chapter 13 permits the separate classification of co-signed debts, “the proper interpretation of Section 1322(b)(1) is that a codebtor claim may be separately classified only if the classification does not unfairly discriminate.”), aff’d, 202 F.3d 725 (5th Cir. 1999); In re Applegarth, 221 B.R. 914, 915 (Bankr. M.D. Fla. 1998) (“[T]he better view is that Section 1322(b)(1) does not allow a debtor to separately classify a codebtor claim while unfairly discriminating against other unsecured creditors.”); In re Janssen, 220 B.R. 639, 643–46 (Bankr. N.D. Iowa 1998) (Noting disagreement in reported decisions, court concludes “the unfair discrimination standard applies to Chapter 13 plans that separately classify co-signed consumer debts.”); In re Strausser, 206 B.R. 58, 60 (Bankr. W.D.N.Y. 1997) (“[T]he weight of authority confirms that different treatment must nonetheless avoid unfair discrimination.”); In re Martin, 189 B.R. 619, 628 (Bankr. E.D. Va. 1995) (Recognizing that the courts are split whether the unfair-discrimination test applies to the separate classification of co-signed debts, “[p]ermitting a debtor to arbitrarily differentiate between creditors based upon the co-signed status of a debt—without any further justification—is an invitation to abuse. . . . This Court therefore adopts the analysis of [In re Cheak, 171 B.R. 55 (Bankr. S.D. Ill. 1994),] and Battista [180 B.R. 355 (Bankr. D.N.H. 1995),] which requires a debtor to demonstrate ‘fair’ discrimination.”); In re Battista, 180 B.R. 355, 357 (Bankr. D.N.H. 1995) (Unfair-discrimination test applies to separate classification of co-signed claims, and it is unfair discrimination to pay general unsecureds less than they would receive upon a liquidation in a Chapter 7 case. “[A]uthority is split on whether the ‘however’ clause is a carve-out from the unfair discrimination test. . . . [T]he better view is that the unfair discrimination standard applies to plans that separately classify co-signed consumer debts.); In re Cheak, 171 B.R. 55, 58 (Bankr. S.D. Ill. 1994) (Separate classification of co-signed claim is subject to the unfair discrimination test, notwithstanding § 1322(b)(1). Separate classification for 100% payment of a credit card debt co-signed by a nonfiling spouse is unfair discrimination.); In re Lewman, 157 B.R. 134, 136–37 (Bankr. S.D. Ind. 1992) (“While the Codebtor Classification allows separate classification of consumer debts on which codebtors are liable, it does not dictate that all such classifications pass muster. . . . The Codebtor Classification simply means that separate classification and treatment on the sole basis of codebtor liability is not per se unfair discrimination. Debtors still bear the burden of showing that separate classification and treatment of unsecured claims does not unfairly discriminate.”); 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-month payment of other unsecured debt is unfair discrimination, applying modified four-factor test.); In re Hamilton, 102 B.R. 498, 502 (Bankr. W.D. Va. 1989) (Debtor is not permitted to separately classify co-signed educational loans. “[T]he desire of parents to protect their children from the claims of creditors for debts incurred solely for the benefit of the co-maker children does not, by itself, constitute a legitimate interest of the debtor which should be protected by permitting discriminatory treatment.”); In re Gonzalez, 73 B.R. 259 (Bankr. D.P.R. 1987) (Section 1322(b)(1) permits a Chapter 13 debtor to separately classify unsecured codebtor claims; however, the plan may not discriminate unfairly against other unsecured claims. Plan that prefers co-signed claim with effect that other classes of unsecured creditors will receive less than they would receive upon liquidation in a Chapter 7 case unfairly discriminates.); In re Easley, 72 B.R. 948 (Bankr. M.D. Tenn. 1987) (Debtor’s power to treat co-signed consumer debts “differently” does not automatically authorize all discriminations in favor of co-signed claims. “Differently” has content separate from the proscription against unfair discrimination. Debtor offered no evidence to support separate classification for payment in full of a single co-signed consumer debt when only 12% was to be paid to the holder of claim declared nondischargeable in prior Chapter 7 case.); In re Todd, 65 B.R. 249 (Bankr. N.D. Ill. 1986) (It is not unfair discrimination to pay 100% of claim co-signed by debtor’s police street partner and 26% of claim potentially nondischargeable in a Chapter 7 case.).

 

4  See discussion of good faith beginning at § 103.1  In General.

 

5  In re Hill, 261 B.R. 495, 498 (Bankr. N.D. Fla. 2001) (Acknowledging split of authority with respect to whether the unfair-discrimination test applies to the separate classification of co-signed debt, bankruptcy court finds the debate “less important when section 1322 is read in connection with section 1325.” Court schedules an evidentiary hearing to permit the debtor to prove good faith with respect to plan that separately classifies co-signed claim for payment in full and nothing to other unsecured creditors. “Discretion regarding the separate treatment of co-signed consumer debt and other unsecured debt is subsumed by the good faith requirement.”).

 

6  In re McKown, 227 B.R. 487, 492 (Bankr. N.D. Ohio 1998) (“[T]he option of providing ‘different’ treatment to a co-signed, unsecured consumer obligation does not mean that a debtor has been dealt a wild card that automatically permits the debtor to discriminate unfairly against his or her general unsecured creditors.”); In re Lewman, 157 B.R. 134, 136 (Bankr. S.D. Ind. 1992) (“While the Codebtor Classification allows separate classification of consumer debts on which codebtors are liable, it does not dictate that all such classifications pass muster.”); In re Easley, 72 B.R. 948 (Bankr. M.D. Tenn. 1987).

 

7  11 U.S.C. § 1322(b)(1). See also §§ 84.1 [ Cosigners and Joint Obligors Are Protected ] § 65.1  Cosigners and Joint Obligors Are Protected and 87.1 [ Codebtor Received the Consideration ] § 67.1  Codebtor Received the Consideration.

 

8  255 B.R. 579 (Bankr. N.D. Cal. 2000), rev’d, 268 B.R. 548 (B.A.P. 9th Cir. 2001).

 

9  268 B.R. at 553–54.

 

10  See § 85.1 [ Consumer Debts Only ] § 65.2  Consumer Debts Only.

 

11  See § 85.1 [ Consumer Debts Only ] § 65.2  Consumer Debts Only.

 

12  In re Whitelock, 122 B.R. 582 (Bankr. D. Utah 1990).

 

13  See § 151.1 [ Priority Claims ] § 87.4  Priority Claims.

 

14  See Groves v. LaBarge (In re Groves), 160 B.R. 121, 124 (E.D. Mo. 1993) (Court rejects argument that government-guaranteed student loans are co-signed loans of the sort entitled to special classification treatment under § 1322(b)(1). “Debtors cite no cases to support the necessary elements of this argument . . . no cases holding that student loans are ‘consumer debt’ and that the federal agency guaranteeing a student loan is an ‘individual liable on such consumer debt with the debtor,’ as those terms are used in § 1322(b)(1).”). But see In re Beauchamp, 283 B.R. 287, 289 (Bankr. D. Minn. 2002) (“[A]ssuming that student loans constitute ‘consumer debt’ under the statute, treating them more favorably than other unsecured debt is not justified because the obligations were incurred by the Debtors for the benefit of their non-debtor children, who would be ordinarily expected to pay the obligations anyway.”); In re Lewman, 157 B.R. 134, 136 (Bankr. S.D. Ind. 1992) (“The court will assume that an educational loan for a family member fits within the definition of a consumer debt.”).

 

15  In re Janssen, 220 B.R. 639, 643 (Bankr. N.D. Iowa 1998).

 

16  See § 84.1 [ Cosigners and Joint Obligors Are Protected ] § 65.1  Cosigners and Joint Obligors Are Protected. See, e.g., Spokane Ry. Credit Union v. Gonzales (In re Gonzales), 172 B.R. 320, 329–30 (E.D. Wash. 1994) (Co-signed car loan can be separately classified for more favorable treatment because car loan was co-signed by debtor’s employer and “debtor has strong reasons to repay the loan in full . . . . Debtor may be fired . . . if H & N Electric has to repay the loan on behalf of Debtor. As a practical matter, Debtor is going to repay the loan to keep his job. Therefore, separate classification of this debt is justified.”); In re Ross, 161 B.R. 36, 37–38 (Bankr. C.D. Ill. 1993) (It is not unfair discrimination to pay $384 per month toward undersecured claim for purchase of a recreational cabin where other unsecured creditors will receive only 9%. Purchase of cabin was financed by debtor’s employer. Debtors contended that if they didn’t pay for the cabin, the employer would fire the debtor. Court found that “[t]he relationship between the Debtors and the employer is in the nature of a co-signer or guaranty relationship. . . . Applying the [four factors] . . . the Chapter 13 plan does not unfairly discriminate against the Debtors’ unsecured creditors. If the Debtors do not pay for the cabin and the employer is forced to do so, Debtor . . . will lose his job and the Debtors will lose the ability to fund the Chapter 13 plan.”).

 

17  See §§ 86.2 [ Automatic Relief under § 1301(d) ] § 66.2  Automatic Relief under § 1301(d) and 88.1 [ Plan Does Not Pay Debt in Full ] § 67.2  Plan Does Not Pay Debt in Full.

 

18  See 11 U.S.C. §§ 1301(c)(2) and (d), discussed in §§ 86.2 [ Automatic Relief under § 1301(d) ] § 66.2  Automatic Relief under § 1301(d) and 88.1 [ Plan Does Not Pay Debt in Full ] § 67.2  Plan Does Not Pay Debt in Full.

 

19  See Southeastern Bank v. Brown, 266 B.R. 900, 910 (S.D. Ga. 2001) (Although § 1322(b)(1) does not explicitly authorize payment of postpetition interest on co-signed debts, § 1301 “by implication” authorizes an exception to the treatment of postpetition interest under § 502. “Debtors may include post-petition interest on cosigned [sic] debts in their repayment plans, despite a party’s objection to that claim.”); In re Monroe, 281 B.R. 398, 402 (Bankr. N.D. Ga. 2002) (Plan can pay postpetition interest on separately classified co-signed debt. “The Court finds the reasoning and approach in [Southeastern Bank v. Brown, 266 B.R. 900 (S.D. Ga. 2001)] to be logical and persuasive. Therefore, the Court will allow the Debtor to propose the payment of interest on the unsecured portion of Mitsubishi’s claim.” Section 1322(b)(4) allows payment of undersecured claim with postpetition interest at the same time as payments to other secured creditors.); In re Butler, 242 B.R. 553 (Bankr. S.D. Ga. 1999) (Chapter 13 debtor must pay postpetition interest to avoid relief from the codebtor stay; separately classified co-signed claim can be paid postpetition interest only after secured claims, priority claims and the principal amount of allowed unsecured claims have been paid.); In re Austin, 110 B.R. 430 (Bankr. E.D. Mo. 1990).

 

20  See § 162.2 [ Discount Rates and Interest If Liquidation Would Produce Dividend ] § 90.5  Discount Rates and Interest If Liquidation Would Produce Dividend.

 

21  11 U.S.C. § 502(b)(2). See Leeper v. Pennsylvania Higher Educ. Assistance Agency, 49 F.3d 98 (3d Cir. 1995) (Applying Bruning v. United States, 376 U.S. 358, 84 S. Ct. 906, 11 L. Ed. 2d 772 (1964), unmatured postpetition interest on a nondischargeable student loan is not allowable but accrues and is nondischargeable after Chapter 13 plan is completed.); In re Shelbayah, 165 B.R. 332 (Bankr. N.D. Ga. 1994) (Unmatured postpetition interest on a student loan is plainly not allowable under § 502(b)(2).).

 

22  Southeastern Bank v. Brown, 266 B.R. 900, 905–10 (S.D. Ga. 2001) (Resolving the disagreement between In re Alls, 238 B.R. 914 (Bankr. S.D. Ga. 1999), and In re Butler, 242 B.R. 553 (Bankr. S.D. Ga. 1999), “claim” includes unmatured interest under § 101(5), and § 1301(c)(2) requires relief from the codebtor stay to the extent the plan does not propose to pay postpetition interest. “[B]ecause the stay must be lifted if post-petition interest is not provided for in the plan, § 1301 must by implication authorize an exception to the prohibition against post-petition interest as stated in § 502. Otherwise, the stay would have no meaning. . . . While this Court is not confident that § 1322 actually provides explicit authorization for treating post-petition interest differently in cosigned [sic] loans, the Court does find that § 1322 clearly shows that cosigned [sic] loans are unique and can be treated differently in at least a general sense. Given the practical effect of § 1301 and the fact that the Code itself acknowledges that cosigned [sic] debts are unique, this Court must find that § 1301 is implicitly excepted from the post-petition interest provisions of § 502.”).

 

23  See § 89.1 [ Postpetition Interest, Attorneys’ Fees, Costs and Other Charges ] § 67.3  Postpetition Interest, Attorneys’ Fees, Costs and Other Charges. See, e.g., In re Janssen, 220 B.R. 639, 643–46 (Bankr. N.D. Iowa 1998) (“This Court must respectfully disagree with those decisions allowing unsecured creditors to receive post-petition interest from a debtor when there is a co-signor [sic]. . . . The term ‘claim’ as used in [§ 1301(c)(2)] is not normally considered to include post-petition interest. . . . If Congress intended the term ‘claim’ to include post-petition interest, there would be no need for provisions such as §§ 502(b)(2) or 506(b), both of which deal with the ability of creditors to obtain post-petition interest in addition to the amount of their claim. Post-petition interest results in a lower dividend for the general unsecured creditors and would be unfairly discriminatory if awarded. Accordingly, Debtor’s separate classification of co-signed, unsecured, consumer debts is not entitled to receive post-petition interest under the Plan.”). Accord Ramirez v. Bracher (In re Ramirez), 204 F.3d 595 (5th Cir. 2000) (Citing Chacon v. Bracher (In re Chacon), 202 F.3d 725 (5th Cir. 1999), separate classification of debt for payment in full with interest before distribution of 20% to other unsecured claims was not supported by any evidence of fairness.); In re Alls, 238 B.R. 914, 920 (Bankr. S.D. Ga. 1999) (Debtor cannot pay postpetition interest to co-signed unsecured claim holder and codebtor stay prevents creditor from collecting postpetition interest from the cosigner. “While section 1322(b)(1) does not permit separate treatment of codebtor unsecured claims, the section does not authorize payment of postpetition interest on such claims. . . . [S]ection 502(b)(2) generally disallows payment of postpetition interest on unsecured claims.”); In re Chacon, 223 B.R. 917 (Bankr. W.D. Tex. 1998) (Separately classified co-signed debts are subject to unfair-discrimination test, and debtors failed to prove fairness of plan that paid co-signed debts in full with interest in advance of general unsecured claims.), aff’d, 202 F.3d 725 (5th Cir. 1999).

 

24  Pre-1984 cases allowing separate classification of co-signed claims under appropriate circumstances include Worthen Bank & Trust Co. v. Cook, 26 B.R. 187 (D.N.M. 1982); In re Girardeau, 35 B.R. 9 (Bankr. D.S.C. 1983); In re Moore, 31 B.R. 12 (Bankr. D.S.C. 1983); In re Freeman, 28 B.R. 74 (Bankr. S.D. Miss. 1982), aff’d sub nom. Public Fin. Corp. v. Freeman, 28 B.R. 77 (S.D. Miss.), aff’d in part, 712 F.2d 219 (5th Cir. 1983); In re Vanleeuween, 17 B.R. 189 (Bankr. S.D. Ohio 1982); In re Hill, 4 B.R. 694 (Bankr. D. Kan. 1980); In re Kovich, 4 B.R. 403 (Bankr. W.D. Mich. 1980). Pre-1984 cases not allowing separate classification of co-signed claims include In re Barnes, 689 F.2d 193 (D.C. Cir. 1982); American Family Ins. Group v. Barker, 7 B.R. 707 (Bankr. W.D. Mo. 1980); In re Fonnest, 5 Bankr. Ct. Dec. (CRR) 1236 (Bankr. S.D. Ohio 1980); In re Nickels, 4 B.R. 481 (Bankr. S.D. Ohio 1980); In re Wade, 4 B.R. 98 (Bankr. M.D. Tenn. 1980); In re McKenzie, 4 B.R. 88 (Bankr. W.D.N.Y. 1980); In re Utter, 3 B.R. 369 (Bankr. W.D.N.Y. 1980); In re Iacovoni, 2 B.R. 256 (Bankr. D. Utah 1980).

 

25  See Spokane Ry. Credit Union v. Gonzales (In re Gonzales), 172 B.R. 320 (E.D. Wash. 1994) (Co-signed car loan can be separately classified for more favorable treatment because car loan was co-signed by debtor’s employer and debtor will repay the loan to keep his job. Separate classification of a credit card debt was fair discrimination because “only the debtor used the credit card.”); In re Monroe, 281 B.R. 398 (Bankr. N.D. Ga. 2002) (Separate classification of co-signed undersecured car lender is not subject to the unfair discrimination test; plan can pay postpetition interest on separately classified co-signed debt.); In re Janssen, 220 B.R. 639 (Bankr. N.D. Iowa 1998) (Fair discrimination for plan to separately classify loan to buy a truck and loan to pay household, schooling and child care expenses when debts were co-signed by the debtor’s father and are separately classified for payment in full with approximately 13% dividend to other unsecured claim holders; however, debtor cannot pay postpetition interest to the co-signed claim holders.); In re Ross, 161 B.R. 36, 37–38 (Bankr. C.D. Ill. 1993) (It is not unfair discrimination to pay $384 per month toward undersecured claim for purchase of a recreational cabin and 9% to other unsecured creditors where cabin was financed by debtor’s employer. “The relationship between the Debtors and the employer is in the nature of a co-signer or guaranty relationship. . . . Applying the [four factors] . . . the Chapter 13 plan does not unfairly discriminate against the Debtors’ unsecured creditors. If the Debtors do not pay for the cabin and the employer is forced to do so, Debtor. . . will lose his job and the Debtors will lose the ability to fund the Chapter 13 plan.”); In re Chandler, 148 B.R. 13 (Bankr. E.D.N.C. 1992) (Joint debts of husband and wife can be separately classified for payment in full while individual debts of one spouse are paid only 9.6% because under North Carolina law the debtors’ entireties property would only be subject to the claims of joint creditors of both spouses.); In re Chapman, 146 B.R. 411, 416 (Bankr. N.D. Ill. 1992) (Section 1322 was amended in 1984 to allow for separate classification and disparate treatment of co-signed consumer debt “without regard to unfair discrimination.” Any other separate classification is permissible, by implication, only if the discrimination is fair.); In re Riggel, 142 B.R. 199 (Bankr. S.D. Ohio 1992) (Applying four-part test, a reasonable basis for separate classification is demonstrated if the separately classified claims are afforded special treatment by the Code. Co-signed claims are provided special treatment by § 1322(b)(1) and thus can be separately classified. “This section excepts such claims from the ‘unfair discrimination’ test.” In the absence of proof by the debtor that a co-signed obligation exists, a proposed separate classification for co-signed obligations is improper.); In re Austin, 110 B.R. 430 (Bankr. E.D. Mo. 1990) (Section 1322(b)(1) permits separate classification of co-signed consumer debt to be paid in full with contractual postpetition interest to preclude claim holder from collecting postpetition interest from codebtor.); In re Dornon, 103 B.R. 61, 64 (Bankr. N.D.N.Y. 1989) (1984 amendment “automatically sanctions different and favored treatment for a debtor’s consumer debts which are co-signed by another individual and constitutes a ‘carve out’ to the ‘unfair discrimination’ standard.”); In re Todd, 65 B.R. 249 (Bankr. N.D. Ill. 1986) (It is not unfair discrimination to pay 100% of claim co-signed by debtor’s police street partner and 26% of claim potentially nondischargeable in a Chapter 7 case.); In re Perkins, 55 B.R. 422 (Bankr. N.D. Okla. 1985) (Applying four-prong test from In re Kovich, 4 B.R. 403 (Bankr. W.D. Mich. 1980), and In re Dziedzic, 9 B.R. 424 (Bankr. S.D. Tex. 1981), court confirms 100% payment to co-signed claim holder and 22% to all other unsecured claim holders.).

 

26  See Ramirez v. Bracher (In re Ramirez), 204 F.3d 595 (5th Cir. 2000) (Separate classification of a co-signed debt for payment in full with interest before distribution of 20% to other unsecured claims was not supported by any evidence of fairness.); Spokane Ry. Credit Union v. Gonzales (In re Gonzales), 172 B.R. 320 (E.D. Wash. 1994) (Separate classification of a co-signed debt for dental work performed on the debtor’s girlfriend is unfair discrimination.); In re Beauchamp, 283 B.R. 287 (Bankr. D. Minn. 2002) (Student loans co-signed by the debtors’ children are subject to the unfair discrimination test and cannot be separately classified for payment in full.); In re McNichols, 254 B.R. 422 (Bankr. N.D. Ill. 2000) (Third amended plan unfairly discriminates by paying 40% of co-signed unsecured claims and 10% of other unsecured claims without any explanation why nonfiling spouse could not pay the co-signed debts in full.), motion to alter or amend denied, 255 B.R. 857 (Bankr. N.D. Ill. 2000); In re McNichols, 249 B.R. 160, 176 (Bankr. N.D. Ill. 2000) (Applying four-part test and citing Chacon v. Bracher (In re Chacon), 202 F.3d 725 (5th Cir. 1999), separate classification of co-signed debt for full payment and 10% to other unsecured creditors is unfair discrimination because nonfiling cosigner spouse has financial ability to pay the claims himself. “[A] debtor’s ability to classify cosigned debts under § 1322(b)(1) is not absolute. . . . [T]he cosigner spouse clearly has the ability to pay his share of any joint unsecured debt. That the Plan proposes to pay the co-debtor claim of the spouse in full, yet will produce a dividend of approximately 10% to the other general unsecured creditors, produces a widely disparate result.”); In re Alls, 238 B.R. 914 (Bankr. S.D. Ga. 1999) (Debtor cannot pay postpetition interest to co-signed unsecured claim holder, and codebtor stay prevents creditor from collecting postpetition interest from the cosigner.); In re Regine, 234 B.R. 4 (Bankr. D.R.I. 1999) (Unfair discrimination to separately classify debt co-signed by the debtor’s mother for 100% payment and 17% to other unsecured claims.); In re Burnip, 229 B.R. 904 (Bankr. S.D. Ohio 1999) (Debtor’s liability to refund commissions for selling interests in a partnership is unfairly discriminated against by a plan provision for separate classification and payment of 1% when general unsecured claims will be paid 15%.); In re McKown, 227 B.R. 487 (Bankr. N.D. Ohio 1998) (Unfair-discrimination test prohibits 100% payment of debt co-signed by brother-in-law when general unsecureds will receive only 33%.); In re Markham, 224 B.R. 599, 601 (Bankr. W.D. Ky. 1998) (Unfair discrimination to separately classify for less favorable treatment deficiency resulting from debtor’s co-signing of brother’s purchase of a pickup truck.); In re Chacon, 223 B.R. 917 (Bankr. W.D. Tex. 1998) (Separately classified co-signed debts are subject to unfair- discrimination test, and debtors failed to prove fairness of plans that paid co-signed debts in full with interest in advance of general unsecured claims.), aff’d, 202 F.3d 725 (5th Cir. 1999); In re Strausser, 206 B.R. 58 (Bankr. W.D.N.Y. 1997) (Applying a five-part test for fairness of discrimination, denies confirmation of plan that separately classifies debt co-signed by uncle for 100% payment and 5% distribution to other unsecured claim holders.); In re Thompson, 191 B.R. 967 (Bankr. S.D. Ga. 1996) (Denies confirmation of plan that separately classifies co-signed claims for 100% payment and 0% to other unsecured claim holders where cosigner, debtor’s mother, is financially able to pay the co-signed claim without suffering.); In re Martin, 189 B.R. 619 (Bankr. E.D. Va. 1995) (Rejects separate classification of claims co-signed by nonfiling spouse where plan fails to account for nonfiling spouse’s income and expenses and otherwise fails four-part test.); In re Battista, 180 B.R. 355 (Bankr. D.N.H. 1995) (Unfair-discrimination test applies to separate classification of co-signed claims, and it is unfair discrimination to pay general unsecureds less than they would receive upon a liquidation in a Chapter 7 case.); In re Cheak, 171 B.R. 55 (Bankr. S.D. Ill. 1994) (Refuses on unfair discrimination ground separate classification for 100% payment of credit card debt co-signed by nonfiling spouse when separate classification would protect nonfiling spouse’s income and benefit the debtor at the expense of other unsecured creditors.); In re Lewman, 157 B.R. 134, 136–37 (Bankr. S.D. Ind. 1992) (Court denies confirmation of plan that would separately classify student loans for more favorable treatment notwithstanding that the debtors are guarantors and the student loan probably fits the codebtor claim definition in § 1322(b)(1). “The court will assume that an educational loan for a family member fits within the definition of a consumer debt. . . . While the Codebtor Classification allows separate classification of consumer debts on which codebtors are liable, it does not dictate that all such classifications pass muster. . . . The Codebtor Classification simply means that separate classification and treatment on the sole basis of codebtor liability is not per se unfair discrimination. Debtors still bear the burden of showing that separate classification and treatment of unsecured claims does not unfairly discriminate. . . . The Debtors apparently desire, in essence, to pay their son’s student loan in full . . . relieving him of a debt on which he is primarily liable (and which the Debtors may never be called on to pay, if he pays the debt) with funds that would otherwise be available to the Debtors’ other unsecured creditors, while protecting their son from collection efforts for the duration of the Plan. In these circumstances, the Court finds that the Debtors’ attempt to separately classify and favorably treat the [educational loan] does not comport with the purposes of the Codebtor Classification. Disallowing the separate classification and favorable treatment should not compel the Debtors to pay the debt in full anyway to spare their son an obligation that is not justly his; and if the [student loan’s] liability happens to precipitate the son’s bankruptcy, it won’t be because the Debtors’ bankruptcy shifted an unexpected liability on him. Absent compelling circumstances showing otherwise, it would be unfair for a debtor to use the Codebtor Classification to pay a contingent liability in full, thus relieving a nondebtor of his or her primary liability on the debt, with funds that could be applied to unsecured debts on which the debtor is primarily liable.”); In re Whitelock, 122 B.R. 582 (Bankr. D. Utah 1990) (Loan secured by debtor’s mother’s real property is a consumer debt when loan was obtained to pay off prior loan for debtor’s tax liability. “Consumer debt” includes debt secured by real property because the language of the statute is broad enough and resort to inconsistent legislative history would be inappropriate. 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 fair-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 Young, 102 B.R. 1022 (Bankr. W.D. Mo. 1989) (Debtor cannot select some co-signed debts for preferred treatment and separately classify other co-signed debts for treatment with other unsecured claims.); In re Hamilton, 102 B.R. 498, 502 (Bankr. W.D. Va. 1989) (Debtor is not permitted to separately classify co-signed educational loans. “[T]he desire of parents to protect their children from the claims of creditors for debts incurred solely for the benefit of the co-maker children does not, by itself, constitute a legitimate interest of the debtor which should be protected by permitting discriminatory treatment.”); In re Davis, 101 B.R. 505 (Bankr. S.D. Ohio 1989); In re Diaz, 97 B.R. 903 (Bankr. S.D. Ohio 1989); In re Gonzalez, 73 B.R. 259 (Bankr. D.P.R. 1987) (Section 1322(b)(1) permits a Chapter 13 debtor to separately classify unsecured codebtor claims; however, the plan may not discriminate unfairly against other unsecured claims. Plan that prefers co-signed claim with effect that other classes of unsecured creditors will receive less than they would receive upon liquidation in a Chapter 7 case unfairly discriminates.); In re Easley, 72 B.R. 948 (Bankr. M.D. Tenn. 1987) (Debtor’s power to treat co-signed consumer debts “differently” does not automatically authorize all discriminations in favor of co-signed claims. “Differently” has content separate from the proscription against unfair discrimination. Debtor offered no evidence to support separate classification for payment in full of a single co-signed consumer debt when only 12% was to be paid to the holder of claim declared nondischargeable in prior Chapter 7 case.); In re Dondero, 58 B.R. 847 (Bankr. D. Or. 1986) (Debtor may not separately classify a co-signed claim for less favorable treatment.).

 

27  Spokane Ry. Credit Union v. Gonzales (In re Gonzales), 172 B.R. 320 (E.D. Wash. 1994).

 

28  172 B.R. at 329–30.

 

29  11 U.S.C. § 1301(c)(1). See § 87.1 [ Codebtor Received the Consideration ] § 67.1  Codebtor Received the Consideration.

 

30  191 B.R. 967 (Bankr. S.D. Ga. 1996).

 

31  191 B.R. at 973–74. Accord In re McNichols, 249 B.R. 160, 176 (Bankr. N.D. Ill. 2000) (Separate classification of co-signed debt for full payment and 10% to other unsecured creditors is unfair discrimination because nonfiling cosigner spouse has financial ability to pay the claims. “[T]he cosigner spouse clearly has the ability to pay his share of any joint unsecured debt. That the Plan proposes to pay the co-debtor claim of the spouse in full, yet will produce a dividend of approximately 10% to the other general unsecured creditors, produces a widely disparate result.”).

 

32  See § 84.1 [ Cosigners and Joint Obligors Are Protected ] § 65.1  Cosigners and Joint Obligors Are Protected.

 

33  206 B.R. 58 (Bankr. W.D.N.Y. 1997).

 

34  206 B.R. at 60–61.

 

35  See above in this section.

 

36  See In re Chacon, 223 B.R. 917 (Bankr. W.D. Tex. 1998) (Debtors had burden to prove that discrimination against unsecured creditors was not unfair.), aff’d, 202 F.3d 725 (5th Cir. 1999); In re Applegarth, 221 B.R. 914 (Bankr. M.D. Fla. 1998) (Debtor has the burden of proving the fairness of discrimination, citing In re Strausser, 206 B.R. 58 (Bankr. W.D.N.Y. 1997).).

 

37  In re Easley, 72 B.R. 948 (Bankr. M.D. Tenn. 1987). Accord Ramirez v. Bracher (In re Ramirez), 204 F.3d 595 (5th Cir. 2000) (Applying Chacon v. Bracher (In re Chacon), 202 F.3d 725 (5th Cir. 1999), separate classification of co-signed debt for payment in full with interest before distribution of 20% to other unsecured claims was not supported by any evidence of fairness.); In re Chacon, 223 B.R. 917 (Bankr. W.D. Tex. 1998) (In consolidated cases, all debtors failed to present evidence of the necessity of separate classifications, including evidence why level payment to all unsecured creditors was not an available alternative.), aff’d, 202 F.3d 725 (5th Cir. 1999).

 

38  In re Todd, 65 B.R. 249 (Bankr. N.D. Ill. 1986).

 

39  In re Beauchamp, 283 B.R. 287, 288–89 (Bankr. D. Minn. 2002) (Student loans co-signed by the debtors’ children are subject to the unfair discrimination test and cannot be separately classified for payment in full. “The fact that the loans are cosigned by their children does not provide a legitimate basis for the discrimination. . . . There is no legitimate purpose in allowing the Debtors to pay the obligations of their children, who received the benefits of the loans, at the expense of the Debtors’ other unsecured creditors. Such treatment is unfairly discriminatory.”); In re Lewman, 157 B.R. 134 (Bankr. S.D. Ind. 1992) (Debtors’ desire to pay their son’s student loan with funds that would otherwise be paid to other unsecured creditors is unfair discrimination.); In re Hamilton, 102 B.R. 498 (Bankr. W.D. Va. 1989).

 

40  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 for the discrimination. Discrimination based “upon purely personal grounds” fails the fair-discrimination test. 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.). Accord In re Regine, 234 B.R. 4 (Bankr. D.R.I. 1999) (Applying four-part test, unfair discrimination to separately classified debt co-signed by the debtor’s mother for 100% payment and 17% to other unsecured claims.); In re McKown, 227 B.R. 487 (Bankr. N.D. Ohio 1998) (Unfair-discrimination test prohibits 100% payment of debt co-signed by brother-in-law when general unsecureds will receive only 33%.); In re Thompson, 191 B.R. 967 (Bankr. S.D. Ga. 1996) (Denies confirmation of plan that separately classifies co-signed claims for 100% payment and 0% to other unsecured claim holders where cosigner, debtor’s mother, is financially able to pay the co-signed claim without suffering.).

 

41  In re Cheak, 171 B.R. 55, 58 (Bankr. S.D. Ill. 1994) (Court refuses separate classification for 100% payment of credit card debt co-signed by nonfiling spouse. Separate classification of co-signed claim is subject to the unfair-discrimination test, notwithstanding § 1322(b)(1). “[I]n this case the codebtor is the debtor’s wife, who has not joined the debtor in his Chapter 13 proceeding. The separate income of the debtor’s wife presumably benefits the debtor to the extent they, as a married couple, pool their income for household expenses. Thus, if the debtor were permitted to pay 100% of this co-signed claim through his Chapter 13 plan, he would protect his wife’s income and thereby benefit himself at the expense of other unsecured creditors. The identity of interest between the debtor and his wife as co-signer distinguishes this case from one involving a co-signer who is a relative or close friend with a separate income. . . . [T]he debtor’s proposed discrimination in favor of Bank’s claim does not serve a legitimate purpose that would justify his disparate treatment of other unsecured creditors.”). Accord In re Martin, 189 B.R. 619, 628 (Bankr. E.D. Va. 1995) (Rejects separate classification of claims co-signed by nonfiling spouse where plan fails to account for nonfiling spouse’s income and expenses and otherwise fails four-part test. Recognizing that the courts are split whether the unfair-discrimination test applies to the separate classification of co-signed debts, “[p]ermitting a debtor to arbitrarily differentiate between creditors based upon the co-signed status of a debt—without any further justification—is an invitation to abuse. . . . This Court therefore adopts the analysis of [In re Cheak, 171 B.R. 55 (Bankr. S.D. Ill. 1994),] and [In re Battista, 180 B.R. 355 (Bankr. D.N.H. 1995),] which requires a debtor to demonstrate ‘fair’ discrimination.” Plan would pay two co-signed debts 100% and 6.5% to the holder of a judgment for assault and battery. If all unsecured debts were treated the same, the dividend would be 10.2%.).

 

42  In re Janssen, 220 B.R. 639, 644–45 (Bankr. N.D. Iowa 1998) (“[D]iscrimination in favor of Citizens State Bank’s claim and GMAC’s claim has a reasonable basis for separate classification in that Debtor strongly desires a continuing relationship with her father post-bankruptcy. . . . Debtor could not carry out her Plan without discriminating in favor of Citizens State Bank and GMAC because she may attempt to repay these creditors outside of the Plan to protect her father from creditor pressure, which would lessen the Plan’s likelihood for success. . . . [D]iscrimination in favor of Citizens State Bank and GMAC has been proposed in good faith and is directly related to the basis or rationale for the discrimination. . . . Debtor’s father is a 73-year old retired farmer and is not in good health.”).

 

43  In re Ross, 161 B.R. 36 (Bankr. C.D. Ill. 1993). Accord Spokane Ry. Credit Union v. Gonzales (In re Gonzales), 172 B.R. 320, 330 (E.D. Wash. 1994) (Co-signed car loan and co-signed credit card debt can be separately classified for more favorable treatment because both were co-signed by the debtor’s employer, and “debtor has strong reasons to repay the loan[s] in full. . . . Debtor may be fired. . . . As a practical matter, Debtor is going to repay the loan[s] to keep his job.”).

 

44  In re Battista, 180 B.R. 355, 357 (Bankr. D.N.H. 1995) (Unfair-discrimination test applies to separate classification of co-signed claims, and it is unfair discrimination to pay general unsecureds less than they would receive upon a liquidation in a Chapter 7 case. “[A]uthority is split on whether the ‘however’ clause is a carve-out from the unfair discrimination test. . . . [T]he better view is that the unfair discrimination standard applies to plans that separately classify co-signed consumer debts. . . . Here, the classification proposed by the debtor will result in receipt of a six percent distribution to the holders of the non-codebtor unsecured claims in Class F. In a chapter 7 liquidation, those creditors would receive a distribution of approximately 17%. This result is not only unfairly discriminatory . . . but also an independent basis for denying confirmation under section 1325(a)(4).”); In re Gonzalez, 73 B.R. 259 (Bankr. D.P.R. 1987). See In re Thompson, 191 B.R. 967, 973–74 (Bankr. S.D. Ga. 1996) (“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. A debtor’s ability to separately classify co-signed debts is conditioned upon the debtor satisfying the basic elements of section 1322(b)(1) while staying within the constraints of the Code as a whole, to wit: a consumer debt, co-signed for the debtor’s benefit, the separate classification of which does not jeopardize other required elements for confirmation as contained in section 1325. . . . If the application of the good faith requirement causes the debtor to be unable to protect the codebtor from financial ruin, the prospect for such an occurrence is suggested in the legislative history to be one of the considerations for allowing the codebtor claim to be treated ‘differently.’ . . . If a debtor is going to propose full payment of a co-signed debt and a zero distribution to other unsecured creditors, absent other factors, the fact that the classification is not necessary to prevent the cosigner’s financial ruin weighs heavily against the debtor’s good faith. . . . The zero distribution proposed by Debtors in this case cannot be said to satisfy the good faith requirement.”).

 

45  In re Burnip, 229 B.R. 904, 906 (Bankr. S.D. Ohio 1999) (Debtor’s liability to refund commissions for selling interests in a partnership is unfairly discriminated against by a plan provision for separate classification and payment of 1% when general unsecured claims will be paid 15%. “Mr. Burnip’s liability as a partner of Cornerstone would be analogous to having co-obligors (i.e., the other partners) for the relevant obligation. This factor would support the contingent nature of the partnership claims, but in the event of default by the partnership, the remaining claim would be entitled to receive identical treatment as proposed for other unsecured creditors. Section 1322(b)(1) does not allow for less favorable treatment of co-signed claims, although more favorable treatment may be permissible.”); In re Markham, 224 B.R. 599, 601 (Bankr. W.D. Ky. 1998) (Unfair discrimination to separately classify deficiency on co-signed debt for less favorable treatment. Debtor co-signed brother’s purchase of a pickup truck. Brother defaulted, and bank repossessed and sold the truck, leaving a deficiency of $6,935. Debtors’ Chapter 13 plan separately classified the co-signed deficiency for 15% payment while paying 70% to other unsecured claim holders. “[W]hile the purposes and intent underlying § 1322(b)(1) support an interpretation that the language of that section permits co-signed claims to be treated more favorably than other unsecured claims, they do not support a finding that a less favorable treatment of co-signed claims is permissible. . . . [A] Chapter 13 Plan which treats a co-signed claim that is in default less favorably than other unsecured claims unfairly discriminates against the creditor.”). Accord In re Davis, 101 B.R. 505 (Bankr. S.D. Ohio 1989); In re Diaz, 97 B.R. 903 (Bankr. S.D. Ohio 1989); In re Dondero, 58 B.R. 847 (Bankr. D. Or. 1986).

 

46  In re Young, 102 B.R. 1022 (Bankr. W.D. Mo. 1989). See also In re Gregg, 179 B.R. 828, 830 (Bankr. E.D. Tex. 1995) (Debtor can separately classify three student loans for payment in full where other unsecured claim holders will be paid only .74%; however, separate classification of a fourth student loan for treatment different from other three is unfair discrimination. “All of the student loans in this case are nondischargeable under 11 U.S.C. § 523. Therefore, a separate classification for these claims does not unfairly discriminate against the other unsecured creditors. . . . However, . . . TGSLC [Texas Guaranteed Student Loan Corporation] is being treated differently from the rest of the student loan claims. . . . The Court was presented with no evidence to determine whether TGSLC was being paid in full outside the Plan. If TGSLC is being paid outside the Plan, then the other student loan claimants are being discriminated against. Several courts have held that treatment of some unsecured claims outside a plan while treating others under a plan amounts to discriminatory classification, and that, therefore, unsecured claims may not be so treated, where such treatment is not justified under the ‘fairness’ test. . . . If TGSLC is not being paid directly outside the Plan, then TGSLC is being discriminated against. The other student loan claims are being paid 100% through the Plan. There is no specific provision for TGSLC. TGSLC has filed a proof of claim. . . . TGSLC falls into the class of unsecured creditors receiving a .74% dividend. TGSLC will be left with an unpaid, nondischargeable claim while the rest of the student loan claimants are paid in full. . . . Debtor has failed to provide the Court with any reasonable basis for treating TGSLC differently from the rest of the student loan claims.”).

 

47  See above in this section.

 

48  See Spokane Ry. Credit Union v. Gonzales (In re Gonzales), 172 B.R. 320, 329–30 (E.D. Wash. 1994) (Fairness of discrimination with respect to separate classification of co-signed debts will depend on whether the co-signed debt benefited the debtor or the nondebtor cosigner. Section 1322(b)(1) sanctions preferential treatment for co-signed claims, but the debtor has the burden of showing that any such discrimination is fair. “Underlying the assumption that a debtor will feel a great need to pay in full a co-signed debt between the debtor and a friend or relative is the additional assumption that the co-debt benefited the debtor, not the friend or relative. The obligation to repay arises because the friend or relative extended his or her credit to help the debtor acquire credit. In return for the help, a debtor will feel a moral obligation to repay the loan in full to protect the co-signer. However, the same is not true where the debtor extends his or her credit to help the co-signer. No moral obligation exists to repay the loan since no help was given to the debtor. On the contrary, it was the debtor that helped the co-signer. Without the moral obligation to repay the loan in full, irrespective of the plan, there is little chance this type of co-debt will impede completion of the plan. Therefore, no reason justifies the classification of unsecured co-signed debt, acquired for the benefit of the co-signer, separately from other general unsecured debt. To do so would be unfair to the general unsecured creditors. Accordingly, this court finds that § 1322(b)(1) is limited to co-signed debt acquired for the benefit of the debtor, not the co-signer.” Co-signed car loan can be separately classified for more favorable treatment because car loan was also co-signed by debtor’s employer, and “debtor has strong reasons to repay the loan in full. . . . Debtor may be fired . . . if H & N Electric has to repay the loan on behalf of Debtor. As a practical matter, Debtor is going to repay the loan to keep his job. Therefore, separate classification of this debt is justified.” If the car loan has been co-signed only by the debtor’s girlfriend, “it would have been unfair to the general unsecured creditors” to separately classify the debt because such a loan would benefit only the girlfriend because “she drove the car,” and “no moral obligation would exist for Gonzales to repay the loan.” Separate classification of a credit card debt was fair discrimination because “only the debtor used the credit card.” The credit card debt was co-signed by the debtor’s girlfriend and by the debtor’s employer, thus “the rationale for permitting separate classification of co-signed unsecured debt under § 1322(b)(1) applies.” Favorable classification of a third co-signed debt for dental work performed on the girlfriend is unfair discrimination. “[S]eparate classification of this unsecured debt would be unfair to the other unsecured creditors. Clearly, [the debtor’s girlfriend] alone benefited from this debt. No moral obligation exists for Gonzales to repay the debt since he was not the primary recipient of the credit. He only extended his credit to accommodate [his girlfriend]. Therefore, no reason exists to treat this debt separately.”).

 

49  See, e.g., In re Delauder, 189 B.R. 639, 645–47 (Bankr. E.D. Va. 1995) (Direct payment of undersecured car lender for more favorable treatment than other unsecured claim holders is permitted because the unsecured portion of the car lender’s claim is small and direct payment of the undersecured claim will actually increase the percentage of repayment to other unsecured claim holders. Car loan was a long-term debt on which the last installment was due after the last payment under the plan. If the long-term debt were paid through the Chapter 13 trustee, the percentage distribution to all unsecured claim holders would actually fall from 25% to approximately 18% because the unsecured portion of the car lender’s claim was small and accelerating the long-term car loan for payment in full during the life of the plan would reduce the money available to unsecured claim holders. In other words, the discrimination in favor of the car lender actually worked to the advantage of other unsecured claim holders. “[A]lthough this court would not, as a routine matter, permit an undersecured automobile loan to be paid directly by a debtor outside the plan, such treatment is not improper in this case. Here, the last payment on the automobile loan is due after the last payment under the plan, the direct payment does not reduce the dividend to unsecured creditors and does not appear to be motivated primarily by a desire to avoid the trustee’s commission, and the plan otherwise complies with all the requirements for confirmation. For these reasons, the court cannot find that the plan unfairly discriminates against general unsecured creditors.”).