§ 88.2     Nondischargeable Claims after BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 88.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Chapter 13 still provides the broadest discharge available to an individual debtor under any chapter of the Bankruptcy Code, but BAPCPA carved away at that broader discharge in several ways that will have implications for the classification of claims.

[2]

BAPCPA enlarged the exception to discharge for domestic support obligations1 (DSOs). BAPCPA added to § 1328(a) seven new exceptions to discharge at the completion of payments under a Chapter 13 plan:

 

 1.
Trust fund taxes a debtor is required to collect or withhold, described in § 507(a)(8)(C).2
 

 

 

 

 2.
Taxes with respect to which a return was not filed or was filed late and within two years before the petition, described in § 523(a)(1)(B).3
 

 

 

 

 3.
A tax or custom duty with respect to which the debtor made a fraudulent return or willfully attempted to evade or defeat taxes under § 523(a)(1)(C).4
 

 

 

 

 4.
Claims for false pretenses, false representations or actual fraud under § 523(a)(2).5
 

 

 

 

 5.
Claims not listed or scheduled in time to permit the timely filing of a proof of claim or the timely filing of a complaint objecting to dischargeability under § 523(a)(2), (4) or (6) as described in § 523(a)(3).6
 

 

 

 

 6.
Claims for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny, described in § 523(a)(4).7
 

 

 

 

 7.
Claims for damages or restitution awarded in a civil action as a result of willful or malicious injury by the debtor that caused personal injury or death.8
 

 

 

[3]

Several of these new exceptions to discharge will be common in Chapter 13 cases. In particular, the exception to discharge in § 523(a)(2)—for false pretenses, misrepresentation or actual fraud—will involve Chapter 13 debtors in credit card dischargeability litigation that heretofore has been confined to Chapter 7 cases. These new and expanded exceptions to discharge will provide new incentives for Chapter 13 debtors to separately classify claims that are or might be nondischargeable.9 Chapter 13 debtors don’t want to be stuck with large nondischargeable debts at the end of years of payment to creditors through a plan. Many debts that are now nondischargeable in Chapter 13 cases will accumulate nondischargeable postpetition interest if the claims are not paid during the Chapter 13 case.

[4]

In any Chapter 13 case in which the debtor is not financially able to pay all unsecured claims in full, the separate classification of a nondischargeable debt for more favorable treatment implicates the unfair discrimination standard in § 1322(b)(1).10 In general, the appellate courts have concluded that the nondischargeable character of a debt, by itself, does not justify separate classification for more favorable treatment.11

[5]

Several of the new exceptions to discharge at completion of payments under a Chapter 13 plan have no other special attributes that bear on the fairness of separate classification. For example, the new exception to discharge at the completion of payments in Chapter 13 cases for debts described in § 523(a)(2) will saddle many Chapter 13 debtors with nondischargeable debts for credit card purchases of luxury goods and services within 90 days of the petition and for cash advances within 70 days of the petition. It will be difficult to convince bankruptcy courts of the fairness of discrimination of any plan that separately classifies these nondischargeable claims for more favorable treatment than other unsecured creditors. The same is likely to be true for unscheduled debts under § 523(a)(3) and for debts for fraud or defalcation in a fiduciary capacity, embezzlement or larceny described in § 523(a)(4). The new exception to discharge for restitution or damages awarded in a civil action as a result of willful or malicious injury by the debtor could produce large claims that will be unmanageable without separate classification, but any such plan is likely to run squarely into the unfair discrimination test.

[6]

When a nondischargeable debt is also a priority claim, the courts have looked more favorably on separate classification in Chapter 13 cases. This results in part from the structure of § 1322. The unfair discrimination test of separate classification in § 1322(b)(1) is “subject to” the mandatory provision in § 1322(a)(2) that a Chapter 13 plan must provide for the full payment of claims entitled to priority under § 507.12

[7]

Among the new and expanded exceptions to discharge in Chapter 13 cases are several debts that are both priority claims and nondischargeable after BAPCPA. For example, the expanded definition of DSO in § 101(14A) creates a larger class of debts for alimony, maintenance and support that are both nondischargeable at the completion of payments in a Chapter 13 case under § 1328(a)(2) and entitled to priority under § 507(a)(1).13 It is anticipated that most courts will permit the separate classification of DSOs for payment in full with accruing postpetition interest notwithstanding that the debtor is not financially able to pay all unsecured claims in full with postpetition interest.

[8]

The same outcome is likely with respect to debts for personal injury or death caused by/resulting from driving or boating while intoxicated as described in § 523(a)(9). These debts were nondischargeable at the completion of payments in a Chapter 13 case under § 1328(a)(2) before BAPCPA, but BAPCPA added a new priority for most DWI claims in § 507(a)(10).14 DWI claims that are now both nondischargeable and entitled to priority in a Chapter 13 case are candidates for separate classification for more favorable treatment and should survive the unfair discrimination test for the same reasons that separate classification of a DSO is generally permitted.

[9]

After BAPCPA, there will also be some tax claims that are both nondischargeable and entitled to priority. For example, trust fund taxes collected or withheld by a Chapter 13 debtor are entitled to priority under § 507(a)(8)(C) and full payment through a Chapter 13 plan and are now also nondischargeable under § 1328(a)(2). Before BAPCPA, tax claims described in § 507(a)(8)(C) were priority claims entitled to full payment through a Chapter 13 plan but without postpetition interest under § 1322(a)(2).15 Trust fund taxes specified in § 507(a)(8)(C) are still priority claims that must be paid in full, but interest will now accrue during the administration of the Chapter 13 case and that interest will be nondischargeable at the completion of payments under the plan. The same will be true for the new nondischargeable taxes described in § 523(a)(1)(B) and (C) to the extent those taxes are also entitled to priority under § 507(a)(8).

[10]

The likelihood of successful classification of these new nondischargeable priority taxes is greater than for debts that are only nondischargeable and not entitled to priority.

[11]

Two other statutory changes by BAPCPA could affect the classification picture for nondischargeable debts in Chapter 13 cases. Discussed in detail elsewhere, § 1322(b)(10) was amended by BAPCPA to permit a Chapter 13 plan to pay postpetition interest to the holder of a nondischargeable claim to the extent the debtor has disposable income available after making provision for “full payment of all allowed claims.”16 As a general rule, the interest that accrues by judgment or applicable law on a nondischargeable debt partakes of the same nondischargeable character as the underlying debt.17 Chapter 13 debtors want to separately classify nondischargeable debts for payment of postpetition interest to avoid a potentially substantial accumulation of nondischargeable interest during the Chapter 13 case.

[12]

New § 1322(b)(10) gives Chapter 13 debtors a limited license to pay postpetition interest to the holder of a nondischargeable claim when all other allowed claims are provided full payment under the plan. Unfortunately, it is not clear what “full payment” means in this context and, perhaps more importantly, there is no statutory exception in new § 1322(b)(10) to the unfair discrimination test for separate classification in § 1322(b)(1).18 This means that Chapter 13 debtors able to pay all allowed claims in full who propose to pay postpetition interest to the holder of a nondischargeable claim may encounter difficulties with the unfair discrimination that results when other unsecured claim holders are not being paid postpetition interest through the plan.

[13]

Finally, BAPCPA added a new subsection (4) to § 1322(a) which permits a Chapter 13 plan to provide less than full payment of a DSO that is assigned to or payable to a governmental entity as described in § 507(a)(1)(B) if the plan provides that all of the debtor’s projected disposable income for five years will be applied to make payments under the plan.19 DSOs assigned to or payable to a governmental entity under § 507(a)(1)(B) are priority debts that are also nondischargeable at the completion of payments in a Chapter 13 case.20 New § 1322(a)(4) is statutory permission for Chapter 13 debtors to separately classify DSO claims assigned to the government for less than the full payment to which priority claims are ordinarily entitled so long as five years of disposable income are applied to payments under the plan.

[14]

This does not look like an especially useful new power for most Chapter 13 debtors. Most DSO debts will accrue postpetition interest under applicable nonbankruptcy law, and any plan that can’t pay a DSO claim in full will leave the debtor with accumulated unpaid interest at the completion of payments to other creditors under the plan. Perhaps there will be a few Chapter 13 debtors who can’t construct a confirmable Chapter 13 plan without paying less than all of a DSO claim assigned to the government. New § 1322(a)(4) will then be some help, though it is help at a significant price.

[15]

All in all, it seems likely that there will be renewed litigation in Chapter 13 cases with respect to the separate classification of nondischargeable debts. Between 1979 and 2005, there was a fair amount of litigation whether Chapter 13 debtors could separately classify nondischargeable student loans for more favorable treatment than other unsecured creditors.21 The addition of many new nondischargeable debts to Chapter 13 by BAPCPA will inspire debtors to attempt separate classifications that will draw fire under the unfair discrimination standard in § 1322(b)(1).


 

1  11 U.S.C. §§ 101(14A), 523(a)(5) and 1328(a)(2), discussed in § 552.1 [ Domestic Support Obligations: § 523(a)(5) ] § 159.5  Domestic Support Obligations: § 523(a)(5).

 

2  11 U.S.C. §§ 507(a)(8)(C) and 1328(a)(2), discussed in § 548.1 [ Taxes ] § 159.1  Taxes.

 

3  See 11 U.S.C. §§ 523(a)(1)(B) and 1328(a)(2), discussed in § 548.1 [ Taxes ] § 159.1  Taxes.

 

4  See 11 U.S.C. §§ 523(a)(1)(C) and 1328(a)(2), discussed in § 548.1 [ Taxes ] § 159.1  Taxes.

 

5  See 11 U.S.C. §§ 523(a)(2) and 1328(a)(2), discussed in § 549.1 [ False Representations and Fraud: § 523(a)(2) ] § 159.2  False Representations and Fraud: § 523(a)(2).

 

6  See 11 U.S.C. §§ 523(a)(3) and 1328(a)(2), discussed in § 551.1 [ Unscheduled Creditors: § 523(a)(3) ] § 159.4  Unscheduled Creditors: § 523(a)(3).

 

7  See 11 U.S.C. §§ 523(a)(4) and 1328(a)(2), discussed in § 550.1 [ Fraud and Defalcation: § 523(a)(4) ] § 159.3  Fraud and Defalcation: § 523(a)(4).

 

8  See 11 U.S.C. § 1328(a)(4), discussed in § 554.1 [ Willful or Malicious Injury: § 1328(a)(4) ] § 159.7  Willful or Malicious Injury: § 1328(a)(4).

 

9  See discussion beginning at § 88.1  In General.

 

10  11 U.S.C. § 1322(b)(1) is discussed in § 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1  Power to Classify Unsecured Claims: Tests for Unfair Discrimination.

 

11  See §§ 153.1 [ Student Loans ] § 88.6  Student Loans, 155.1 [ Driving While Intoxicated ] § 88.8  Driving, Boating or Flying while Intoxicated and 156.1 [ Claims That Are or Might Be Nondischargeable Only in a Chapter 7 (Chapter 12, or Individual Chapter 11) Case ] § 88.10  Claims That Are or Might Be Nondischargeable Only in a Chapter 7 (Chapter 12, or Individual Chapter 11) Case.

 

12  11 U.S.C. § 1322(a) and (b), discussed in §§ 151.1 [ Priority Claims ] § 87.4  Priority Claims, 441.1 [ New and Changed Treatment of Priority Claims ] § 73.6  Treatment of Priority Claims Changed by BAPCPA and 460.1 [ New Priority Claims ] § 87.5  Priority Claims after BAPCPA.

 

13  See § 73.3  Priority Claims Added or Changed by BAPCPA, § 87.5  Priority Claims after BAPCPA, § 88.5  Domestic Support Obligations Assigned or Payable to Government: § 1322(a)(4) after BAPCPA,  § 136.21  Domestic Support Obligations after BAPCPA and § 159.5  Domestic Support Obligations: § 523(a)(5).

 

14  11 U.S.C. § 507(a)(10), discussed in §§ 440.1 [ New and Changed Priority Claims ] § 73.3  Priority Claims Added or Changed by BAPCPA and 522.1 [ The New DWI Priority ] § 136.22  The Driving or Boating while Intoxicated Priority after BAPCPA.

 

15  See §§ 98.1 [ Plan Must Provide Full Payment ] § 73.1  Plan Must Provide Full Payment and 100.2 [ Interest Not Required, with Exceptions ] § 73.5  Interest Not Required, with Exceptions.

 

16  11 U.S.C. § 1322(b)(10), discussed in § 459.1 [ Postpetition Interest on Nondischargeable Claims: § 1322(b)(10) ] § 88.3  Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10).

 

17  See §§ 345.1 [ Alimony, Maintenance or Support ] § 158.1  Alimony, Maintenance or Support and 346.1 [ Student Loans ] § 158.2  Student Loans.

 

18  See § 459.1 [ Postpetition Interest on Nondischargeable Claims: § 1322(b)(10) ] § 88.3  Postpetition Interest on Nondischargeable Claims after BAPCPA: § 1322(b)(10).

 

19  See 11 U.S.C. § 1322(a)(4), discussed in § 458.1 [ Domestic Support Obligations Assigned or Payable to Government: § 1322(a)(4) ] § 88.5  Domestic Support Obligations Assigned or Payable to Government: § 1322(a)(4) after BAPCPA.

 

20  See 11 U.S.C. §§ 507(a)(1)(B), 523(a)(5) and 1328(a)(2), discussed in §§ 519.1 [ Domestic Support Obligations ] § 136.21  Domestic Support Obligations after BAPCPA and 552.1 [ Domestic Support Obligations: § 523(a)(5) ] § 159.5  Domestic Support Obligations: § 523(a)(5).

 

21  See §§ 153.1 [ Student Loans ] § 88.6  Student Loans and 155.2 [ Long-Term Debts ] § 88.9  Long-Term Debts.