§ 89.10     A Proposal: Simpler Rules for Classification of Unsecured Claims
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 89.10, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

The cases struggling to apply the unfair-discrimination test in § 1322(b)(1)1 prove that this area of Chapter 13 practice has become too complicated. The classification cases are hopelessly fact bound. Similar facts produce conflicting conclusions about what is or isn’t unfair across districts and among the judges within the same district. But classification of unsecured claims is an increasingly important tool for designing Chapter 13 plans.2 The courts need new perspective on the classification of claims in Chapter 13 cases.

[2]

There is a voice of reason in this wilderness. Professor Douglass Boshkoff at Indiana University School of Law has suggested the following rules to determine whether a proposed classification of unsecured claims is unfair discrimination under § 1322(b)(1):3

Rule 1: A debtor’s proposal concerning the classification of unsecured claims should be accepted as long as it represents a plausible decision with regard to the debtor’s personal or business obligations.
Rule 2: During the first 36 months of a plan, separate classification and favored treatment of insider or nondischargeable claims should not be permitted except with respect to claims that are nondischargeable under §§ 523(a)(5) (alimony and support) or 1328(a)(3) (restitution).
Rule 3: Between months 37 and 60 of a plan, separate classification and favored treatment of insider and nondischargeable claims should be permitted.
[3]

Professor Boshkoff’s rules are premised that bankruptcy courts should defer to debtor choices concerning classification of unsecured claims if there is a credible explanation that is not corrupted by preference for insiders or nondischargeable claims. During the first 36 months of a plan—the minimum period for payments typically required by the disposable income test4—a debtor’s separate classification of unsecured claims would be entitled to deference, not unlike the “business judgment rule” that has developed to test a debtor’s decision whether to assume or reject an executory contract under § 365.5 However, during the first 36 months, favorable treatment of insider or nondischargeable claims would not be allowed except for alimony, maintenance or support under § 523(a)(5)6 and restitution described in § 1328(a)(3).7 After 36 months, because the debtor is under no statutory compulsion to pay unsecured claim holders, debtors should have greater discretion to favor even insider and nondischargeable claim holders through extended payments under the plan.8

[4]

Professor Boshkoff’s proposed rules are an attractive alternative to the four-part test and other tests offered in the case law.9 Special treatment of alimony and support claims during the first 36 months is a reasonable accommodation of the needs of dependents and former spouses and acknowledges that a debtor’s failure to pay support may result in state court action that disrupts payments to all creditors. Favored treatment of restitution claims during the first 36 months may keep the debtor out of jail and at work so that funding the plan is possible for the benefit of all creditors. Other nondischargeable claims—for example, a student loan—are not entitled to favored treatment during the first 36 months of the plan but could be favored with larger or continuing payments after 36 months.

[5]

There is much logic to this construct. Professor Boshkoff’s proposal deserves attention from the courts searching for better classification rules in Chapter 13 cases.


 

1  See discussion beginning at § 87.1  Power to Classify Unsecured Claims: Tests for Unfair Discrimination.

 

2  New statutory exceptions to discharge in Chapter 13 cases contribute to the increased pressure for classification of claims. See discussion beginning at § 88.1  In General.

 

3  D. Boshkoff, Rethinking the Treatment of Unsecured Claims in Chapter 13 Proceedings (Apr. 1993) (unpublished manuscript, Federal Judicial Center). Professor Boshkoff’s suggestions are used here with permission. Any errors in translation are strictly the fault of this author.

 

4  See §§ 163.1 [ In General ] § 91.1  In General, 166.1 [ Counting the Three-Year Period ] § 91.5  Counting the Three-Year Period and 199.1 [ General Rule: Three Years, More or Less ] § 112.1  General Rule: Three Years, More or Less.

 

5  See § 172.1 [ Debtor Can Assume, Assign or Reject Executory Contracts ] § 102.1  Debtor Can Assume, Assign or Reject Executory Contracts.

 

6  See §§ 152.2 [ Alimony, Maintenance and Support ] § 88.4  Alimony, Maintenance and Support and 345.1 [ Alimony, Maintenance or Support ] § 158.1  Alimony, Maintenance or Support.

 

7  See §§ 154.1 [ Restitution, Fines and Other Criminal Problems ] § 88.7  Restitution, Fines and Other Criminal Problems and 348.1 [ Criminal Restitution and Criminal Fines ] § 158.4  Criminal Restitution and Criminal Fines.

 

8  See, e.g., In re Thibodeau, 248 B.R. 699, 707 (Bankr. D. Mass. 2000) (Plan paying student loan arrearages in full as part of curing default under § 1322(b)(5) fails unfair-discrimination test because the debtor could propose plans that do not discriminate against the non–student loan claims. “Alternatively, the Debtor could propose a plan which provides that for the first 36 months all payments would be devoted to all unsecured claims, and that for the remaining 24 months payments would be devoted solely to the student loans.”); In re Williams, 231 B.R. 280, 283 (Bankr. S.D. Ohio 1999) (Court would consider a plan that pays criminal restitution debt equally with other unsecured debt during the first 36 months with some special treatment after 36 months. “[T]he Trustee has suggested that the debtor consider paying the restitution claim at the same rate as unsecured creditors for the first three years and then pay the claim in full over the next two years. If the probation authorities would be satisfied by such substantial compliance with the restitution order, this court suggests that it would consider granting confirmation of such an alternative plan.”); In re Strickland, 181 B.R. 598, 599 (Bankr. N.D. Ala. 1995) (“A general unsecured creditor has a right to expect no more than three years of the debtor’s disposable income being used to fund a plan. . . . It will be this court’s policy to allow nondischargeable student loans to be paid as a general unsecured creditor on a pro rata basis for the first 36 months of the plan. The remaining 24 months of the plan may be devoted solely to the payment of the student loan.”). Contra In re Sullivan, 195 B.R. 649, 657 (Bankr. W.D. Tex. 1996) (In re Strickland, 181 B.R. 598, 599 (Bankr. N.D. Ala. 1995) “seem[s] to miss the point of sections 1322(d) and 1325(b). The purpose behind these sections is not to prevent a debtor from extending his plan to provide a greater payout to creditors. The purpose is to prevent debtors from stretching the same payout over a longer period unless the court finds ‘cause’ to allow the debtor two extra years. . . . Strickland . . . [presumes] that the question of unfair discrimination applies only to the first thirty-six months of the plan. The statute itself, however, draws no such distinction.”).

 

9  See § 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1  Power to Classify Unsecured Claims: Tests for Unfair Discrimination.