§ 101.4 — Curing Default and Maintaining Payments on Unsecured Debt
Revised: June 7, 2004
Section 1322(b)(5) permits Chapter 13 debtors to cure default and maintain payments “on any unsecured claim . . . on which the last payment is due after the date on which the final payment under the plan is due.”1 Although § 1322(b)(5) is most often used to manage long-term secured debts such as home mortgages,2 many courts have recognized that the section also authorizes curing default and maintaining payments on long-term unsecured debts.3 There are few situations in which it will be to the debtor’s advantage to maintain the original terms of an unsecured debt.
Unsecured claims generally can be modified under § 1322(b)(2).4 If the debtor is unable to pay an unsecured claim in full during the plan, the unpaid balance will be discharged at the completion of payments, unless the claim is nondischargeable in the Chapter 13 case. Unsecured claims that are nondischargeable in a Chapter 13 case upon completion of payments under the plan include alimony, maintenance and support,5 educational loans described in § 523(a)(8),6 restitution and fines included in a sentence on the debtor’s conviction of a crime7 and claims for personal injury or wrongful death arising from operation of a motor vehicle while intoxicated.8 Of these claims, educational loans and marital support are most likely to have a last payment due after the date on which the final payment is due under the plan. Nondischargeable, long-term, unsecured claims for support or an educational loan are candidates for treatment under § 1322(b)(5).
A Chapter 13 plan that treats an unsecured claim as a long-term debt under § 1322(b)(5) contains a separate classification for purposes of § 1322(b)(1). The unfair-discrimination test in § 1322(b)(1) applies to determine the propriety of curing default and maintaining payments on the unsecured debt.9 Long-term treatment of an unsecured claim under § 1322(b)(5) typically has the effect of paying postpetition interest to the claim holder—interest that is not allowable under § 502(b)(2) and payment of which is likely to provoke objection to confirmation from less-favored unsecured claim holders.10
There are many reported decisions struggling to determine the fairness of using § 1322(b)(5) to manage unsecured student loans.11 Student loans often have repayment periods that commence months or years after some future event such as graduation or leaving school. Student loan contracts are almost always unsecured, and most call for payments over more than three years. Debtors want to pay nondischargeable student loans with postpetition interest according to the contract during the plan to avoid accumulating a large unpaid interest charge that will survive discharge.
There are a few reported decisions in which Chapter 13 debtors have used § 1322(b)(5) to manage an unsecured marital debt. In In re Dorf,12 the debtor owed an ex-spouse $33,800 for prepetition maintenance arrears and an ongoing postpetition monthly alimony payment of $3,300. The obligation to make monthly payments would expire two years into the plan. The debtor proposed to use § 1322(b)(5) to stretch out the two years of alimony over the five years of the plan. The bankruptcy court found the plan was an impermissible use of § 1322(b)(5):
[U]nder 1322(b)(5), a debtor can maintain current payments and cure any prepetition arrears through the bankruptcy plan, but can do so only on long term debts. In this case, the final fixed maintenance payment is due February 1, 1999, and the final payment under the Proposed Plan is anticipated sometime in the next century. Thus, Debtor does not qualify for relief under § 1322(b)(5).13
One reported decision allows a Chapter 13 debtor to use § 1322(b)(5) to manage a long-term unsecured debt that would otherwise be dischargeable at the completion of payments under the plan. In In re Ford,14 the debtor caused a prepetition automobile accident, and the victim’s insurance company paid damages. To regain his driving privileges, the debtor agreed to reimburse the insurance company $9,819 by executing a note payable in monthly installments of $50, with the last payment due in April 2012. The plan classified the insurance reimbursement for long-term treatment under § 1322(b)(5).
The bankruptcy court first found “no reason why the unsecured debt at issue in this case cannot be classified as a long-term debt under § 1322(b)(5).”15 The Chapter 13 trustee argued that use of § 1322(b)(5) to manage dischargeable unsecured debts would lead to abuse. The bankruptcy court found this unlikely: “Because § 1322(b)(5) debts are made nondischargeable by § 1328(a)(1), there is, at best, a remote possibility that today’s ruling will spurn legions of debtors on to classify credit card debt in such a way.”16 The court then set the following requirements for the use of § 1322(b)(5) to manage unsecured debt:
First, the debtor’s Chapter 13 plan must classify the debt as a “Special Class Unsecured” debt. Second, the Chapter 13 plan may do only two things: (1) provide for the ongoing monthly payments due under the contract and (2) cure any pre-petition arrearage within a “reasonable time.” . . . Because a debtor electing to classify a debt under § 1322(b)(5) is not entitled to accelerate the payments due under the contract . . . . [a]ny payments above and beyond the $50.00 monthly installment due under the contract must be applied towards the arrearage.17
The bankruptcy court in Ford was influenced to allow use of § 1322(b)(5) because long-term treatment actually increased the percentage of repayment of other unsecured claims through the plan by decreasing the portion of the insurance reimbursement debt that would actually be paid during the life of the plan.
Ford mentions the downside to using § 1322(b)(5) to manage long-term unsecured debt. As detailed elsewhere,18 claims provided for under § 1322(b)(5) are excepted from discharge upon completion of payments by § 1328(a)(1). There is no exception in § 1328(a)(1) for unsecured debts or special circumstances.
In contrast, not all educational loans are nondischargeable in Chapter 13 cases. The section that makes student loans nondischargeable in Chapter 13 cases—§ 1328(a)(2)—incorporates § 523(a)(8) of the Code. Section 523(a)(8) contains an exception—student loans are dischargeable if excepting the student loan from discharge would “impose an undue hardship on the debtor and the debtor’s dependents.”19
If a Chapter 13 debtor provides for a student loan (or any debt) under § 1322(b)(5), the debt is excepted from discharge by § 1328(a)(1) and the exception to the exception in § 523(a)(8) is not applicable. Put another way, a Chapter 13 debtor who cures default and maintains payments on a long-term student loan under § 1322(b)(5) probably forfeits the opportunity to argue that excepting the student loan from discharge would be an “undue hardship” to the debtor.
Loss of the undue hardship exception to nondischargeability in § 523(a)(8) is significant in a Chapter 13 case because the debtor will not become eligible for discharge for three to five years. Circumstances can change a great deal during that time. Use of § 1322(b)(5) to manage the student loan during the life of the plan may forfeit the debtor’s right to argue the exception in § 523(a)(8) later in the Chapter 13 case.
A majority of courts have held that the power to cure default and maintain payments on unsecured debt in § 1322(b)(5) is permissive, not mandatory: a contract calling for payments beyond the life of the plan does not require the debtor to use § 1322(b)(5).20 A few reported decisions have denied confirmation of plans based, in whole or in part, on the debtor’s failure to provide for an unsecured educational loan by curing default and maintaining payments under § 1322(b)(5).21
Section 1322(b)(3) permits a Chapter 13 plan to “provide for the curing or waiving of any default.”22 This power is not limited to any particular kind of debt and can be used to rehabilitate an unsecured debt when the shorter term of the contract does not allow use of § 1322(b)(5). Any unsecured claim provided for under § 1322(b)(3) that is not otherwise modified by the plan would be paid in full consistent with its contract through the plan. This will rarely be the debtor’s best choice because the typical unsecured consumer debt contract includes interest and payment terms that are not favorable to the debtor. Except in the rare plan paying all unsecured debt in full with interest, treatment of an unsecured debt under § 1322(b)(3) would be a difficult classification to justify under the unfair-discrimination standard in § 1322(b)(1).23 Perhaps § 1322(b)(3) could be used to separately classify a nondischargeable student loan with a remaining contract term shorter than the length of the plan for payment in full according to contract terms (with interest?).24
1 11 U.S.C. § 1322(b)(5) (emphasis added).
2 See discussion beginning at § 81.1 Overview: General Rules for Saving Debtor’s Home.
3 See, e.g., In re Ford, 221 B.R. 749, 752 (Bankr. W.D. Tenn. 1998) (“[N]o reason” why long-term unsecured debt to an insurance company “cannot be classified as a long term debt under § 1322(b)(5).”); In re Dorf, 219 B.R. 498, 502 (Bankr. N.D. Ill. 1998) (“[U]nder 1322(b)(5), a debtor can maintain current payments and cure any prepetition arrears through the bankruptcy plan, but can do so only on long-term debts.” Monthly obligation for support would be fully satisfied before the last payment under the plan and thus did not fall within § 1322(b)(5).); In re Benner, 156 B.R. 631, 633 (Bankr. D. Minn. 1993) (“By its express terms, section 1322(b)(5) also applies to both secured and unsecured debt.”).
4 See § 104.1 [ The Power to Modify ] § 74.11 The Power to Modify. Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L. Ed. 2d 228 (1993), may require an exception to this general rule when a creditor has a lien on real property that is the debtor’s principal residence but is also an unsecured claim holder because the value of the property is insufficient to support the entire lien. See § 118.1 [ Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman ] § 79.1 Most Home Mortgages Cannot Be Modified: § 1322(b)(2) and Nobelman.
5 See § 345.1 [ Alimony, Maintenance or Support ] § 158.1 Alimony, Maintenance or Support.
6 See § 346.1 [ Student Loans ] § 158.2 Student Loans.
7 See § 348.1 [ Criminal Restitution and Criminal Fines ] § 158.4 Criminal Restitution and Criminal Fines.
8 See § 347.1 [ Driving While Intoxicated ] § 158.3 Driving while Intoxicated.
9 See § 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1 Power to Classify Unsecured Claims: Tests for Unfair Discrimination.
10 See § 155.2 [ Long-Term Debts ] § 88.9 Long-Term Debts.
11 See § 153.1 [ Student Loans ] § 88.6 Student Loans.
12 219 B.R. 498 (Bankr. N.D. Ill. 1998).
13 219 B.R. at 502.
14 221 B.R. 749 (Bankr. W.D. Tenn. 1998).
15 221 B.R. at 752.
16 221 B.R. at 752.
17 221 B.R. at 753–54.
18 See § 351.1 [ Long-Term Debts ] § 158.7 Long-Term Debts.
19 11 U.S.C. § 523(a)(8).
20 Education Assistance Corp. v. Zellner, 827 F.2d 1222 (8th Cir. 1987) (Section 1322(b)(5) is permissive, not mandatory. Chapter 13 debtor is permitted to cure the default and maintain payments on a student loan but has the option to provide for a percentage repayment and partial discharge. Student loan guarantor cannot force debtor to treat student loan as a long-term obligation.). Accord Homebanc v. Chappell (In re Chappell), 984 F.2d 775 (7th Cir. 1993) (Chapter 13 debtor has discretion whether to use § 1322(b)(5) to cure defaults and maintain payments on a long-term obligation. This debtor permissibly chose not to use § 1322(b)(5) but instead to accelerate the second mortgage and pay it in full during the life of the plan, some 19 years before the contract term.); In re Ward, 129 B.R. 664 (Bankr. W.D. Okla. 1991) (When debtor’s plan proposed to pay entire amount of mortgage within the term of the plan, debtor could not be forced to cure defaults under § 1322(b)(5).); In re Winthurst, 97 B.R. 457 (Bankr. C.D. Ill. 1989); In re Hill, 96 B.R. 809 (Bankr. S.D. Ohio 1989) (Section 1322(b)(5) is but one method of managing a home mortgage. If debtor is able to pay the allowed amount of the mortgage holder’s secured claim in full during the life of the plan, then debtor can decline to treat the mortgage holder under § 1322(b)(5) and simply pay the allowed amount of the mortgage in full during the life of the plan under § 1325(a)(5)(B).); In re Gronski, 65 B.R. 932 (Bankr. E.D. Pa. 1986) (Debtor has choice to cure the default on a HEAL loan but need not do so.); In re Ali, 63 B.R. 591 (Bankr. E.D. Wis. 1986); In re Akin, 54 B.R. 700 (Bankr. D. Neb. 1985); In re Peterson, 53 B.R. 339 (Bankr. D. Or. 1985).
21 See § 153.1 [ Student Loans ] § 88.6 Student Loans. See, e.g., In re Newberry, 84 B.R. 681, 684 (Bankr. E.D. Cal. 1988) (It is bad faith justifying denial of confirmation for debtor to fail to provide for treatment of student loans as long-term debts to be maintained during the plan. “Such a confirmable plan would pay off his educational loans in full and make the funds loaned to [the debtor] available for future needy students.”); In re Doersam, 60 B.R. 130 (Bankr. S.D. Ohio 1986), aff’d, 849 F.2d 237 (6th Cir. 1988) (Student loan is a long-term debt because it is payable over a period of not less than five years under 34 C.F.R. § 682.507(b). Debtor’s failure to propose long-term treatment for student loan is one ground for denial of confirmation.); In re Geehan, 59 B.R. 600 (Bankr. S.D. Ohio 1986) (Court denies confirmation and orders debtor to classify student loan, to pay the arrearage on the student loan in full during the life of the plan, and to make the regular monthly payments under the plan.).
22 11 U.S.C. § 1322(b)(3). See § 115.1 [ Curing Default, Waiving Default, Maintaining Payments and Combinations ] § 78.4 Curing Default, Waiving Default, Maintaining Payments and Combinations for discussion of the use of § 1322(b)(3) to manage secured claims.
23 See § 149.1 [ Power to Classify Unsecured Claims: Tests for Unfair Discrimination ] § 87.1 Power to Classify Unsecured Claims: Tests for Unfair Discrimination.
24 See §§ 115.1 [ Curing Default, Waiving Default, Maintaining Payments and Combinations ] § 78.4 Curing Default, Waiving Default, Maintaining Payments and Combinations and 153.1 [ Student Loans ] § 88.6 Student Loans.