§ 88.1 — In General

Revised: June 7, 2004

[1]

The separate classification of nondischargeable claims raises difficult questions and has produced many conflicting reported opinions. “Nondischargeable claims” take several forms in Chapter 13 cases.

[2]

Since the enactment of the Bankruptcy Code, alimony, maintenance and support claims described in § 523(a)(5) have been nondischargeable in Chapter 13 cases.1 “Long-term” debts with respect to which the plan cures default and maintains payments under § 1322(b)(5) are not discharged for the obvious reason that the balance will be paid by the debtor after completion of payments to other creditors under the plan.2 Postpetition consumer debts described in § 1305(a)(2)3 are not dischargeable “if prior approval by the trustee of the debtor’s incurring such debt was practicable and was not obtained.”4

[3]

In 1990, Congress added three new exceptions to discharge in Chapter 13 cases: educational loans described in § 523(a)(8);5 debts for death or personal injury caused by operation of a motor vehicle under the influence of alcohol or drugs;6 and restitution included in a sentence on the debtor’s conviction of a crime.7 In 1994, Congress added criminal fines included in a sentence on the debtor’s conviction of a crime.8

[4]

There are obvious incentives for a Chapter 13 debtor to separately classify for payment in full any claim that is nondischargeable. Debts for alimony, maintenance, support, student loans, drunken driving, restitution and criminal fines will remain personal obligations of the debtor after completion of payments to other creditors.9 Most Chapter 13 debtors aim to emerge from their cases owing only the balances on long-term debts that have been rehabilitated under § 1322(b)(5).10

[5]

But the (reasonable) desire of debtors to pay nondischargeable claims in full during the plan is not necessarily consistent with the (reasonable) expectations of dischargeable claim holders. If the debtor is financially unable to pay all unsecured claims in full, the debtor will have to separately classify the nondischargeable claims for more favorable treatment. The separate classification of nondischargeable claims will be measured against the unfair-discrimination standard in § 1322(b)(1).11

[6]

The fairness of separate classification of nondischargeable claims has produced an immense body of case law.12 Some courts have categorically rejected the separate classification of nondischargeable claims, reasoning that personal liability of the debtor is preserved by the Code, but the Code specifies no additional entitlement during the case. Other courts generally approve the favorable classification of nondischargeable claims on the theory that it is a “rational” and “reasonable” discrimination from the debtor’s standpoint: otherwise, the debtor’s fresh start is diminished. Many reported decisions fall somewhere between these two positions. These other courts consider the nondischargeable character of a debt as one factor bearing on the fairness of discrimination and, on the facts of individual cases, sometimes approve separate classification.

[7]

Public policy considerations overlay and sometimes obscure the analysis of unfair discrimination in this debate. For example, the policy arguments that support the favorable classification of child support claims are difficult to apply when the nondischargeable claim separately classified by the debtor is a student loan.13 The content of this debate changed again in Chapter 13 cases filed after October 22, 1994, because the 1994 Act amended § 507(a)(7) to make most alimony, maintenance and support debts priority claims entitled to full payment under § 1322(a)(2).14

[8]

And then there are many claims that are nondischargeable under § 523(a) of the Code in an individual Chapter 7, Chapter 11 or Chapter 12 case that are dischargeable upon completion of payments in a Chapter 13 case. In particular, the so-called fraud exceptions to discharge in § 523(a)(2), (a)(4) and (a)(6) apply to individual debtors in Chapter 7, Chapter 11 or Chapter 12 but are not exceptions to discharge in a Chapter 13 case at completion of payments under the plan.15 Many courts have determined that the nondischargeability of a claim in an individual Chapter 7, 11 or 12 case is relevant to the fairness of discrimination in a Chapter 13 case with respect to the classification of claims.16 Creating some confusion, many courts have also held that the treatment of claims that would be nondischargeable in an individual Chapter 7, 11 or 12 case is a factor bearing on the debtor’s good faith at confirmation under § 1325(a)(3).17

[9]

These cases send conflicting messages. Some courts seem to be saying that Chapter 13 debtors should favor nondischargeable claim holders to demonstrate good faith for purposes of § 1325(a)(3). To do so, in a Chapter 13 case in which the debtor is financially unable to pay all unsecured claim holders in full, the debtor must separately classify the claims that would be nondischargeable in a Chapter 7 case. But it is fundamental that a Chapter 13 debtor can discharge many claims that would not be dischargeable in a Chapter 7, 11 or 12 case—indicative of congressional intent that nondischargeability under another chapter is not controlling of appropriate treatment of claims in a Chapter 13 case. To convert the legislative choice to permit broader discharge in a Chapter 13 case into a rule that penalizes the general unsecured by requiring favorable classification of select dischargeable claims is a distortion of basic Chapter 13 principles. The cases addressing the fairness of favorable classification of claims that would be nondischargeable in a Chapter 7, 11 or 12 case are in disarray and are not easily reconciled with the cases addressing the related good-faith questions at confirmation.18


 

1  11 U.S.C. § 1328(a)(2); (c)(2). See § 345.1 [ Alimony, Maintenance or Support ] § 158.1  Alimony, Maintenance or Support. In Chapter 13 cases filed after October 22, 1994, alimony, maintenance and support debts described in § 507(a)(7) are also priority claims entitled to full payment under § 1322(a)(2). See §§ 98.1 [ Plan Must Provide Full Payment ] § 73.1  Plan Must Provide Full Payment, 99.1 [ What Claims Are Priority Claims? ] § 73.2  What Claims Are Priority Claims?, 291.1 [ Treatment of Priority Claims ] § 136.1  Treatment of Priority Claims and 301.1 [ Alimony, Maintenance and Support in Cases Filed after October 22, 1994 ] § 136.20  Alimony, Maintenance and Support in Cases Filed after October 22, 1994. The debts for alimony, maintenance and support that are nondischargeable in a Chapter 13 case under §§ 1328 and 523(a)(5) are not precisely coextensive with the alimony, maintenance and support claims entitled to priority under § 507(a)(7). See §§ 99.1 [ What Claims Are Priority Claims? ] § 73.2  What Claims Are Priority Claims?, 301.1 [ Alimony, Maintenance and Support in Cases Filed after October 22, 1994 ] § 136.20  Alimony, Maintenance and Support in Cases Filed after October 22, 1994 and 345.1 [ Alimony, Maintenance or Support ] § 158.1  Alimony, Maintenance or Support.

 

2  11 U.S.C. § 1328(a)(1); (c)(1). See § 351.1 [ Long-Term Debts ] § 158.7  Long-Term Debts.

 

3  See §§ 204.1 [ Providing for Postpetition Claims ] § 113.6  Providing for Postpetition Claims and 302.1 [ Postpetition Claims ] § 137.1  Postpetition Claims before BAPCPA.

 

4  11 U.S.C. § 1328(d). See §§ 204.1 [ Providing for Postpetition Claims ] § 113.6  Providing for Postpetition Claims, 302.1 [ Postpetition Claims ] § 137.1  Postpetition Claims before BAPCPA and 350.1 [ Postpetition Claims ] § 158.6  Postpetition Claims.

 

5  11 U.S.C. § 1328(a)(2), as amended by Pub. L. No. 101-508, 104 Stat. 1388 (Nov. 5, 1990). See § 346.1 [ Student Loans ] § 158.2  Student Loans.

 

6  11 U.S.C. § 1328(a)(2), as amended by Pub. L. No. 101-581, 104 Stat. 2865 (Nov. 15, 1990), and Pub. L. No. 101-647, 104 Stat. 4916 (Nov. 29, 1990). See § 347.1 [ Driving While Intoxicated ] § 158.3  Driving while Intoxicated.

 

7  11 U.S.C. § 1328(a)(3), as amended by Pub. L. No. 101-581, 104 Stat. 2865 (Nov. 15, 1990), reenacted, Pub. L. No. 101-647, 104 Stat. 4789 (Nov. 29, 1990). See § 348.1 [ Criminal Restitution and Criminal Fines ] § 158.4  Criminal Restitution and Criminal Fines.

 

8  See 11 U.S.C. § 1328(a)(3), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 302, 108 Stat. 4106 (1994). See § 348.1 [ Criminal Restitution and Criminal Fines ] § 158.4  Criminal Restitution and Criminal Fines.

 

9  See discussion of nondischargeable debts beginning at § 158.1  Alimony, Maintenance or Support

 

10  See § 351.1 [ Long-Term Debts ] § 158.7  Long-Term Debts.

 

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

 

12  See discussion beginning at § 88.2  Nondischargeable Claims after BAPCPA.

 

13  See §§ 152.2 [ Alimony, Maintenance and Support ] § 88.4  Alimony, Maintenance and Support and 153.1 [ Student Loans ] § 88.6  Student Loans.

 

14  See §§ 99.1 [ What Claims Are Priority Claims? ] § 73.2  What Claims Are Priority Claims? and 301.1 [ Alimony, Maintenance and Support in Cases Filed after October 22, 1994 ] § 136.20  Alimony, Maintenance and Support in Cases Filed after October 22, 1994.

 

15  See § 344.1 [ Broadest Discharge Available ] § 157.1  Broadest Discharge Available. The fraud exceptions to discharge in 11 U.S.C. § 523(a)(2), (a)(4) and (a)(6) are applicable in a Chapter 13 case when the debtor seeks a discharge before completion of payments under the plan. See § 354.1 [ Exceptions to Hardship Discharge ] § 160.6  Exceptions to Hardship Discharge before BAPCPA.

 

16  See § 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.

 

17  See discussion beginning at § 106.1  In General.

 

18  See §§ 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) Caseand 187.1 [ Separate Classification of Nondischargeable Claims and Good Faith ] § 106.5  Separate Classification of Nondischargeable Claims and Good Faith. See also Professor Boshkoff’s proposed new rules for classification of unsecured claims in § 159.1 [ A Proposal: Simpler Rules for Classification of Unsecured Claims ] § 89.10  A Proposal: Simpler Rules for Classification of Unsecured Claims.