vermont bar association seminar materials 62nd mid-year meeting bankruptcy … · 2019. 3. 18. ·...

Vermont Bar Association

Seminar Materials

62nd Mid-Year Meeting

Bankruptcy and Student Loans

March 22, 2019

Lake Morey Resort

Fairlee, VT

Speakers:

Heather Cooper, Esq.

Melissa Ranaldo, Esq.

Todd Taylor, Esq.

Marc Webb, Esq.

http://www.escribers.net

Educational Lending and Bankruptcy: What Every Attorney Wants to Know

Student Loans Generally and a Borrower’s Options in Chapter 13 (40 minutes)

• Current scourge of student loans and how to deal with them inside and outside of bankruptcy

• What is an “educational loan” under the bankruptcy statute [11 USC §523(a)(8)]

• The high hurdle for discharging a student loans in a bankruptcy case, set by In re: Brunner, 831 F.2d 395, 396 (2d Cir.1987)

o The possibility of a partial discharge of student loan debt in bankruptcy

• How to deal with student loan debts that cannot be discharged under In re Brunner: dealing with student loan debt in Chapter 13 bankruptcy cases, as a general unsecured claim

o Separate classification of student loans in Chapter 13 plan o Payment of student loans outside the Chapter 13 plan

Lenders’ Treatment of Student Loans During a Chapter 13 Case (10 minutes)

• What happens with student loans, on the lender’s side, during a Chapter 13 case? o Does interest accrue? How about penalties? o What is the consequence of a debtor not paying student loans during the

pendency of a Chapter 13 plan? o What about if the debtor makes only partial payments during the plan?

▪ Balance due could be higher when the Debtor completes ch 13 plan Treatment of a Borrower’s Pre-Bankruptcy Payments on a Student Loan (15 minutes)

• How to spot potential problems with a client’s payment of student loan debt prior to a Chapter 7 bankruptcy filing

• Can such payments be recovered by a Chapter 7 trustee as a preference?

• What constitutes a preferential payment and what does not? o Are payments the borrower made for their own educational loans at risk? o What about payments borrower made on loans for their children’s

education – are they at risk too? Federal Student Loan Rules; Discharge Options in and out of Bankruptcy (25 minutes)

• Federal Student Loan Programs – basics and loan characteristics

• Federal Student Loan Repayment Programs – Focus on IDR

• Federal Student Loan Administrative Discharges – Focus on TPD (Total and Permanent Disability) Discharge

• Treatment of Federal Student Loans in Chapter 13 Plans – Plan terms possibly permitting continued payments under income-based repayment plans

Student Loans Generally and a Borrower’s Options in

Chapter 13

By Todd Taylor, Esq.

A. Current scourge of student loans and how to deal with them inside and

outside of bankruptcy

Student Loan debt is a scourge. It has and will prevent Millennials and

Generation-X persons from being able to afford their first house, from

being able to marry, from being able to save, from being able to enjoy their

relative youth worry-free and stress free. It wrecks credit. It destroys

health. It also affects older Americans - even Baby Boomers - who have

helped out their kids with Parent-Plus Loans - who now are unexpectedly

facing high student loan payments themselves as they are looking

retirement squarely in the face and perhaps undergoing health challenges

that older Americans have to endure. And, sure enough, probably the next

generation of students - Generation Z - will feel the bloody tentacles of

student loan debt impale them.

It seems that there are not enough high-paying white collar jobs to employ

all these persons and pay them a wage to sustain themselves and still be

able for them to make their student loan payments. And these jobs appear

to be in tech, information systems, and science-based areas. Liberal arts

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majors, art history majors, those doctoral students who love and have

studied Diderot and Kant and Voltaire and Shakespeare and Erasmus and

Michelangelo and Leonardo and have attained the pleasure of pure

intellectual accomplishment and scholarship, are going to be in deep trouble

finding high-paying jobs to service their student loans.

Check out these numbers, my colleagues, from various sources:

$1.56 trillion in total U.S. student loan debt

44.7 million Americans with student loan debt

11.5% of student loans are 90 days or more delinquent or are in default

Average monthly student loan payment (among those not in deferment):

$393

Median monthly student loan payment (among those not in deferment):

$222

About 3.4 million Parent PLUS borrowers owe $87 billion. (Yes, billion.)

That’s about 6% of all outstanding federal student loans. What’s more, the

new data show that parent default rates are on the rise, and repayment is

slowing.

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The outlook is even worse for minority students or those students who

have both undergraduate and graduate debt, which could approach 200k or

more for a four-year plus education.

If any parents in the audience are starting to get nauseous thinking about

this, I stole some airline throw-up bags for you if you need one, lol.

Democrats have promised student loan relief, but for that to happen we

need a Democratic President and a Democratic House and a Democratic

Senate , or at least a filibuster proof Democratic Senate where cloture can

be invoked and a Democratic House even with a Republican President

whose inevitable veto can be over-ridden.

Republicans have abandoned their basic classic conservative principles and

have turned into profligate trickle down spenders, none of which spending

has been earmarked for student loan relief but for the usual fat cats, and

certainly nothing has tricked down to students - the future and youth of this

country.

And what can happen if a person defaults on student loans: Well, really bad

stuff: And it can occur if you go to really bad schools, or internet schools,

and get promised the world by the school administrators, and false high job-

placement rates, but get instead get a pig in a poke, and you end up getting

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a worthless degree. And I am talking to you out there, Trump University

alums. What bad stuff can happen: Here you go -

1. The Treasury Offset Program can seize tax refunds;

2. Your Social Security benefits can be partially seized;

3. Collection agencies and their attorneys can garnish your wages;

4. Your credit report gets whacked every missed student loan payment ,

virtually undoing your bankruptcy fresh start;

5. Federal, state, or local governments placing a tax lien on your house,

making borrowing against your house well-nigh impossible.

Thus, my friends, we bankruptcy lawyers might become the first line of

defense . So it is important we understand what we can do to help these

poor souls in a bankruptcy filing with large student loan debt.

If a Brunner partial or full discharge is not likely ( Brunner to be discussed

in detail below ) , your duty is to advise your clients that after their

bankruptcy discharge, they must get their student loan house in order so

negative marks don’t hit credit and ruin their fresh start. At the very least,

if student loan payments are crushing them, and they have some disposable

income in their Schedules I and J, and otherwise meet the requirements of

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Chapter 13, they can file a Chapter 13, which essentially freezes the

student loan contractual payments for three to five years and stops

collection efforts. But all the contractual obligations, and any interest,

payments, and attorney’s fees if the student loan contract allows them, all

come back after the Chapter 13 bankruptcy is discharged as they continue

to accrue during the life of the Chapter 13.

According to studentloanhero.com,1 these are the most common non-

bankruptcy methods to deal with student loans for persons struggling to pay

them:

Income-Based Repayment (IBR)

Pay As You Earn Repayment (PAYE)

Revised Pay As You Earn (REPAYE)

Income-Contingent Repayment (ICR)

Standard repayment

(For most borrowers, an income-driven repayment plan maximizes the

amount you’ll have forgiven and lower your monthly payments).

1https://studentloanhero.com/featured/the-complete-list-of-student-loan-forgiveness-programs/

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Also, there have been class -action lawsuits against student loan servicers

such as Navient, so always check your servicer in Google to see if they are

party to any class -action lawsuits that might provide legal relief on the

student loans. You should also get a notice in the mail with deadlines you

must be cognizant of in order to participate in the action.

B. What is an “Educational Loan” under the bankruptcy statute {11

U.S.C. §523 (a)(8)

11 U.S.C. §523 (a) ( Exceptions to Discharge )

(8) unless excepting such debt from discharge under this

paragraph would impose an undue hardship on the debtor and

the debtor’s dependents, for—

(A)

(i) an educational benefit overpayment or loan made, insured, or

guaranteed by a governmental unit, or made under any program funded in

whole or in part by a governmental unit or nonprofit institution; or

(ii) an obligation to repay funds received as an educational benefit,

scholarship, or stipend; or

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(B) any other educational loan that is a qualified education loan, as defined

in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a

debtor who is an individual;

This statue is very broad. It covers virtually any educational benefit

conferred on a student or a student’s parents or a co-debtor. It covers

private loans, traditional student loans, loans the school directly makes to

you to attend, Parent-Plus loans, an unfulfilled educational benefit, stipend

or scholarship ( as where a student-athlete, let’s say, quits and walks off the

team ). Thus, it is much broader than just student loans. Thus, section (A)

of the statute is quite self-explanatory and has a plain meaning. It certainly

would include most every and all federal student loan or state student loan,

such as VSAC loans.2

These educational benefits and loans come in all varieties, to wit:

Direct Subsidized Loans are for students with demonstrated financial need,

as determined by federal regulations. There is no interest charged while an

undergraduate student is in school at least half-time, during deferment (a

period when loan payments are temporarily postponed), or during grace

2https://www.salliemae.com/college-planning/student-loans-and-borrowing/compare-federal-vs-private-loans/federal-student-loans/

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(the period, usually six months after you graduate or leave school, before

you begin to make principal and interest payments).

Direct Unsubsidized Loans are federal student loans that aren’t based on

financial need. Your school determines the amount you can borrow based

on the cost of attendance and other financial aid you receive. Interest is

charged during all periods and will be capitalized (when unpaid interest is

added to a student loan’s principal amount), even when you’re in school,

during grace, and deferment periods. This increases your total federal loan

cost.

Direct PLUS Loans are unsubsidized credit-based federal loans for parents of

dependent students and graduate/professional students. PLUS loans can

help pay for education expenses up to the cost of attendance (the amount

of money your school estimates you’ll need to attend there one year), after

your other financial aid is exhausted. Interest is charged during all periods

and will be capitalized. This increases your total federal loan cost.

Thus, most student loans the bankruptcy practitioner will see will be

covered under the statute.

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It gets tricker when the practitioner is dealing with private student loans,

and a more detailed analysis is needed to determined if covered under the

statute.

Section (B) of the statute is really about private student loans, and this is

more complicated. According to the The Tate Blog: 3

“Private student loans from the bank deserve a more nuanced analysis since (B) “as

definded in section 221(d)(1) of the Internal Revenue Code of 1986 “ is where private

student loans receive their protections. , and it goes through a very thorough analysis of

when a private student loan qualifies under this section and when it does not, to wit:

Many private student loans won’t be able to meet the first two types of protected debt.

That’s because many private loans are made by private for-profit banks. Sallie Mae. JP

Morgan Chase. Charter One. Etc.

Likewise, a loan isn’t a conditional grant or scholarship. So private student loans aren’t

protected by the third type of protected education related debt.

That leaves just the fourth type of protected debt:

Any other educational loan that meets section 221(d)(1) of the Internal Revenue Code of

1986 definition of a qualified educational loan. Qualified education loans under 221(d)(1)

of the Internal Revenue Code of 1986 Section 221(d)(1) of the Internal Revenue Code of

1986 defines a qualified education loan as: any indebtedness incurred by the taxpayer

solely to pay qualified higher education expenses. That definition leads us to ask what

3(https://tateesq.com/student-loans-internal-revenue-code-1986/)

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expenses are considered as qualified higher education expenses? Answering that question

causes us to turn to § 221(d)(2), which defines a qualified higher education expense as: the

cost of attendance at an eligible educational institution. Both cost of attendance and

eligible educational institution are terms of art that are defined in other statutes.

Cost of attendance

To define cost of attendance we have to leave the Internal Revenue Code and go to the

Education Code. Specifically, we need to visit 20 U.S.C. § 1087ll.

Instead, section 10877ll greets us with a legion of extensions that define cost of attendance

for all types of students. Students who attend full-time or part-time. Students who attend

via correspondence or while incarcerated. Students with dependents. Students with

disabilities.

Section 221(d)(1) of the Internal Revenue Code of 1986 has a lot of parts.

Cost of attendance means the costs as determined by an institution for tuition and fees,

books, supplies, transportation, miscellaneous personal expenses, and room and board.

Eligible educational institution

The IRS defines eligible educational institution rather simply as:

a school offering higher education … [that is] eligible to participate in a student aid program

run by the US Department of Education.

The student aid program the definition is referring to is Title IV of the Higher Education

Act. Title IV funding covers Pell Grants, Direct Loans, FFEL loans, Perkins Loans, etc.

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.

If the loan is a private student loan made by a for profit lender — Sallie Mae’s Tuition

Answer Loan for example — then it is protected from discharge only if it is a qualified

education loan.

If the private student loan exceeded the cost of attendance at your school, then it is not a

qualified education loan. If your school could not get Title IV funding when you borrowed

the private student loan, then the loan is not a qualified education loan.

The first if/then statement tells us which subsection of 11 U.S.C. § 523(a)(8) the private

student loan is potentially protected from discharge under. The second and third if/then

statements helps us determine whether the loan meets the requirements of § 221(d)(1).

Namely, is the loan considered a qualified education loan.”

Thus, simply put: Don’t assume every private student loan is going to be a

considered an educational loan or benefit under 11 U.S.C. §523(a)(8) and

understand that various statutes and regulations are involved. They have to

be closely analyzed and the loan documents gone through line-by-line.

C. The high hurdle for discharging a student loan in a bankruptcy case,

set by In re Brunner, 831 F.2d 395,396 (2d. Cir. 1987)

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Under Brunner, in order for a debtor to have his or her student loans

discharged as an undue hardship, the debtor must establish:

(a) that the debtor cannot maintain, based upon his or her current income and

expenses, a “minimal” standard of living if forced to repay the student loans

(the “minimal standard”);

(b) that additional circumstances exist indicating that this state of affairs is

likely to persist for a significant portion of the loan repayment period (“future

prospects”);

and

(c) that the debtor has made a good faith effort to repay the student loans

(“good faith”). Id. at 396.

Under this Bankruptcy District’s Vezina decision ( see below for summary of this

case ),

“It is the debtor's burden to prove each of the three prongs of the Brunner test. In re Lehman,

226 B.R. 805, 808 (Bankr.D.Vt.1998). The debtor must prove his or her case by a

preponderance of the evidence. In re Maulin, 190 B.R. 153 (Bankr.W.D.N.Y.1995); see also

Elmore v. Massachusetts Higher Educ. Assist. Corp. (In re Elmore), 230 B.R. 22, 26 (Bankr. D.

Conn.1999). If a debtor cannot satisfy each and every prong of the Brunner test, he or she is

not entitled to a hardship discharge. Williams v. New York State Higher Educ. Servs. Corp. (In

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re Williams), 296 B.R. 298, 302 (S.D.N.Y.2003) (quoting Pennsylvania Higher Educ.Assistance

Agency v. Faish (In re Faish ), 72 F.3d 298, 306 (3d Cir.1995)); see also In re Thoms, 257 B.R.

144, 148 (Bankr.S.D.N.Y.2001); Lehman, 226 B.R. at 808. The determination of undue hardship,

by nature, is case and fact-specific. See, e.g., Maulin, 190 B.R. at 156. Further, “[a]

determination of whether a student loan debt falls under the hardship provision of § 523(a)(8)[ ]

for discharge is discretionary with the Bankruptcy Judge.” In re Lohman, 79 B.R. 576, 580

(Bankr. D. Vt.1987).

It is instructive to look how Judge Brown has decided these cases during her

twenty-year tenure to provide insight for the practitioner.

Summary of Judge Brown’s Brunner decisions4 INCLUDING HER DECiSION ON PARTIAL

DISCHARGE ( I have highlighted in red key phrases from the decisions)

In re Clare Creek Kelsey ,( Adv. Pro. # 00-1034, Oct. 23, 2001 )

Applying the three-prong Brunner test, and the Court stating that it closely

scrutinizes claims for undue hardship based upon psychological or emotional

disability and whether these claims are subject to fabrication, exaggeration or

fraud, and the Court further stating that substantiated expert testimony is

essential as well as the demeanor and credibility of the witness in testifying, and

the Court finding that the debtor presented credible evidence for failure to

4Simply go to this Bankruptcy District’s website, go to the Judges’ Opinions, and type“Brunner” into the search engine , and you will pick up all of these cases

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tender payments on her student loan obligations based on the fact she had

experienced confusion as to who was the true holder of those obligations,

the Court found for the Debtor and discharged the student loans.

In re Christopher Bolen, (Adv. Pro. #00-1060, Oct. 8, 2003)

Applying the three-prong Brunner test, where the debtor had income

fluctuation, child support, and had to pay another student loan, and the

Court analyzing Brunner’s requirement of not only the current inability to

pay but also additional, exceptional circumstances strongly suggestive of

continuing inability to pay over an extended period of time, and holding

that an additional example of an additional circumstance impacting the

Debtor’s future earnings would be illness, disability, or becoming liable for

other dependents, and even though the Debtor did not present any new,

exigent circumstances, the Court was persuaded at that prong 2 was met

because for a 10 year period the Debtor has not been able to find a job in

his legal field for which he was trained and had to accept low- level, low-

paying positions, and concluding that good faith is a moving target that must

be tested in light of the circumstances of the Debtor, the Court found prong

3 was satisfied of good faith by Debtor communicating with the student loan

company, wrongly but sincerely believed the student loans were no longer

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due because of a prior bankruptcy filing, and the Defendant not responding

to the Debtor’s letter, the court did find good faith even though he never

sought a deferment or consolidation, and the court emphasizing that

Debtor’s conduct and how he dealt with the student loans prior to the filing

would be a consideration in the good faith prong of the Brunner test.

In re Kirsten Lee Waters ,(Adv. Pro. #06-1013, Dec. 2, 2007)

Applying the three-prong Brunner test, a young Debtor on social security

disability, the Court denied her relief for discharge because her schedules I

and J and her testimony was not enough for the “minimum standard” of the

Brunner test; and as to the prong 2 future prospects test, the debtor failed

to present medical evidence to prove that her emotional and physical

condition provided an inability to pay over an extended period of time,

which is a component of when hardship is “undue”; in dicta, the Court held

as to prong 3 that the Court will assess good faith based on the Debtor’s

efforts to obtain employment, maximize income and minimize expenses,

and stated that an indicia of good faith would be when a debtor seeks out

loan consolidation options. The debtor failed in this prong too because she

provided no documentation that she ever made a payment, presented no

evidence by way of documentation in terms of requesting a deferment or

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forbearance, and spent her money in such a way that also belied good faith

when she received an SSDI arrears payment of $13,000 and used none of it

toward her student loans.

In re Barbara L. Vezina ,(Adv. Pro. #03-1025, Dec. 6, 2004)

Applying the three-prong Brunner test, a case involving yours truly and our

esteemed and award - winning AUSA Melissa Ranaldo5 the Court found all

three prongs to have been met because an examination of debtor’s income

and expenses showed that she could prove the “minimum standard”

component because she was age 57 who suffers from chronic and

debilitating ailments was unable to work for more than 30 hours per week,

and these circumstances in total showed an example of an additional

circumstance impacting Debtor’s future earnings such that she would not be

able to pay her student loans at any point in the foreseeable future that

will last through the loan repayment period; the good faith test prong was

proven because her prior conduct in which she made payments on her

student loans that totaled half of the original principal amount.

In re Veronica D. Reed (Adv. Pro. #04-1025, June 13, 2005)

5Ms. Ranaldo recently received a professional award of excellence for her efforts as acivil litigator in the Office of the United States Attorney.

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Applying the three-prong Brunner test, the Court only partially discharged

the debtor’s loans finding authority under Section 105 of the Bankruptcy

Code for a partial discharge, saying that the Debtor could afford to pay back

$9,000 of her loans with a $45,000 balance based on an analysis that the

debtor would be able to reduce her expenses even though the debtor

satisfied the first two prongs of the test and also the Court relying heavily

on the fact that although the debtor provided evidence of her current

disability that she presented no evidence that she will be disabled from

working at any particular point in the future.

In re Paula Mary Powers, (Adv. Pro. #05-1054, Aug. 4, 2006)

In a case involving a request for summary judgment by a debtor apparently

suffering from end- stage renal disease, the summary judgment was denied

due to failure of proof (medical record form unauthenticated) and broad

sweeping testimony and not particular enough as to her future medical

expense and her future employability demonstrated that there were

material issues of fact that required a trial.

In re Pedro J. Flores ,(Adv. Pro. #02-1066, Nov. 5, 2003)

In a case involving yours truly the Court adopted the holding of Hood v

Tennessee Student Assistance Corp. (In re Hood), 319 F.3d 755(6th Cir.

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2003) , the Court finding that the Defendant did not have sovereign

immunity, citing public policy considerations underlying the fresh start that

the Bankruptcy Code provides and analyzing and adopting the Hood analysis

of the Seminole Tribe Case as applied to bankruptcy6

In re James F. King, III, (Adv. Pro. #05-1061, May 11, 2007)

Applying the three-prong Brunner test, the debtor, a PTSD victim, and

extremely well- educated, going through enormous life challenges including

a divorce and having to live at home with his family, all of whom suffered

from various illnesses, and after hearing evidence from the debtor’s

treating psychiatrist that his disorder will be life -long and that he would not

be able to ever obtain the kind of employment that would enable him to pay

his student loans and to live independently the Court applying the essence

Brunner’s rationale that the debtor showed “unique” or “exceptional”

circumstances in his current situation that would clearly limit his ability to

earn a living and to repay his loans. It is important to note , the Court said,

that certainty of hopelessness is not required and is rejected in order to

meet the second Brunner prong. The second prong requires evidence not

on the certainty of hopelessness but on the current inability to pay and

additional exceptional circumstances suggestive of continuing inability to

6 See Seminole Tribe vs Florida 517 U.S .44 (1996).

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pay over an extended period of time. The Court also seemed to apply to

the good faith prong a totality of circumstances standard regarding the

debtor’s efforts to maximize income, minimize expenses and repay the

student loans.

In re Educational Credit Management Corp. v. Christopher J. Welton (Adv.

Pro. #01-1037, Sept. 9, 2003)

The Court held that the debtor cannot discharge a student loan by ambush,

by placing a clause into the Chapter 13 Plan, as that violates due process.

An Adversary Proceeding is required by the debtor to discharge any student

loan. It should be noted that Judges Murtha and Sessions have reached the

same conclusion is U.S. District Court opinions.

In re Patricia Jo Braine (Adv. Pro. #10-1026, March 16, 2012)

Applying the three-prong Brunner test, in a case where the monthly student

loan payment exceeded debtor’s net monthly income and where there were

additional exceptional circumstances that she can no longer work as a

photographer or videographer due to her disabilities, and where she had

numerous other medical issues, and where the doctor testified that she

would be limited on how much she could work into the future, and where

debtor did make some payments pre-petition and consolidated her student

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loans, and did look for work within her functional capacities, that the

debtor met all three prongs of the Brunner test.

In re Santamassino, (Adv. Pro. #06-1037, Aug. 23, 2007)

Applying the three-prong Brunner test, in a case where the debtor filed an

affidavit showing that her expenses exceeded her income and where the

defendant did not attempt to contest that affidavit, where the doctor

submitted an affidavit as to the debtor’s mother’s medical situation as to

her Parkinson’s disease that was chronic and progressive and required the

debtor to care for her mother 24/7, that situation constituted additional

and exceptional circumstances to satisfy the second prong of Brunner, and

the third prong of Brunner was satisfied where it was shown pre-petition

debtor made payments on her student loans, sought a forbearance

agreement from the lender and has sold a lot of her property just to pay her

basic monthly expenses that was enough to satisfy the “good faith” prong of

Brunner. The Court specifically held that the mother was a dependent of

the Debtor for the purposes of the Brunner test as the term dependency

was not defined in the Bankruptcy Code.

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In re Congdon, 06-1034 AP 06-1034 (Adv. Pro. #06-1034, March 29, 2007)

This case is noteworthy for the Court finding admissible the ALJ’s Notice of

Social Security Disability Decision under 803(8)(C) of the Federal Rules of

Evidence, but noting :

“Having found that the ALJ’s Decision is admissible, the Court must now determine how much

weight to accord the document. The Court concludes that the Decision is entitled to limited

weight because the issues and standards involved in Congdon’s Social Security proceeding are

wholly distinct from the issues and standards applicable to this proceeding. The question before

the ALJ was whether Congdon met the definition of “disabled” under the specific Social

Security Administration regulations. The ALJ had before him a variety of medical opinions that

he assessed pursuant to those regulations.4 Here, by contrast, the Court must determine

whether the Plaintiff’s medical condition represents exceptional circumstances suggestive of a

“continuing inability to repay [student loans] over an extended period of time.” Brunner, 831

F.2d at 396. In other words, the debtor’s disability must be long-term, if not permanent, and

severe to the extent that it will substantially impede the debtor’s ability to repay his or her

student loans( emphasis supplied). This Court had none of the documents before it that the ALJ

had before him.

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OVERVIEW OF COURT’S BRUNNER OPINIONS - What Can Be Learned

We have learned a lot from these opinions. They are your road map to

success for your client. Let’s summarize:

First Prong: As regards your client’s income and expenses, make sure they

are accurate, reasonable and can be defended with back up documentation.

Obviously, too, the income needs to be accurate. The case is helped

immeasurably if the debtor has attempted to reduce her expenses and

otherwise juggled in order to pay her student loans, or took some other

steps to get her finances in order prior to the filing of the bankruptcy

petition. Expenses will need to exceed income for this prong to be satisfied

and that basic living expenses cannot be met and still pay student loans.

{Also, I would use http://livingwage.mit.edu/states/50/locations which gives

what a living wage is for each county in Vermont. This could be very helpful

in establishing what is the “minimal standard of living” in the applicable

locale. }

Second Prong: The future prospects prong, although you don’t have to

show hopelessness, you do have to show additional and exceptional

circumstances or exigencies such as illness, disability, taking care of others

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http://livingwage.mit.edu/states/50/locations

or some other exigency severe enough to last long into the future. THIS

REQUIRES EXPERT MEDICAL OPINION EVIDENCE . A debtor’s testimony alone

about her medical condition will not be enough since she is not a medical

doctor or the treating physician. What she said the doctor told her to prove

the truth of her medical condition won’t work either ( HEARSAY 101 ). To

lower costs of medical testimony, stipulate with the other side to introduce

medical records and agree to a video tape deposition of the doctor at his or

her medical office that can be used substantively at trial, as that would be

much less expensive than having the doctor testify at Court. This, too, will

require medical testimony. And if you really want to impress the Judge,

overwhelm the other side, and get to Lawyer Heaven and fork out a few

thousand dollars for a Functional Capacity Evaluation. A functional capacity

requires a vocational rehabilitation or disability evaluation expert to

evaluate an individual's capacity to perform work activities related to his or

her skills and past employment based upon the person’s medical history and

level of disability, and what jobs that person may be eligible to perform

within those parameters based upon the local job market, and how much

these qualifying jobs would pay. Also, be prepared to authenticate and use

life-expectancy tables if you have an older client.

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Third Prong: You have to get your ducks in a row on this. If your client

made pre-petition payments to the student loan company, get copies of the

cancelled check; if there were deferments or forbearances, get a copy of

those documents. Get a copy of all communications by the debtor to the

student loan company, agency, or servicer, including e-mails. If there were

an attempt to find better employment and make more money to meet

expenses or to make the student loan payments, try to get a copy of the

employment applications. If the debtor made lifestyle adjustments in order

to increase disposable income, like moving into a smaller apartment to save

on rent, be prepared to prove that. This is all evidence of good faith to pay

required by this prong. If the Court believes that your client is lazy or a

malingerer, you are going to lose. If you think those issues are present in

your case, have your client prepared to address them but ATTEMPT TO FIX

THAT PERCEPTION PRIOR TO THE FILING OF THE ADVERSARY PROCEEDING .

Lastly, under Reed, a half of loaf is better than none of the loaf. Don’t give up looking at

the discharge issue for younger persons who are not necessarily disabled but have

additional and arguably exigent circumstances such as other kids to put through college,

and will have other Parent-Plus loans to sign, making their debt even after a bankruptcy

discharge very high; in such a case, I can see an argument for partial discharge of the past

loans. Be creative - argue not just for a partial discharge of principal, but also the

discharge of interest and penalties.

Page 24

REMEMBER, THE BANKRUPTCY COURT IS ESSENTIALLY A COURT OF

EQUITY AND EQUITABLE PRINCIPLES WERE THE FOUNDATION OF ITS

CREATION.

D. How to Deal with Student Loan Debts that Cannot be Discharged

Under In re Brunner: dealing with student loan debt in Chapter 13

Bankruptcy Cases, as a general unsecured claim

One option is the pro rata payment of student loans with other allowed

general unsecured claims, which we can call the Standard Option.

There are those cases in which a person just can’t pay her student loan

debt. She has been struggling for years. Her income just doesn’t support it.

And she is being threatened with aggressive collections, or garnishments,

or worse. That’s where Chapter 13 comes in. At the very least, the

automatic stay will prevent any more harm to the debtor that has been

occurring.

In the most straightforward Chapter 13 case, the Standard Option as I call it,

she will get five years of relief. Her student loan debt will be paid pro rata

with her other general unsecured debt, so, for example, in a reductionist

example, if she has a one credit card of $5000 and one student loan debt of

$5000, each creditor will receive the same dividend based upon her

monthly disposable income or the above-Median Test number she must pay

Page 25

in. If she passes the Means Test ( a.k.a. below- Median ) , then her Schedule

I and J disposable income controls; if she fails the Means Test ( a.k.a. above-

median ) , the Means Test number will control. The Plan has to be for 60

months or until the total Plan amount is satisfied in full if she fails the

Means Test; or no less than 36 months or no greater than 60 months if she

passes the Means Test.

My practice is to keep a debtor in a Chapter 13 for 60 months if the student

loan debt is just going to be unmanageable well into the future, so the

debtor has five years of relief and no worry about her student loans. But

you have to emphasize that this is only a temporary solution since when the

Plan ends and the case is discharged, the student loans, being non-

dischargeable, will rear their ugly heads with all accrued interest and

penalties and maybe attorney’s fees, and she will then have to work out a

payment plan, or a consolidation loan, or one of the other options to deal

with student loan debt outside of bankruptcy ,or just start paying under the

terms of the original contract once the discharge enters, or hope that

Congress has stepped in during that time and passed legislation to help

debtors with unmanageable student loan debt.

Page 26

I. This District’s Approach to Student Loans in Chapter 13 and Separate Classification

Thanks to the assistance of Judge Brown and Trustee Sensenich who were kind enough to

respond to an inquiry as to the Court’s approach to student loans and Chapter 13 in cases

already decided and not before the Court,7 the author was able to have special insight the

writing of this section .

According to our esteemed Trustee Sensenich, he has seen a Chapter 13 case confirmed

where the student loan debt was paid outside the Plan per the contractual terms8 and

inside the Plan the general unsecured creditors received a 100% dividend. And after I

wrote this last sentence, like right on cue, confirming Trustee Sensenich’s on point

prescience, Judge Brown’s Law Clerk Eric O’Connor sent out this email on April 6,

2019: 9

Per Clerk O’Connor’s email:

“... there is an order just filed today (3.6.19) approving the Debtor's direct payments to student

loan servicers, as a permissible separate classification which does not constitute unfair

discrimination under 11 U.S.C. § 1322(b)(1). The Debtor listed the payments in Section 5.2 of

her chapter 13 plan. She also attached a letter from servicer Great Lakes, explaining the

7This response by Judge Brown and Trustee Sensenich proved very helpful becauseconfirmed cases involving student loans often do no not involve written opinions, so the onlymethod to ascertain the operating legal principles and approach was through the kind consideration of their response.

8This is quite an unusual construct because traditionally all unsecured debt has to be paidinside the Plan.

9See Chapter 13 Plan, Findings and Order, Affidavits, and Motion to Pay Directly, and Order in theRebecca M. White case, 18-10503, ( Bankr. D. VT. Order Entered March 6, 2019 )

Page 27

treatment of borrower accounts when the borrower files for bankruptcy. This represents

another way in which Debtors in Vermont may treat student loan debt (when notice is proven

and best interest of all creditors can be shown). In this case, the Debtor reached out directly to

the loan servicers, those servicers did not object to the plan, and the Debtor's plan provided

100% to general unsecured creditors.

In other words, this is the construct where the student loans are direct paid

outside the Plan and general unsecured creditors are paid inside the Plan . This

saves the debtor money, too, since the debtor is not paying the Trustee’s

statutory commission on payments made outside the Pan, that commission

anywhere generally between 8 and 10% on the dollar: so substantial savings to the

debtor potentially.

The beauty of this Chapter 13 Plan construct is that at the end of the

Chapter 13 case, the Debtor will be current in her student loan payments. If the

student loan payments were paid inside the Plan, then they would be subject to

the Trustee’s statutory commission, which just reduces what is ultimately paid to

the student loan creditors. Also, depending upon how and when the Trustee

disburses it may mean late payments could accrue on the student loans or

additional interest.

So, the trick is, but the income has to be there, is to try to devise a Plan

that pays student loan creditors directly outside of the Plan and pay enough to the

Page 28

GUCS under the best interest test 10 without violating the unfair discrimination

prohibition.

Judge Brown kindly weighed in on separate classification in an e-mail dated

March 1, 2019, and since she can say it and explain it much better than I, I quote

her verbatim:

“The question of separate classification of student loans in ch 13 plans has not come up very often in

this District, and typically I have resolved any question about this issue at the confirmation hearing,

without separate written order. Thus, it is hard to point you to cases or give you a definitive response

about whether I have permitted separate classification of student loans in plans where the debtor paid

less than 100% to her creditors.

But, my recollection is that I have approved ch 13 plans where

(1) the debtor was eligible to file a 36 month plan;

(2) the debtor filed a plan for a term longer than 36 months;

(3) the debtor's plan proposed to pay holders of allowed general unsecured claims at least the higher

of

(a) amount the creditors would have received in chapter 7, or

(b) the debtor could otherwise pay, by devoting all their NMI to the plan over a 36 month term; and

(4) the debtor makes the "extra" payments to the student loan creditor during months 37 et seq .

In this way, the student loan creditors are separately classified, they get paid more than other general

unsecured creditors but there is no unfair discrimination because they get this higher dividend only if

10The "best interest of creditors test" of 1325(a)(4) -- also informally known as "theliquidation test" -- requires that unsecured creditors in a Chapter 13 case be paid at least as muchthrough confirmation of a proposed Chapter 13 plan as they would receive if the debtor's casewere liquidated under Chapter 7 of the Bankruptcy Code.

Page 29

and after the other unsecured claims get paid the amount to which they are entitled under the best

interest test - which can be less than 100%. > I followed the rationale J Ninfo set out in In re Husted,

142 BR 72, Bankr WDNY 1992 in permitting such classification. I cannot tell you how many plans

with this type of separate classification I have confirmed but I believe there have been a few.

I have also permitted a Debtor to pay student a loan debt outside the plan if the Debtor was paying all GUS

claims in full over 5 years. See In re Cassi J. Carolson (ch 13 # 12-10589) - order entered 9/6/12 approving

separate classification. And, that question is before me again, in the case of Rebecca Moffatt White (18-

10583) where the D proposes separate classification in the form of payment of the student loans outside the

plan, with a 100% dividend on all other allowed general unsecured claims over the term of the plan.”

Thus, using the guidelines set for in the above emails, if the facts

apply, and the debtor can afford it, the debtor can pay down her student

loans in a separate classification without their being a finding of unfair

discrimination.

But clearly what is important in any construct is that there be no unfair

discrimination. Try being creative in separately classifying student loan debt

so that there is no unfair discrimination to GUCS and that the best interest of

creditors test is met, so you must be prepared to argue and defend that

position with every proposed student loan classification.

I have not found a case where Judge Brown has directly written on what

constitutes unfair discrimination In Chapter 13. But we have an idea of the

Page 30

test Judge Brown might adopt because she, in her email, mentioned the

decision of In re Husted, 142 B.R. 72 (Bankr. WDNY 1992 ). In Husted, that

Court ( in allowing a separate classification of a child support claim ) set the

test as follows:

In assessing whether a classification is unfairly discriminatory under Section 1322(b)(1), and thus whether

separate classification should be disallowed, courts have generally considered four factors:

(1) Whether there is a rational basis for the classification;

(2) Whether the classification is necessary to the debtor's rehabilitation under Chapter 13;

(3) Whether the discriminatory classification is proposed in good faith;

(4) Whether there is a meaningful payment to the class discriminated against.

(5) The difference between what the creditors discriminated against will receive as the plan is proposed, and

the amount they would receive if there was no separate classification.

Interestingly, the Husted Court went on to say this:

The fact that separately classified creditors receive more than other unsecured creditors, certainly is a form

of discrimination, but it is not necessarily unfair. Such classifications may not be unfair in some cases

because if they are not allowed, the Debtor might be forced to file under Chapter 7 and the unsecured

creditors may receive nothing. In re Kovich, 4 B.R. 403, 407 (Bankr.W.D.Mich.1980). In addition, under this

Court's "test" the discrimination will not unfairly prejudice other creditors since they will receive at least

what they would receive in a Chapter 7 liquidation, as required by 11 U.S.C. § 1325(a)(4), and more than

what they would receive if there was a single unsecured class under a three year plan using all of the

debtor's disposable income.

Page 31

What does all this tell me? It tells me separate classification of student loans

is a wide open field in this District. It is only limited by the attorney’s imagination

and the facts she has to work with. It also tells me it’s going to be a case-by-case

grind, and the jurisprudence in this area will develop over the last ten years of

Judge Brown’s term, or the next 24 years depending upon how long Judge Brown

wants to stay on the bench.

The definition of unfair discrimination above seems broad enough so that

creative Chapter 13 plans can be drafted that allow for separate classification of

student loans and perhaps a higher dividend being allowed if there are special

circumstances. My interpretation in looking at cases in other jurisdictions and

thinking about the rationale behind the unfair discrimination rule is that as long as

you put together a Chapter 13 plan with separate classification that does no undue

harm to the other unsecured creditors, then that will pass muster.

For example, what about this? : an under- median debtor in a Chapter 13

case who is obligated to pay her disposable income for 36 months creates a 60

month plan with the last 24 months only with a dividend going just to student

loan creditors. I will call this the 36/24 approach. There is arguably no harm to the

other unsecured creditors because they received only what they were entitled to

receive under a required 36 month plan even if the overall dividend to the student

loan creditors would be higher ( since they also received monies during the first 36

Page 32

months ). This might pass muster.

Other courts have allowed separate classification where the debtor could

partake of the public loan forgiveness program and write off $50,000 of her

student loan debt with the cost of discrimination to unsecured creditors of only 5%.

In re Pracht, 464 B.R. 486 (Bankr. M.D. Ga. 2012).

Another court allowed for separate classification because under state law

the debtor would have lost her professional license for defaulting on her

student loans thus preventing her from paying any other creditors; and thus

she was allowed to pay her student loan debt at a much higher dividend so

she could keep her job and the other creditors would receive something

instead of nothing. In re Kalfayan, 415 B.R. 907 (Bankr. S.D. Fla. 2009).

Another court allowed separate classification since it would allow him to get

other student loans so he could return to his college and obtain his degree

with the court citing public policy as a rationale. In re Freshly, 60 B.R. 96

(Bankr. N.D. Ga. 1987).

Other courts have found paying student loan debts first and other general

unsecured claims last as long as the allowed general unsecured claims were

paid in full. In re Foreman, 136 B.R. 532 (Bankr. S.D. Iowa 1992) .

Another court found that using other income or assets in excess of

Page 33

disposable income and to give unsecured creditors a higher dividend than

they otherwise would have received allowed the debtor to pay his student

loan in full, but struck paying interest on the student loan which is

prohibited by Section 1322b(10) absent provision to pay all allowed claims in

full. In re Stoll, 2013 WL 1279069 (Bankr. D. Kan. Mar. 27, 2013).

Another court has allowed the above -median debtor to pay more to student

loans at a higher percentage than other debt where the monthly payment

under the plan was higher than what was to be paid under the Means Test; in

other words the I & J disposable income was higher than what was mandated

under the Chapter 13 Means Test. In re Knowles, 501 B.R. 409 (Bankr. D.

Kan. 2013).

I also attach the case of In re Engen, 561 B.R.523 (Bankr. D. Kan. 2016),

a fairly recent case that reviews the whole jurisprudential landscape of

student loan classification in Chapter 13 and takes us on a ride through the

many approaches of the various Districts. This a priceless decision and a

roadmap for all of us.

Page 34

In re Husted, 142 B.R. 72 (1992)

Bankr. L. Rep. P 74,681

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

KeyCite Yellow Flag - Negative Treatment Disagreed With by In re Crawford, W.D.Wis., July 27, 2001

142 B.R. 72 United States Bankruptcy Court,

W.D. New York.

In re Eric Jon HUSTED, Debtor.

Bankruptcy No. 92–20415. |

June 5, 1992.

Synopsis

Confirmation hearing was held on debtor’s proposed

Chapter 13 plan. The Bankruptcy Court, John C. Ninfo,

II, J., held that plan did not “discriminate unfairly” merely

because it proposed to pay debtor’s nondischargeable

obligation for past-due child support in full, while paying

only 25% on other unsecured claims.

Plan confirmed.

West Headnotes (6)

[1]

Bankruptcy

Objections; Sua Sponte Determinations

Bankruptcy court has authority and duty to

examine Chapter 13 plan, even when there are

no objections to its confirmation, to ensure that

confirmation requirements have been complied

with. Bankr.Code, 11 U.S.C.A. § 1325.

Cases that cite this headnote

[2]

Bankruptcy

Classification and Discrimination

Claims may be classified into separate classes in

Chapter 13 plan, as long as plan does not

unfairly discriminate against any class so

designated. Bankr.Code, 11 U.S.C.A. §

1322(b)(1).

10 Cases that cite this headnote

[3]

Bankruptcy

Classification and Discrimination

In deciding whether Chapter 13 debtor’s

classification of claims is “unfairly

discriminatory,” so as to preclude confirmation

of plan, bankruptcy court should consider

whether there is rational basis for classification,

whether classification is necessary to debtor’s

rehabilitation, whether discriminatory

classification is proposed in good faith, whether

there is meaningful payment to class

discriminated against, and difference between

what creditors discriminated against will

received under proposed plan, and amount they

would have received if there was no separate

classification. Bankr.Code, 11 U.S.C.A. §

1322(b)(1).


[4]

Bankruptcy

Unsecured Claims

Bankruptcy court will confirm five-year Chapter

13 plan that proposes to separately classify

unsecured claims and provides different

treatment for separate classes, as long as there is

good faith rational basis for separate

classification, and if class being discriminated

against is receiving a meaningful distribution

which is greater than what would be received in

Chapter 7 proceeding or under three-year debt

adjustment plan. Bankr.Code, 11 U.S.C.A. §

1322(b)(1).


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In re Husted, 142 B.R. 72 (1992)



[5]

Bankruptcy

Unsecured Claims

Fact that separately classified creditors receive

more than other unsecured creditors under

proposed debt adjustment plan does not

necessarily mean that plan is unfair.

Bankr.Code, 11 U.S.C.A. § 1322(b)(1).


[6]

Bankruptcy

Unsecured Claims

Five-year Chapter 13 plan which proposed to

pay nondischargeable debt for past-due child

support payments in full, while paying only 25%

on other unsecured claims, did not “discriminate

unfairly” against other unsecured claims, where

other unsecured creditors received more than

they would have received in Chapter 7

liquidation and under three-year plan in which

all unsecured claims were treated alike.

Bankr.Code, 11 U.S.C.A. § 1322(b)(1).


Attorneys and Law Firms

*72 Richard D’Amanda, Rochester, N.Y., for debtor.

George M. Reiber, Chapter 13 Trustee, Rochester, N.Y.

MEMORANDUM AND OPINION

JOHN C. NINFO, II, Bankruptcy Judge.

[1] This case is before the court for confirmation of the

Debtor’s modified Chapter 13 plan which: (1) pursuant to

11 U.S.C. § 1322(b)(1) separately classifies a delinquent

child support claim and the Debtor’s other unsecured

claims; (2) proposes to pay the child support claim in full

*73 and the other unsecured creditors 25% of their

allowed claims; and (3) extends the plan for a full five

years. There were no objections by any creditors or the

Chapter 13 trustee to the confirmation of the Debtor’s

modified plan. However, the Court has the authority and

duty to examine a plan even when there are no objections

to its confirmation to insure that the requirements of 11

U.S.C. § 1325 have been complied with. Matter of

Chaffin, 836 F.2d 215, 216 (5th Cir.1988); In re Lawson,

93 B.R. 979, 981 (Bankr.N.D.Ill.1988). Even though the

Chapter 13 trustee did not object to confirmation of the

Debtor’s modified plan, he did request that the Court

issue a written decision if it decided to confirm the

modified plan, since separate classification of other than

co-debtor claims had not been previously allowed by now

retired Bankruptcy Judge Edward D. Hayes.

BACKGROUND

On February 18, 1992 the debtor, Eric Jon Husted (the

“Debtor”), filed a voluntary petition initiating a Chapter

13 case. In his schedule of liabilities, the Debtor lists a

$1,100 liability to his former spouse for delinquent child

support payments. The schedules also indicate that the

Debtor has secured debt of $1,400, priority unsecured

debt of $2,106 and general unsecured debt of $3,139, not

including the child support arrears. The plan separately

classifies the delinquent child support claim from the

other general unsecured claims and proposes 60 monthly

payments of $140 which would provide for the child

support claim to be paid in full and all other unsecured

creditors to receive 25% of their claims. If the plan had

provided for the use of all of the Debtor’s disposable

income over a three year term, all unsecured creditors,

including the child support claim, would have received

17%.

DISCUSSION

The whole purpose behind Chapter 13 is to enable the

individual “to develop and perform a plan for the

repayment of his debts.” H.R.Rep. 95–595 at 118,

U.S.Code Cong. & Admin.News 1978 pp. 5787, 6079;

Matter of Brown, 7 B.R. 529, 531 (Bankr.S.D.N.Y.1980).









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In re Husted, 142 B.R. 72 (1992)



[2] The Bankruptcy Code allows a debtor to separately

classify claims in a Chapter 13 plan and to treat the

separate classes differently to enable a debtor to

successfully perform under a plan the provisions of which

are believed to be necessary to the debtor’s overall

rehabilitation. In re Lawson, 93 B.R. 979, 984

(Bankr.N.D.Ill.1988). Section 1322(b)(1) provides that

pursuant to subsections (a) and (c) “the plan may—(1)

designate a class or classes of unsecured claims, as

provided in section 1122 of this title, but may not

discriminate unfairly against any class so designated ...”

(emphasis added). Section 1122(a) states that subject to

subsection (b) “a plan may place a claim or an interest in

a particular class only if such claim or interest is

substantially similar to other claims or interests of such

class.” In addition, Section 1322(a)(3) requires that if

claims are classified by a plan, each claim within a

particular class must be treated the same.

By allowing separate classification of debts, Congress

acknowledged that it understood that some debtors, to

insure their interest in completing the plan, obtaining a

fresh start or maintaining a decent quality of life, would

have a need to pay certain debts in full while other

creditors received a pro rata share. Payment of only a part

of these debts would prevent the accomplishment of these

stated goals and thus hinder the Debtor’s overall

rehabilitation.

The inability to retain the services

of the doctor currently providing

critical health care could lead to

ineffective treatment, devastating

the debtor’s family and possibly

rendering performance under the

plan impossible; criminal

prosecution for negotiating a

non-sufficient funds check could

have the same impact; failure to

pay child support arrearages, since

the debt is not dischargeable in

Chapter 13 (pursuant to Section

1328(a)(2)) could leave the debtor

at the completion of his plan still

substantially in debt.

*74 In re Lawson, 93 B.R. at 984. Therefore, certain

classifications were anticipated by Congress, such as

co-debtors1, child support arrears, medical debts, and

criminal restitution. Numerous courts have allowed

separate classification under a Chapter 13 plan for debts

that would otherwise be non-dischargeable under 11

U.S.C. § 523 or under 11 U.S.C. § 1328(a)(2) such as

child support or student loan obligations. Matter of

Foreman, 136 B.R. 532 (Bankr.S.D.Iowa 1992) (student

loan); Matter of Curtis, 2 B.R. 43 (Bankr.W.D.Mo.1979)

(child support); In re Storberg, 94 B.R. 144

(Bankr.D.Minn.1988) (child support); In re Whittaker,

113 B.R. 531 (Bankr.D.Minn.1990) (child support); In re

Freshley, 69 B.R. 96 (Bankr.N.D.Ga.1987) (student loan).

However, fewer courts have allowed a separate

classification for debts which may hinder the debtor in his

overall rehabilitation, such as debts to doctors or local

creditors who might not service the debtor after

completion of their Chapter 13 plan. In re Sutherland, 3

B.R. 420 (Bankr.W.D.Ark.1980) (allowed separate

classes for medical debts and credit accounts); In re Hill,

4 B.R. 694 (Bankr.D.Kan.1980) (allowed separate classes

for doctors, dentists, hospitals); In re Terry, 78 B.R. 171

(Bankr.E.D.Tenn.1987) (allowed separate classification

for small debts).

[3] In assessing whether a classification is unfairly

discriminatory under Section 1322(b)(1), and thus

whether separate classification should be disallowed,

courts have generally considered four factors:

(1) Whether there is a rational basis for the

classification;

(2) Whether the classification is necessary to the

debtor’s rehabilitation under Chapter 13;

(3) Whether the discriminatory classification is

proposed in good faith;

(4) Whether there is a meaningful payment to the

class discriminated against.

In re Kovich, 4 B.R. 403 (Bankr.W.D.Mich.1980); In re

Dziedzic, 9 B.R. 424 (Bankr.S.D.Tex.1981); In re Harris,

62 B.R. 391 (Bankr.E.D.Mich.1986); In re Davidson, 72

B.R. 384, 386–387 (Bankr.D.Colo.1987); In re Lawson,

93 B.R. 979, 982 (Bankr.N.D.Ill.1988); Mickelson v.

Leser (In re Leser), 939 F.2d 669, 672 (8th Cir.1991); In

re Saulter, 133 B.R. 148, 149 (Bankr.W.D.Mo.1991).

In addition, this Court believes that a fifth factor should

be considered as stated by the Bankruptcy Court in the

case of In re Moore, 31 B.R. 12, 17 (Bankr.D.S.C.1983):

(5) The difference between what

the creditors discriminated

against will receive as the plan is









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In re Husted, 142 B.R. 72 (1992)



proposed, and the amount they

would receive if there was no

separate classification.

Unfortunately, the court decisions applying the above

four-part test have not been consistent due to the

difficulty in applying these factors when assessing the

fairness of the discriminatory classification. In re Lawson,

93 B.R. at 982.

[4] Because of the uncertainty in application of this

four-part test this Court is prepared, in the absence of a

showing of bad faith or specific valid objections by

creditors or the Trustee2, to confirm Chapter 13 plans

which propose to separately classify unsecured claims and

provide different treatment for the separate classes when

it is clearly demonstrated that:

(1) there is a good faith rational basis for the separate

classification necessary for the Debtor’s overall

rehabilitation, especially if the debts being separately

classified would otherwise be non-dischargeable *75

under Sections 523 or 1328; and

(2) the class being discriminated against is

receiving a meaningful distribution which is

greater than would be received in a Chapter 7

liquidation and than would be received under a

three-year single unsecured class plan where all

of the Debtor’s disposable income was devoted

to the plan.

The separate classification of non-dischargeable debts,

when they are the ones in the separate class, will enable

the debtor to meet Congress’ clear policy of having these

claims paid in full, and will allow the debtor to obtain a

true “fresh start,” since the Debtor will be completely free

of his prior obligations after the plan is completed.

[5] The fact that separately classified creditors receive

more than other unsecured creditors, certainly is a form of

discrimination, but it is not necessarily unfair. Such

classifications may not be unfair in some cases because if

they are not allowed, the Debtor might be forced to file

under Chapter 7 and the unsecured creditors may receive

nothing. In re Kovich, 4 B.R. 403, 407

(Bankr.W.D.Mich.1980). In addition, under this Court’s

“test” the discrimination will not unfairly prejudice other

creditors since they will receive at least what they would

receive in a Chapter 7 liquidation, as required by 11

U.S.C. § 1325(a)(4), and more than what they would

receive if there was a single unsecured class under a three

year plan using all of the debtor’s disposable income.

[6] This simplified “test” meets all of the factors which

have been used by other courts to analyze “unfair

discrimination.” In this case, the Debtor’s proposed

modified plan satisfies the simplified “test” in that: (1)

The separate classification of a non-dischargeable debt

has a rational basis; (2) is necessary to the Debtor’s

overall rehabilitation, since he desires to pay the child

support arrears during his plan, and it will allow him to be

free from all debts once he completes the plan; (3) the

classification is proposed in good faith; there is no

evidence nor any objections before the Court that would

lead the Court to believe the plan is not; (4) there is a

meaningful 25% distribution to unsecured creditors in the

class being discriminated against which is more than they

would receive in a Chapter 7 liquidation case (25% versus

0%); and (5) more than they would receive under a

three-year plan where all of the Debtor’s disposable

income was devoted to the plan and the unsecured

creditors were treated in one class (25% versus 17%).

CONCLUSION

The Court finds that all of the requirements of 11 U.S.C. §

1325 for confirmation of the Debtor’s modified plan have

been met, and that in accordance with 11 U.S.C. §

1323(c) there is cause for and the Court approves the term

of the plan to be for five years. The Debtor’s modified

plan is confirmed.

IT IS SO ORDERED.

All Citations

142 B.R. 72, Bankr. L. Rep. P 74,681

Footnotes 1

Under the 1984 amendments, Section 1322(b)(1) was amended to permit any co-debtor debt to be treated differently.














In re Husted, 142 B.R. 72 (1992)



2

For example, as to any given plan creditors may contend that because of the term of the plan or the actual distribution of payments, on a present value basis part (2) of the test has not been met.

The absence of objections to confirmation of a plan is a relevant consideration, since it may lend equity to the debtor’s position or indicate that a creditor accepts a plan as honestly filed. Matter of Chaffin, 836 F.2d 215, 216 (5th Cir.1988).

End of Document

© 2019 Thomson Reuters. No claim to original U.S. Government Works.


In re Engen, 561 B.R. 523 (2016)


561 B.R. 523 United States Bankruptcy Court, D. Kansas.

IN RE: Mark H. ENGEN and Maureen E. Engen, Debtors.

Case No. 15–20184 |

Signed December 13, 2016

Synopsis

Background: Chapter 13 trustee objected to confirmation

of debtors’ proposed plan.

[Holding:] The Bankruptcy Court, Robert D. Berger, J.,

held that debtors’ separate classification and favored

treatment of student loans was not unfairly

discriminatory.

Objection overruled.

West Headnotes (8)

[1]

Bankruptcy

Classification and discrimination

There is no requirement that all substantially

similar claims in Chapter 13 plan be placed in

the same class nor is there a prohibition against

classifying substantially similar claims

separately. 11 U.S.C.A. §§ 1122(a), 1129(b)(1),

1322(b)(1).


[2]

Bankruptcy


Classification of claims is simply the grouping

together of claims with respect to which Chapter

13 plan proposes a common treatment, and fact

that some unsecured creditors will receive more

than others does not mean that discrimination is

unfair; each case must be decided on its own

merits. 11 U.S.C.A. §§ 1122(a), 1129(b)(1),

1322(b)(1).


[3]

Bankruptcy

Evidence

Proponent of Chapter 13 plan has burden of

proving that proposed classification is not

unfairly discriminatory. 11 U.S.C.A. §

1322(b)(1).


[4]

Bankruptcy


Debtors’ separate classification and favored

treatment of student loans in proposed Chapter

13 plan was not unfairly discriminatory; while

debtors’ proposed plan paid student loan claims

without post-petition interest prior to other

general unsecured claims, the proposed plan was

fair, as debtors’ non-student loan unsecured

creditors received a significant prepetition

dividend of 83 percent that discriminated against

the student loan claims, and the student loan

claims were long-term debts accounting for over

71 percent of their total unsecured debt. 11

U.S.C.A. § 1322(b)(1).


[5]

Bankruptcy

Educational loans

Student loan claims are presumptively

nondischargeable under the Bankruptcy Code,

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In re Engen, 561 B.R. 523 (2016)


absent a showing of undue hardship. 11

U.S.C.A. § 523(a)(8).


[6]

Bankruptcy

Protection Against Discrimination or

Collection Efforts in General; ”Fresh Start.”

Fundamental goal of the Bankruptcy Code is

allowing an honest but unfortunate debtor a

fresh start.


[7]

Bankruptcy

Equitable powers and principles

Bankruptcy Code is comprised of statutes of

equity, and the bankruptcy court is a court of

equity and should invoke equitable principles

and doctrines, refusing to do so only where their

application would be inconsistent with the Code.


[8]

Bankruptcy



Fresh start goal of Bankruptcy Code is not

absolute, and bankruptcy courts must provide

fair treatment to creditors.



*524 Teresa M. Kidd, Lenexa, KS, David A. Reed,

Kansas City, KS, for Debtors.

MEMORANDUM OPINION AND ORDER

APPROVING SEPARATE CLASSIFICATION AND

DISCRIMINATION IN FAVOR OF STUDENT

LOANS

ROBERT D. BERGER, U.S. BANKRUPTCY JUDGE,

DISTRICT OF KANSAS

Confirmation of Debtors’ Chapter 13 plan is pending

before the Court.1 William H. Griffin, the Chapter 13

trustee (Trustee), objects to confirmation and alleges

Debtors’ separate classification and favored treatment of

presumptively nondischargeable student loans is unfairly

discriminatory in violation of 11 U.S.C. § 1322(b)(1).2

The Debtors propose a plan in which student loan

creditors are paid as *525 a separate class before other

general unsecured creditors. The Court’s reference to

“separate classification” includes this favorable treatment.

The Court, having reviewed the pleadings and counsels’

arguments, overrules the Trustee’s objection. Debtors’

proposed plan satisfies § 1322(b)(1) because Debtors’

separate classification and favored treatment of student

loans does not discriminate unfairly, and the student loan

claims are substantially similar.3

VENUE AND JURISDICTION

This Court has jurisdiction over the parties and the subject

matter pursuant to 28 U.S.C. §§ 157(a) and 1334(a) and

(b), and the Amended Standing Order of Reference of the

United States District Court for the District of Kansas that

exercised authority conferred by § 157(a) to refer to the

District’s bankruptcy judges all matters under the

Bankruptcy Code and all proceedings arising under the

Code or arising in or related to a case under the Code,

effective June 24, 2013.4 Furthermore, this Court may

hear and finally adjudicate this matter because it is a core

proceeding pursuant to 28 U.S.C. § 157(b)(2)(L). The

parties do not object to venue, jurisdiction or the

Constitutional authority of this Court.

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In re Engen, 561 B.R. 523 (2016)


FINDINGS OF FACT

On February 4, 2015, husband and wife Mark Engen and

Maureen Engen (Debtors) filed for Chapter 13 relief.5

Debtors are above median income. On February 4, 2015,

Debtors filed a Chapter 13 Plan (the Initial Plan).6 On

March 13, 2015, the Trustee filed an objection to

confirmation of Debtors’ Initial Plan because: (a)

Debtors’ original Form B22C reflected negative

disposable income; (b) the Trustee requested

documentation of Debtors’ cell phone expenses; and (c)

Debtors did not sufficiently address a mortgage balloon

payment due to BMO Harris Bank (BMO).7 On April 27,

2015, Debtors amended their means test calculation.8 On

May 4, 2015, Debtors filed an Amended Chapter 13 Plan

(the Amended Plan).9 On May 5, 2015, the Trustee

objected to confirmation of Debtors’ Amended Plan.10 On

January 23, 2016, David A. Reed entered his appearance

as attorney of record for the Debtors.11 On February 5,

2016, Debtors filed a Fourth Amended Chapter 13 Plan

(the Proposed Plan).12

The Debtors’ proposed monthly plan payment is $4,983

per month, which will pay BMO Harris Bank NA (the

first mortgagee) $15,412.46 without interest on account of

its prepetition arrearage claim, $1,415.25 on account of a

post-petition arrearage, and the principal due on the note

in the amount of $115,622.99, all of which will pay the

first mortgage note in full during the five-year

commitment period.13 *526 Ocwen Financial’s second

mortgage position is stripped off under the Plan because it

is wholly unsecured; Ocwen has not filed a proof of claim

and the deadline has passed. The other secured debt paid

under the Plan is to Hyundai Capital America for an auto

loan in the amount of $34,646.87. The priority tax claims

paid through the Plan for the Internal Revenue Service

and the Kansas Dept. of Revenue aggregate $25,381.67;

in addition, Debtors owe non-priority unsecured tax

claims in the amount of $7,556.22. Nonpriority general

unsecured debt on which proofs of claim have been filed

total $91,120.30, of which $64,791.59 are student loans.

The Debtors propose to pay various administrative

expenses under the Plan, including the Trustee’s fee and

the unpaid balance on administrative priority attorney fee

claims. A summary of the proposed Plan treatment and

prepetition payments to unsecured creditors is set out

below. On February 8, 2016, Debtors filed an updated

Form 122C which shows that their average monthly

income is $12,126.00 and their monthly disposable

income is —$1,122.23.14 On February 24, 2016, the

Trustee filed an objection to confirmation of Debtors’

Proposed Plan as to the separate classification; there are

no other objections to confirmation.15

Debtors’ Proposed Plan treats student loan creditors

Navient Solutions (Navient) and the U.S. Department of

Education as separately classified creditors pursuant to §

1322(b)(1).16 The Proposed Plan provides that separately

classified student loan creditors will be paid without

post-petition interest before other general unsecured

claims. Together, the debts to Navient and the U.S.

Department of Education comprise the Student Loan

Claims. Navient’s $34,281.77 claim arises from Mark

Engen’s Direct PLUS Loan with the U.S. Department of

Education.17 Mark is a parent borrower on behalf of his

dependent son.18 The U.S. Department of Education’s

$30,509.82 claim arises from student loans originated by

Maureen Engen.19 The total balance of the Student Loan

Claims is $64,791.59.

Debtors’ Proposed Plan states that the Student Loan

Claims:

[W]ill NOT share pro rata in the

amount to be paid to general

unsecured creditors as determined

by Official Form 22C or the

liquidated value of the estate

pursuant to the “Best Interest of

Creditors” test. Special Class

Creditors will be paid pro rata with

other specially classed creditors, if

any, following payment of

administrative claims, secured

claims and priority claims in the

manner provided by this Plan.20

Creditors have filed priority claims totaling $25,381.67,

secured claims totaling $213,751.40, and general

unsecured claims *527 totaling $91,120.30. The Student

Loan Claims of $64,791.59 comprise over 71 percent of

the general unsecured claims.21 Debtors’ Proposed Plan

also states: “Pay available funds, if any, to filed and

allowed student loan claims. No available funds are

projected or anticipated.”22 Paragraph 12, titled Student

Loan Obligations, of Debtors’ Proposed Plan does not list

the Student Loan Claims or reference their listing as

separately classified creditors in paragraph 11.23 Debtors’

Proposed Plan would have paid a zero percent dividend to

Student Loan Claims and a zero percent dividend to other

general unsecured creditors—based on circumstances that

existed at the time the Proposed Plan was filed. However,

since the filing of their case, Maureen has received a

pre-tax distribution in the amount of $73,269.34 as the

beneficiary of a parent’s IRA.24 Since Maureen became

entitled to this distribution more than 180 days after the

filing of the case, then to the extent applicable, it does not

fall within the ambit of § 541(a)(5). Nevertheless, Debtors

concede that the beneficial IRA distribution is property of

the estate under § 1306, possibly freeing up assets or



In re Engen, 561 B.R. 523 (2016)


income for distribution to general unsecured claimants.25

At this point, the distribution and use of the proceeds are

not resolved. It is not necessary that it be resolved prior to

this Court’s ruling on separate classification. Regardless,

even if there were not a pending issue with regard to the

distribution, the issue as to separate classification is ripe

for adjudication since Chapter 13 debtors’ acquisition of

post-petition property or material increase in income is a

common occurrence.

The Trustee’s May 5, 2015, objection to confirmation

alleges Debtors’ separate classification of the Student

Loan Claims unfairly discriminates against general

unsecured creditors in violation of § 1322(b)(1).26 The

Trustee asserts that under Knowles,27 the nondischargeable

nature of Debtors’ student loans, without more, is

insufficient to discriminate in favor of the Student Loan

Claims.28

Debtors’ initial brief asserts the separate classification of

Student Loan Claims is fair under § 1322(b)(1).29 Debtors

voluntarily participated in a Debt Management Plan

(DMP) through Money Management International (MMI)

prior to seeking Chapter 13 relief.30 Debtors deposited

$79,445 with MMI from January 18, 2011, to November

17, 2014. MMI disbursed $78,629.98 to prepetition

general unsecured creditors.31 Debtors’ MMI Account

Summary32 indicates that, prior to filing bankruptcy, and

after interest and penalties charged by creditors during the

repayment period, the Debtors paid down their

non-student loan unsecured debts from *528 $73,884.89

to $12,192.16—a net reduction of $61,692.73 over 47

months. All of Debtors’ MMI payments went to

unsecured creditors but “[a]bsolutely none of the $79,445

went to the student loan creditors.”33

Unfortunately, Debtors’ participation in MMI’s DMP was

not all positive. Debtors did reduce their general

unsecured debt, but fell into default on their home

mortgage and note and Student Loan Claims.34 Further, to

help fund their DMP, Debtors reduced their income tax

withholdings.35 This reduction resulted in an Internal

Revenue Service priority tax claim of $22,277.0636 and a

Kansas Department of Revenue priority tax claim of

$3,104.61.37

Debtors also rely on Knowles,38 arguing that while “their

plan appears to discriminate against the other general

unsecured creditors, this treatment is not forbidden”

because § 1322(b)(1) allows discriminatory treatment so

long as a plan “does not discriminate unfairly.”39 Debtors

contend the separate classification of the Student Loan

Claims does not discriminate unfairly as “[n]early 80% of

debtors [sic] unsecured debts [excluding student loans]

were paid immediately prior to the filing of their

bankruptcy case.”40 As noted, the Court’s reference to

“separate classification” contemplates the favorable

treatment provided to the student loans in the separate

class.

*529

The Proposed Plan provides that the Student Loan Claims

will be paid in full without post-petition interest before

payment of other general unsecured claims. Under the

Kansas Form Chapter 13 Plan, “general unsecured

creditors” excludes unsecured priority claims. The MMI

payments did not pay the non-student loan general

unsecured debt in full because of the accrual of interest

and penalties during the repayment period.

ANALYSIS

A. Law

The provisions of the Code applicable to this decision are

§§ 523, 1122, 1129, 1322, and 1325.


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In re Engen, 561 B.R. 523 (2016)


Section 523(a)(8) provides:

(a) discharge under section ... 1328(b) of this title does

not discharge an individual debtor from any debt—

(8) Unless excepting such debt from discharge under

this paragraph would impose an undue hardship on

the debtor and the debtor’s dependents, for

(A)(I) an educational benefit overpayment or loan

made, insured, or guaranteed by a governmental

unit ... ; or

(ii) an obligation to repay funds received as an

educational benefit, scholarship, or stipend; or

(B) any other educational loan that is a qualified

education loan ...

Section 1122 provides:

(a) Except as provided in subsection (b) of this

section, a plan may place a claim or an interest in a

particular class only if such claim or interest is

substantially similar to the other claims or interests

of such class.

(b) A plan may designate a separate class of claims

consisting only of every unsecured claim that is less

than or reduced to an amount that *530 the court

approves as reasonable and necessary for

administrative convenience.

Section 1129(b)(1) provides:

Notwithstanding section 510(a) of

this title, if all of the applicable

requirements of subsection (a) of

this section other than paragraph

(8) are met with respect to a plan,

the court, on request of the

proponent of the plan, shall confirm

the plan notwithstanding the

requirements of such paragraph if

the plan does not discriminate

unfairly, and is fair and equitable,

with respect to each class of claims

or interests that is impaired under,

and has not accepted, the plan.

Section 1322 in pertinent part provides:

The plan—

(3) if the plan classifies claims, shall provide the

same treatment for each claim within a particular

class, ...and

(b) Subject to subsections (a) and (c) of this section, the

plan may—

(1) designate a class or classes of unsecured claims,

as provided in section 1122 of this title, but may not

discriminate unfairly against any class so designated;

...

(5) ... provide for the curing of any default within a

reasonable time and maintenance of payments while

the case is pending on any unsecured claim or

secured claim on which the last payment is due after

the date on which the final payment under the plan is

due....

Section 1325(a)(1) provides:

(a) Except as provided in subsection (b), the court shall

confirm a plan if—

(1) the plan complies with the provisions of this

chapter and with the other applicable provisions of

this title;

Under Chapter 13, a debtor uses post-petition disposable

income to pay prepetition debts under a confirmed plan

over a three- to five-year commitment period. Debtors are

above median income and propose a five-year

commitment period. While debtors must provide for

payment of priority claims under § 507 in full over the

life of the plan,41 they seldom pay nonpriority unsecured

debt in full. The Court may confirm a plan failing to pay

nonpriority unsecured debt in full if “the plan provides

that all of the debtor’s projected disposable income to be

received in the applicable commitment period beginning

on the date that the first payment is due under the plan

will be applied to make payments to unsecured creditors

under the plan.”42 Thus, confirmed plans failing to pay all

nonpriority unsecured debts retain a debt balance at the

end of the commitment period. A full compliance

discharge under § 1328(a) discharges the remaining

balance. However, a § 1328(a) discharge is subject to

exceptions, and a debtor’s liability for those debts

excepted from discharge continues after plan completion.

Student loans are one of those debts excepted from

discharge under § 1328(a).43

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In re Engen, 561 B.R. 523 (2016)


B. Discharge of Student Loans and the Undue

Hardship Test Under § 523(a)(8)

“Despite the continued growth of student loan debt,

Congress has increasingly restricted a debtor’s ability to

discharge his or her student loans through bankruptcy.”

*531 44 In 1978, Congress added § 523(a)(8), prohibiting

the discharge of federal student loans in a Chapter 7

proceeding unless they were due and owing for five years.

“Congress was primarily concerned about abusive student

debtors and protecting the solvency of student loan

programs.”45 Congress wanted “to remove the temptation

of recent graduates to use the bankruptcy system as a

low-cost method of unencumbering future earnings.”46 In

1990, Congress extended the nondischargeability

provision to Chapter 13 full compliance discharge cases

and extended the five-year waiting period to seven years.47

In 1998, a Code revision eliminated all waiting periods as

a means to discharge a student loan. In 2005, Congress

added § 523(a)(8)(B), extending nondischargeability to

private student loans—not only government-related

student loans.48 Under § 523(a)(8), student loans are

nondischargeable, “unless excepting such debt from

discharge ... would impose an undue hardship on the

debtor and the debtor’s dependents.”49

Debtors seeking a § 523(a)(8) undue hardship discharge

are required to file an adversary proceeding under Fed. R.

Bankr. P. 7001(6).50 This “bankruptcy litigation is

sufficiently expensive, and ... so demanding, that debtors

rarely even try to have student loan debt discharged.”51 In

a Chapter 13 case, debtors cannot seek an undue hardship

discharge under § 523(a)(8) until “after completion by the

debtor of all payments under the plan.”52 Clearing §

523(a)(8)’s undue hardship hurdle is challenging and

confusing for debtors because the Code does not define

what constitutes undue hardship. Courts apply a *532

variety of judicially formulated tests that are frequently

criticized by commentators because debtors “must

establish a certainty of hopelessness to achieve a

discharge.”53

For many debtors, achieving an undue hardship discharge

is an exercise in futility. In 2010, a U.S. Bankruptcy Court

found that a man suffering from diabetes and kidney

disease leading to legal blindness had not shown the

requisite certainty of hopelessness, despite the Social

Security Administration’s finding that his blindness

constituted a permanent disability.54 One bankruptcy court

noted that “hardship discharges are rarely granted other

than in the case of a debtor’s death.”55 Section 523(a)(8)

imposes harsher consequences on student loan debtors

than those debtors who hold gambling debts or abuse

most forms of consumer credit56 or, for that matter, other

debts owed to the federal government. “No other

legitimately contracted consumer loan ... is subjected to

the assumption of criminality....”57 The result is that §

523(a)(8) “renders student loan debt presumptively

nondischargeable” while other § 523(a) debts are

“presumptively dischargeable.”58 For student loan debts,

debtors must prove dischargeability as opposed to other §

523(a) exceptions which require creditors to prove

nondischargeability. Section 523(a)(8) sets a

“near-impossible burden for which reform is needed.”59

C. Chapter 13 Separate Classification and

Discrimination [1] [2]Section 1322(b)(1) is permissive and allows debtors

to designate and discriminate between unsecured creditors

in a Chapter 13 plan as provided by § 1122.60 However,

debtors may not discriminate unfairly.61 Section 1122(a)

allows the separate classification of claims that are

substantially similar. In a Chapter 11 case, § 1129(b)(1)

requires that a plan “not discriminate unfairly, and is fair

and equitable.”62 In Chapter 13, § 1322(b)(1) contains the

prohibition that the plan may not discriminate unfairly

against any class designated for separate classification.

The Code allows fair discrimination63 and in Kansas, the

Model Form Chapter 13 Plan provides for separately

classified creditors.64 *533 Section 1122(a) only requires

that “dissimilar claims not be classified together.”65

“There is no requirement that all substantially similar

claims be placed in the same class nor is there a

prohibition against classifying substantially similar claims

separately.”66 “Classification is simply the grouping

together of claims with respect to which the plan proposes

a common treatment.”67 The fact that some unsecured

creditors will receive more than others does not mean that

discrimination is unfair; “[e]ach case must be decided on

its own merits.”68

[3]Separate classification makes “Chapter 13 flexible and

more attractive to Debtors ... [and] encourage[s] debtors

to file Chapter 13 proceedings instead of Chapter 7.”69 On

motion and after notice and a hearing, bankruptcy courts

may rule on the classification of claims under Rule 3013.70

Several cases have held that the nondischargeable nature

of student loan debt is sufficient to allow separate

classification.71 “[C]ourts have allowed the separate

classification of debts that would be nondischargeable in a

chapter 7 case, reasoning that Congress itself indicated a

policy choice to distinguish such debts.”72 Public policy

also supports the separate classification of student

loans.73 Student loans adversely affect a debtor’s ability

to pay debt before and after bankruptcy. This difficulty is

amplified by the loan’s nondischargeable nature and



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In re Engen, 561 B.R. 523 (2016)


negatively impacts the economy and lenders. Failing to

allow separate classification and favorable treatment of

student loans leads to a disharmonious outcome under

the Code in which student loans are special enough not

to discharge unless the rigorous undue hardship test is

met, but not sufficiently special to separately classify.

Separate classification is proper under the Code and

student loans “can be classified separately from other

types of Schedule F nonpriority unsecured debt.”74 The

issue before the *534 Court is whether Debtors’ proposed

separate classification and favorable treatment of the

Student Loan Claims is unfairly discriminatory under §

1322(b)(1).75 Debtors bear the burden to show their

Proposed Plan passes § 1322(b)(1) scrutiny.76

D. Judicially Formulated § 1322(b)(1) Unfair

Discrimination Tests

Both Chapter 11 and Chapter 13 allow separate

classification of general unsecured debt but prohibit

unfair discrimination77 and “many courts have looked to

cases interpreting one for assistance in applying the

other.”78 Support for this analysis stems from § 1322(b)’s

specific reference to § 1122. However, unfair

discrimination should be less stringent in Chapter 13 than

in Chapter 11.79 First, in Chapter 11, voting class

gerrymandering is a concern. In contrast, in Chapter 13,

creditors do not vote and are protected by their ability to

object to confirmation of a plan without fear of waiver

from other creditors. Thus, “unfair discrimination should

be a less strict requirement in Chapter 13, to avoid giving

each creditor the power to unduly hold up confirmation.”80

Second, “the allegations of unfair discrimination [in

Chapter 11] are likely to involve very different issues than

those that arise in Chapter 13 and the results of a refusal

to confirm the plan are drastically different.”81 Chapter 13

unfair discrimination issues commonly include

nondischargeable claims while nondischargeability

infrequently affects unfair discrimination issues in

Chapter 11.82 Under § 1141(d)(2), the § 523(a) exceptions

to discharge do not apply to a non-individual Chapter 11

plan of reorganization. Finally, if confirmation is denied,

a business debtor under Chapter 11 may terminate

operations and liquidate while an individual Chapter 13

debtor cannot simply cease to exist.83 Therefore, the unfair

discrimination analysis under Chapter 13 should be more

lenient than under Chapter 11.

Within the context of Chapter 11, much of the litigation

regarding separate classification of claims arises from a

debtor’s efforts to separately classify large deficiency

claims associated with the strip down of debts secured by

commercial real estate. These efforts are seldom met with

success, *535 84 but in another aspect of Chapter 11

proceedings, it is insightful that unsecured creditors who

are critical to a debtor’s reorganization efforts are

frequently paid in order to keep the doors of a business

open.85 A Chapter 11 debtor requests this special

treatment in what are colloquially referred to as First Day

Motions.86 As a result, prepetition creditors may be paid

for prepetition debts at the onset of Chapter 11

proceedings, well before it is determined whether the

debtor-in-possession will successfully reorganize or

liquidate its assets under a plan or under a § 363 sale. It is

disconsonant to allow such relief to a Chapter 11

business, but not to allow a debtor to separately classify a

student loan debt. Chapter 11 business debtors are not

entitled to greater benefits of reorganization than Chapter

13 consumer debtors.

Cases have reached varying outcomes on whether a

Chapter 13 plan that separately classifies and provides

favorable treatment to student loan creditors is unfairly

discriminatory under § 1322(b)(1). The Code does not

define unfair discrimination and “courts have struggled to

define the limits of unfair discrimination under §

1322(b)(1).”87 Courts “have developed a variety of tests,

criticized them, and then continued to apply them.”88

“[D]ecisions have run the gamut of everything goes to

nothing is allowed.”89 It has been observed that, “a

majority of courts have reached the wrong result in a

significant percentage of the cases involving claims of

unfair discrimination” regarding debtors favoring

nondischargeable student loan claims.90 Determining

fairness is best left to the discretion of the “first-line

decision maker, the bankruptcy judge”91 and “[t]he Court

has wide discretion in determining whether proposed

discrimination is unfair discrimination.”92

A multitude of judicially created methods examine when

discrimination is unfair. The Strict Approach from

Iacovoni93 forbids any discrimination unless explicitly

authorized by the Code. Iacovoni’s specific holding was

superseded by statute.94 The Flexible Approach advanced

in Sutherland95 treats § 1322(b)(1)’s unfair discrimination

provision as requiring no more than compliance with §

1325(a)(4)’s best interests of the creditors test. However,

the Sutherland holding “effectively renders the

prohibition [against unfair discrimination] meaningless,

reading it out of the Code *536 entirely”96 and “courts

have shown no enthusiasm for this approach.”97 The

Balance Approach in McCullough98 requires the debtor to

“place something material onto the scales to show a

correlative benefit to the other unsecured creditors.”99 The

Balance Approach has not received much deference and

“fails to provide a way to consider other strong public







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In re Engen, 561 B.R. 523 (2016)


policies that may justify discriminatory treatment.”100 The

Reasonableness Approach examines whether the

proposed discrimination is reasonable.101 This test “leaves

the matter to the personal views and values of the judges

without providing any real guidance, predictability, or

consistency.”102 The Reasonableness Approach fails

because it “simply replaces the vague term ‘unfair’ with

the equally vague term ‘reasonable.’ ”103 The Bright–Line

Approach,104 Percentage of Repayment Approach,105 and

Interest of Debtor Approach106 have also attracted

minority attention. However, the Multifactor Approach is

the most common method of examining unfair

discrimination.107

The Multifactor Approach comprises factors initially

developed in Kovich.108 In approving discriminatory

Chapter 13 plans favoring a codebtor and a claim for back

rent, the Kovich court held:

Each case must be decided on its

own merits. [1] Is there a

reasonable basis for the

classification? [2] Is the debtor able

to perform a plan without the

classification? [3] Has the debtor

acted in good faith in the proposed

classifications? ... [4] Are they [the

class being discriminated against]

receiving a meaningful payment or

is the plan just a sham?109

These judicially created factors do not originate in the

Code, nor did Kovich explain their origin.110 While

Sutherland111 *537 and Iacovoni112 “attempt to read

sections of the Code out of existence or ignore them

completely,”113 the Multifactor Approach “appear[s] to

read sections into the Code.”114 Nevertheless, subsequent

decisions embraced similar factors because the

Multifactor Approach provided a way to analyze unfair

discrimination “somewhere between total whim and an

Act of God.”115 As courts applied the Multifactor

Approach, it evolved into the following Four–Part Test:

(1) whether the discrimination has a reasonable basis;

(2) whether the debtor can carry out a plan without the

discrimination;

(3) whether the discrimination is proposed in good

faith; and

(4) whether the degree of discrimination is directly

related to the basis or rationale for the discrimination.116

The Four–Part Test also elicited criticism with “wildly

disparate results” because “the test relies upon abstract,

undefined notions of reasonableness, legitimacy, and

good faith.”117 None of the tests are without detractors and

all seem too inflexible to accommodate the diversity of

cases that the Court considers. A totality of the

circumstances standard may be more appropriate.

The Tenth Circuit has not considered unfair

discrimination under § 1322(b)(1).118 Bankruptcy courts in

the Tenth Circuit have used the aforementioned Four–Part

test from Leser119 and Wolff,120 along with the Baseline

Test from Bentley.121 Bentley established the Baseline Test

which looks at whether, despite the different treatment for

each classification, the plan nevertheless offers each class

benefits and burdens equivalent to those the class would

receive under a Chapter 13 plan without separate

classification.122 The Baseline Test considers the

following principles:

(1) equality of distribution;

(2) nonpriority of student loans;

(3) mandatory versus optional contributions; and

(4) the debtor’s fresh start.123

Several courts applying the aforementioned examinations

have found the separate *538 classification of student

loan debt in Chapter 13 fair under § 1322(b)(1).124

The various tests seem too inflexible to properly reflect

the discretion that this Court has with respect to

confirmation of a Chapter 13 plan that contains a

separately classified creditor. Judge Posner acknowledged

the difficulty of establishing a test for separate

classification:

We haven’t been able to think of a

good test ourselves. We conclude,

at least provisionally, that this is

one of those areas of the law in

which it is not possible to do better

than to instruct the first-line

decision maker, the bankruptcy

judge, to seek a result that is

reasonable in light of the purposes

of the relevant law, which in this

case is Chapter 13 of the

Bankruptcy Code; and to uphold

his determination unless it is

unreasonable (an abuse of

discretion).125

Perhaps the various tests can function as a starting point

for the Court’s analysis, but none of the tests should stand

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In re Engen, 561 B.R. 523 (2016)


such were the case, then the discretion of the bankruptcy

court would be the unfortunate victim. Regardless, this

Court shall embark on analysis of the Debtor’s proposed

separate classification *539 employing the Bentley

Baseline Test. The Court will then move on to a broader

discussion of the separate classification that more

accurately contemplates the facts of this case.

E. APPLYING THE BENTLEY BASELINE TEST

SHOWS DEBTORS’ PROPOSED TREATMENT

DOES NOT DISCRIMINATE UNFAIRLY. [4]Bankruptcy courts in the District of Kansas apply the

Baseline Test when considering § 1322(b) challenges to

the separate classification of student loans.126 As a

preliminary analysis or starting point, the Court will do so

here. As discussed below, the Court does not limit its

analysis to the Bentley Baseline Test.

1. Equality of Distribution

On its face, Debtors’ Proposed Plan is

discriminatory—that is the point of separate

classification. However, the Code permits fair

discrimination.127 Here, while dividends on general

unsecured claims are unknown, should a dividend occur

during the Debtors’ Chapter 13 commitment period,

Debtors’ Proposed Plan pays the Student Loan Claims

without post-petition interest prior to other general

unsecured claims. Despite this distribution, Debtors’

Proposed Plan is fair as Debtors’ non-student loan

unsecured creditors received a significant prepetition

dividend that discriminated against the Student Loan

Claims.

MMI applied Debtors’ total voluntary payments to

Debtors’ prepetition non-student loan unsecured debt in

the amount of $78,629.98.128 Non-student loan unsecured

creditors were paid down $61,692.73—a prepetition

dividend of 83 percent—to the detriment of the Student

Loan Claims. The difference between the total payments

and the debt reduction is the accrual of additional interest

and penalties during the repayment period of four years. If

the total payments to MMI had been made through a

Chapter 13 plan, the non-student loan unsecured debt may

have been paid in full because post-petition interest would

not have accrued. Even with interest and fees, Debtors

would have at least $61,692.73 more general unsecured

debt to pay through their Proposed Plan, if Debtors had

not voluntarily reduced their prepetition debt through

MMI. Had Debtors not so dramatically paid down

non-student loan general unsecured debt, any potential

future payments to that debt under Debtors’ Proposed

Plan would be substantially less on a pro-rata basis.

Debtors’ prepetition voluntary participation in MMI’s

DMP benefited unsecured creditors by decreasing the

general unsecured claim amounts. The Court cannot

ignore Debtors’ prepetition actions.129 Debtors’ Plan

properly proposes delaying or reducing potential

distributions to non-student loan general unsecured

creditors who in effect received a net prepetition 83

percent dividend at the expense of Debtors’ Student Loan

Claims and taxes. Debtors’ proposed discrimination is

permissible as the effect may equalize distributions

between the *540 Student Loan Claims and Debtors’

prepetition unsecured debt. However, the Court does not

solely hang its hat on Debtors’ prepetition payments as

other considerations warrant separate classification of

Debtors’ Student Loan Claims.

2. Nonpriority of Student Loans [5]This seems a rather curious factor since if student loan

debt were a priority claim, then the Debtors’ Plan would

have to provide for payment in full of the debt; clearly §

1322(b)(1) contemplates separate classification of

non-priority unsecured claims. The Student Loan Claims

are not entitled to priority status under § 507(a).

Additionally, Student Loan Claims are presumptively

nondischargeable under the Code.130 “The choice

Congress made to impart student loan debt with

nondischargeable status sends a strong signal of intent

that should not be easily ignored.”131 Thus, Congress

intended the Student Loan Claims to receive favored

status.132

The Bentley court opined that:

...nondischargeability is not, and

does not entail, priority as to any

distribution in or through

bankruptcy; it merely permits the

holder to continue to enforce the

debt after bankruptcy ....

Accordingly, as far as the Code is

concerned, nothing in the nature of

the claims at issue here warrants or

justifies treating student loans more

favorably than the others.133

This Court respectfully disagrees. The policy behind






In re Engen, 561 B.R. 523 (2016)


many nondischargeable claims is based on society’s

interest in preventing mischievous debtors from usurping

prior bad acts—false pretenses or fraud,134 embezzlement

and larceny,135 intentional torts,136 criminal restitution,137

tax debts,138 and domestic support obligations.139 These

debts are logically nondischargeable as they were: (a)

wrongfully incurred—such as those for fraud,

embezzlement, restitution, and other wrongdoing; (b) to

protect innocent children to ensure an orderly

society—child support obligations; or (c) to provide for

familial obligations such as alimony and division of debts

and property. The rationale behind nondischargeability of

these debt groups is either punitive in nature, or designed

to curtail rewards for “certain socially undesirable

behaviors.”140 Unlike most of these nondischargeable

debts, “the policy behind the nondischargeability of

student loans is fundamentally different from the policies

behind the Code’s other non-dischargeability *541

designations.”141 The Congress acknowledged the

uniqueness that is student loan debt while drafting the

Bankruptcy Reform Act of 1978.

[E]ducational loans are different

from most loans. They are made

without business considerations,

without security, without cosigners,

and relying for repayment solely on

the debtor’s future increased

income resulting from the

education. In this sense, the loan is

viewed as a mortgage on the

debtor’s future. In addition, there

have been abuses of the system by

those seeking freedom from

educational debts without ever

attempting to repay.142

Among § 523(a)’s nondischargeable debts, student loans

stand alone as the only debt “incurred for a supposedly

socially beneficial purpose.”143 If repayment of the loans

relies upon Debtors’ future income, then a Chapter 13

plan seems an appropriate means to accomplish this task.

Debtors with student loan obligations face a quagmire.

Without separate classification, debtors may face a higher

debt burden after bankruptcy than before. This Court

respectfully disagrees with other courts’ holdings that

without more, nondischargeability of student loans is an

insufficient reason for discriminating in favor of Student

Loan Claims.144 This Court is not alone on this position.145

Regardless, this Court does not limit its rationale to the

singular factor of nondischargeability.

Sustaining the Trustee’s objections would result in a

smaller potential dividend to the Student Loan Claims.

Debtors’ Student Loan Claims will increase during the

pendency of their five-year Proposed Plan as

nondischargeable interest accumulates.146 Thus, a large

portion of nondischargeable debt would remain after

Debtors complete their Proposed Plan, because Debtors’

Student Loan Claims comprise 71 percent of their total

unsecured debt. Debtors may owe more on their Student

Loan Claims after completing their Proposed Plan and

may owe more debt than before filing.147 This hardly

seems a result the Congress intended. Student loans are

nondischargeable because the “Congress wishes to protect

the government’s fiscal health as a guarantor (or lender)

of these loans.”148 Allowing Debtors to treat their Student

Loan Claims favorably ahead of other general unsecured

creditors furthers Congressional intent and protects the

government’s and the student loan program’s *542 fiscal

health.149

Some courts that deny separate classification rely on the

negative inference that “Congress has not granted student

loan claims a priority in the bankruptcy distribution

scheme, but it did bestow such status on support

claims.”150 This Court respectfully disagrees. This

reasoning could render the separate classification

provision superfluous if it were so construed, a disfavored

outcome.151 As discussed below, this erroneous

interpretation ignores case law that approved separate

classification of familial support before that obligation

was awarded priority status. Just because student loans

are not entitled to priority under § 507(a) does not

preclude debtors from separately classifying them with

more favorable treatment under § 1322(b)(1). There are

many reasons why Congress may have excluded student

loans from § 507(a)’s priority treatment. First, granting

student loans priority status may disqualify many debtors

from Chapter 13 relief as § 1322(a)(2) requires full

payment of § 507(a) priority claims. “[I]t would be

impossible for many debtors with outstanding student

loans to pay them all off during a three-year or five-year

plan.”152 Unlike other § 507(a) priorities, many student

loans are not incurred based on the debtor’s ability to

pay.153 “Support obligations are created under judicial

auspices after taking into account the debtor’s income and

expenses. Income taxes necessarily represent a fraction of

income.”154 Some debtors carry large support and tax

debts, “but such should not be the norm.”155 However, in

this Court’s experience, increasingly large and

problematic student loan debt is increasing. Additionally,

“student loans ... are usually incurred without regard to

the debtor’s current budget and may well prove to be

beyond the debtor’s short-term budget once the education

is over.”156 A blanket grant on *543 priority status

precluding debtors from qualifying for Chapter 13 relief

runs afoul of “Congress’s preference that individual



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In re Engen, 561 B.R. 523 (2016)


debtors use Chapter 13 instead of Chapter 7.”157 Notably,

prior to the Code’s 1994 amendments, “most courts

permitted favored treatment of support claims before they

were accorded priority.”158 Equally, the Code does not

disallow separately classifying student loan claims even

though they are not priority.159 The Code and public policy

also allow separate classification of § 523(a)(15)

obligations even though non-support familial obligations

are dischargeable under 1328(a).160

3. Mandatory Versus Optional Contributions

Generally, this factor examines a debtor’s disposable

income under the means test. The result of this test sets

the mandatory contributions an above median income

debtor must make to a Chapter 13 plan. Courts have

looked favorably on debtors contributing additional funds

to separate classification creditors in excess of what the

means test requires.161 Here, Debtors are not offering

anything in addition to what is mandatorily required.

However, Debtors voluntarily contributed $79,445 in

prepetition funds to reduce their non-student loan general

unsecured debt balance, after interest and fees, by 83

percent. Therefore, the third factor of the Baseline Test is

neutral as applied to the Debtors and afforded little

weight.

4. The Debtor’s Fresh Start [6] [7] [8]A fundamental goal of the Code is allowing an

honest, but unfortunate debtor a fresh start.162 The Code is

comprised of statutes of equity, and the “bankruptcy court

is a court of equity and should invoke equitable principles

and doctrines, refusing to do so only where their

application would be ‘inconsistent’ with the Bankruptcy

Code.”163 The fresh start is not absolute,164 and bankruptcy

courts must provide fair treatment to creditors. Congress

intended more debtors to seek relief under Chapter 13

instead of Chapter 7.165 Debtors not permitted to favor

student loans in Chapter 13 risk not receiving a fresh start

and may elect conversion to Chapter 7 in which

unsecured creditors typically receive little to nothing.

Debtors have a legitimate interest in reducing the burden

of their nondischargeable Student Loan Claims through

their *544 Proposed Plan.166 “The amendment making

such [student] loans nondischargeable in chapter 13 cases

came as part of a federal budget balancing package, which

suggests that its purpose was to serve a societal interest in

maximizing the payments on such [student] loans.”167

Further, “the Code specifically permits debtors to cure

defaults and maintain payments on long-term debts on

which the final payment is due after the final payment of

the plan, [and] a number of courts have permitted debtors

to separately classify student loan debts for the purpose of

providing them that specified treatment in a plan.”168

Bentley stated that nondischargeability “merely permits

the holder to continue to enforce the debt after

bankruptcy.”169 In this context, use of the word merely is

misplaced because a full compliance discharge is one of

the most important aspects of the Debtors’ bankruptcy. A

discharge benefits not only the debtor and his family, but

imparts a benefit to the economy and society as a whole.

A student loan’s nondischargeability, coupled with the

government’s collection powers, tips the scales in favor of

separate classification.

Here, Debtors’ Student Loan Claims are long-term debts

under § 1322(b)(5),170 and account for over 71 percent of

their total unsecured debt. Debtors incurred substantial

burdens by voluntarily discriminating in favor of their

other unsecured creditors prepetition. They fell into

default on nondischargeable tax obligations and their

mortgage note. Debtors are properly employing Code

provisions permitting separate classification of their

Student Loan Claims. Separately classifying Debtors’

Student Loan Claims is permitted if Congress intended §

1322(b)(1) to have any meaning, and if not student loans,

then what debt? We allow separate classification of

other creditors “with a special relationship to the debtor or

with claims of a special nature. Courts have sometimes

approved more favored treatment for doctors, landlords,

trade creditors necessary for continued operation of a

business, attorneys, and even banks from which future

credit is needed”171

F. THE STUDENT LOAN COLOSSUS OR HOW

STUDENT LOANS ARE SIGNIFICANTLY

DIFFERENT FROM OTHER GENERAL

UNSECURED DEBT

The industry warnings are urgent and often dire: The

housing market could stall. Marriages are being

postponed. Workers won’t have the savings to retire. The

nation’s food supply will be disrupted.

They point to one threat: soaring student debt.

A tripling of student debt over the past decade to more

than $1.3 trillion has unleashed a torrent of Washington

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In re Engen, 561 B.R. 523 (2016)


lobbying from outside the education sector, with *545

various industries depicting a “crisis” they say requires

federal intervention.172

The U.S. government over the last 15 years made a

trillion-dollar investment to improve the nation’s

workforce, productivity and economy. A big portion of

that investment has now turned toxic, with echoes of the

housing crisis.173

Much has changed in the 15 years since the Bentley

Baseline test was adopted, and it is appropriate to look

beyond the confines of that test. Student loans are unique

and should be separately classified as the Code permits.

Debtors’ circumstances are such that separate

classification and favorable discrimination of their

Student Loan Claims are permissible under § 1322(b)(1).

Both the text and purpose of the Code point to this

conclusion.

Student loans are different because unlike other

nondischargeable debts, it is not the debtor’s misconduct

in acquiring the loans that supports nondischargeability.174

Although acquiring an education without intending to pay

for it is wrongful, “any such ‘wrongdoing’ is a function of

the discharge itself, it was not what created the debt.”175

Further, the Code’s fraud176 and good faith provisions,177

combined with the Chapter 13 trustee’s powers, are

intended to flush out such misdeeds.178 Thus, the idea that

student loans are nondischargeable to avoid fraud and a

free ride is inaccurate. The Code already contains ample

provisions to address fraud and debtors are allowed to

keep other services or property acquired on unsecured

credit. Further, as discussed supra,179 student loans are

unlike other types of § 523(a) debt where the

dischargeability rationale is based on society’s interest in

preventing mischievous debtors from usurping prior bad

acts.

Student loans are also different because Congress has an

interest in protecting the fiscal health of the federal

student loan program.180 In furtherance of this goal, the

government has enormous collection powers on federal

student loans. The government may:

garnish a borrower’s wages without

judgment, seize the borrower’s tax

refund (even an earned income tax

credit), seize portions of federal

benefits such a Social Security, and

deny the borrower eligibility for

new education grants or loans ...

and charge fees that often create

ballooning balances....181

Under § 1095a of the Higher Education Act, holders of

defaulted student loans may garnish up to ten percent of

the *546 debtor’s disposable income.182 Further, the ten

percent limit applies to a single garnishment by an

individual note holder, not the cumulative maximum limit

on a debtor’s disposable income.183 While the Consumer

Credit Protection Act provides a cumulative limit of 25

percent on multiple garnishments,184 practicality may limit

cooperation between multiple claim holders without the

debtor’s intervention. Additionally, the government may

reach further than private lenders by setting off tax

refunds, Social Security, and other government benefits.

Student loan debts have been subject to pernicious scams

and collection efforts.185

Further, “[u]nlike any other type of debt, there is no

statute of limitations. The government can pursue

borrowers to the grave.”186 Congress stated that “[i]t is the

purpose of this subsection to ensure that obligations to

repay loans ... are enforced without regard to any Federal

or State statutory, regulatory, or administrative limitation

on the period within which debts may be enforced.”187

Conversely, the Internal Revenue Service generally may

only pursue collection on assessed taxes “within 10 years

after the assessment of the tax.”188 Demanding student

loan repayment helps assure the fiscal integrity of the

federal student loan program as taxpayers are left on the

hook when debtors default. “Thus, to the extent that

courts regard efforts to favor student loans as focusing

‘solely on the interests of the debtor,’ and the debtor’s

fresh start they miss the point.”189 Separate classification

and favored treatment of student loans furthers the

congressional goal of protecting the federal student loan

program.

Originally, the federal student loans were “intended as a

program of last resort for college students seeking to

finance their educations.”190 Now, “[n]o longer can the

average student from the lower middle classes hope to

enter and exit a postsecondary institution with a valuable

degree without, to some extent, participating in the

guaranteed student loan program.”191 The increasing

student loan burden has far reaching implications from

recent graduates to the elderly. For many recent graduates

it delays marriage,192 defers car purchases,193 postpones

home ownership,194 *547 inhibits saving for retirement,195

and even hinders dating after college.196 “[S]everal studies

show that debt is also associated with significant mental

and physical health problems, particularly in young

people.”197 One study “linked debt to high blood pressure

as well as poor self-reported mental and general health.”198

These stressors are not isolated on the debtor as their

reach negatively impacts a debtor’s family. Graduates

saddled with high student loan debt are less likely to serve




In re Engen, 561 B.R. 523 (2016)


the public as they seek out high-income post-graduation

employment opportunities.199 “Those pursuing careers in

securities or licensed professionals, such as attorneys and

accountants, may face difficulties with licensing boards

who can and do regard financial insolvency as a valid

reason for the refusal to grant a license to work in a

chosen profession.”200 For the elderly, student debt is

becoming a growing concern as those 65 and older in

2013 had outstanding education loans of $18.2 billion

compared with $2.8 billion in 2005.201 For Americans age

65–74, 27 percent of student loans were in default; for

those age 75 and older more than half of student loans

were in default.202 The elderly are particularly at risk

because the government may garnish Social Security

payments.203 Borrowers of all ages are also subject to

abusive collection practices as evidenced by the

Consumer Financial Protection Bureau’s

acknowledgement to “clean up the student loan servicing

market.”204 Separate classification is the right answer for

student loan debt as “Chapter 13 protection increases

annual earnings by $5,562, decreases five-year mortality

by 1.2 percentage points, and decreases five-year

foreclosure rates by 19.1 percentage points.”205

As of June 30, 2016, outstanding student loan debt

reached $1.259 trillion and comprised ten percent of

household debt—ahead of credit card debt at six percent

*548 and automobile debt at nine percent.206 To place this

aggregate student loan balance in perspective, it exceeds

the annual gross domestic product of all but the 11 largest

economies in the world, including the economies of

Russia, Spain and Mexico.207 “Student loans are by far the

fastest growing component of non-housing consumer

debt.”208 Student loans ranked first in the percent of

balances that were more than 90 days delinquent—ahead

of credit cards, mortgages, auto loans, and home equity

lines of credit.209 Many student loan borrowers now

“shoulder educational debt loads that were unimaginable

to their parents’ generation.”210 Notably, “borrowers with

the smallest debts are most likely to default,” indicating

that borrowers who run up six figure debts are not the

source of trouble.211 This predicament “now threatens the

nation’s economic growth”212 and potentially widens the

wealth and income disparity. The massive shift of the

skyrocketing costs of college education to the middle

class over the last three decades has replaced the

decreased government subsidization of public colleges

and universities. It is accurate to classify student loan debt

as singular in identity since borrowers are in effect

compensating for the reduced tax revenue allocated to

post-secondary education. Adjusted for inflation, the cost

to attend a four-year public university has increased 331%

since 1983.213 This societal tax burden has created what is

in effect individual taxation to the public university

attendee, much of which is funded by student loan

borrowing.

In 2007, Congress attempted to alleviate student debt

stress by introducing the income-based-repayment plan.214

The income-based-repayment plan allows borrowers to

make reduced loan payments based on a percentage of

income regardless of the borrower’s chosen occupation.215

The outstanding balance is then forgiven after 20–25

years of timely payments.216 Importantly, unlike other

government sponsored forgiveness programs,217 the

forgiven debt is considered taxable income under the

Internal Revenue Code.218 Borrowers *549 with forgiven

debt under the income-based-repayment plan may easily

face enormous tax burdens.219 “Thus the debtor is asked to

exchange one non-dischargeable debt, a student loan debt,

for another nondischargeable debt, a tax debt, which is

not much progress towards the fresh start envisioned by

the Bankruptcy Code.”220 For many borrowers, and

especially parent Direct PLUS borrowers, this tax burden

occurs at or near retirement—one of the worst possible

times. Additionally, this tax bill is due in full immediately

as the Internal Revenue Service does not have an

income-based-repayment plan.221 Here, Debtors do not

even have the option to participate in an

income-based-repayment plan on the Navient debt as

“[t]he only federal student loans clearly not eligible for

the [income-based-repayment] plan are those loans made

to the parents of students under the PLUS program.”222

The public service loan forgiveness program allows the

tax free forgiveness of unpaid student loan balances after

the borrower has paid for 120 months. The purpose of the

program is to encourage graduates to work in modestly

paid positions in the public sector. The irony is that

perhaps the greatest beneficiaries of this student loan

forgiveness program will be physicians; it is estimated

that each participant will discharge $131,000 in student

loan debt under the program.223 What’s more, “[b]illons of

dollars worth of bonds backed by student loans could

soon face downgrades as bond ratings agencies react to

borrowers revising their repayment plans.”224 “Should

these bonds default, the federal government and

ultimately the U.S. taxpayers could be stuck with billions

of dollars in bad loans.”225 The recent projections *550 of

surpluses for student loan programs have melted away,226

intensifying the need for borrowers to repay the loans as

they are able-such as the Debtors propose in their plan.

At the end of the day, behind the numbers in a consumer

bankruptcy case are individuals who are profoundly

affected by financial circumstances, as well as their

families, employers, and society. There seems little

question that as a general rule, and certainly in the

Debtors’ case, separate classification of student loans

In re Engen, 561 B.R. 523 (2016)


for preferred treatment is proper, reasonable, and fair

discrimination. The benefits to the Debtors, to the student

loan creditors, to the taxpayers, and to other interests

bring home this conclusion. Of course, a blanket rule that

allows separate classification of student loans does not

work because confirmation is determined on a

case-by-case basis and is ultimately a matter for the

Court’s discretion.

Notably, the United States Constitution provides that

Congress shall establish uniform laws on the subject of

bankruptcies.227 John Adams, who signed into law the first

Federal Bankruptcy Act in 1800, considered bankruptcy

and debt a major issue as our citizens were losing farms

and going to debtors’ prisons. Nondischargeable student

loans may create a virtual debtors’ prison, one without

physical containment, but assuredly a prison of emotional

confinement.

Student loans serve a valuable purpose beyond mere

consumerism. They allow individuals the opportunity to

obtain an education, an education that will hopefully

allow student loan recipients to contribute to a prosperous

society, an education that unfortunately is becoming

harder to achieve without the assistance of

government-backed student loans. At the same time, it is

understandable that the Congress demands repayment.

The Code generally prevents debtors from discharging

their student loans and leaving taxpayers with the bill.

Student loan creditors deserve separate classification in

bankruptcy because the taxpayer-funded student loan

system is critical to society’s future welfare. It is one

thing to not allow delinquent debtors an escape hatch

from their student loans, but it is quite another to forbid

debtors with limited resources from favoring a taxpayer

backed nondischargeable obligation incurred for society’s

benefit. If bankruptcy is, in part, the art of compromise,

then Debtors’ Proposed Plan that fairly discriminates in

favor of the Student Loan Claims is a permissible

compromise under § 1322(b)(1).

It is this Court’s experience that many consumer

bankruptcies are filed by desperate individuals, who are

financially, emotionally and physically exhausted.

Sometimes lost in the discussion that the bankruptcy

discharge provides a fresh start to honest but unfortunate

debtors is that, perhaps as importantly, it provides a

commensurate benefit to society and the economy: People

are freed from emotional and financial burdens to become

more energetic, healthy participants. Of course, this

beneficial effect is properly curtailed by the existence of

debts that are excepted from discharge. Here, the Debtors

do not seek to escape their liability for the Student Loan

Claims, but to the contrary, they seek to pay them.

*551 CONCLUSIONS OF LAW

The Trustee’s position is that separately classifying the

Student Loan Claims for favorable payment is unfairly

discriminatory. The Code permits fair discrimination. The

Court overrules the Trustee’s objection. The Debtors’

Plan properly provides for the separate classification of

substantially similar student loan debt and does not

discriminate unfairly in compliance with § 1322(b)(1).

IT IS ORDERED that the Trustee’s objection to

confirmation of Debtors’ Chapter 13 Plan is

OVERRULED.

IT IS SO ORDERED.

All Citations

561 B.R. 523

Footnotes 1

Doc. 52. Debtors, Mark H. Engen and Maureen E. Engen, appear by their attorney, David A. Reed, Kansas City, KS. Trustee, William H. Griffin, appears by Karie L. Fahrenholz, Roeland Park, KS.

2

Doc. 27, 39, 57. All future statutory references are to the Bankruptcy Code (Code), as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 11 U.S.C. §§ 101–1532, unless otherwise specifically noted.

3

See § 1322(b)(1).

4

D. Kan. Standing Order No. 13–1, printed in D. Kan. Rules of Practice and Procedure at 168 (March 2016).






In re Engen, 561 B.R. 523 (2016)


5

Doc. 1.

6

Doc. 4.

7

Doc. 18.

8

Doc. 23.

9

Doc. 25.

10

Doc. 27.

11

Doc. 51. Debtors appeared by attorney, Teresa M. Kidd, Lenexa, KS, until January 23, 2016.

12

Doc. 52. Debtors’ Proposed Plan resolved the Trustee’s objection regarding BMO’s claim.

13

The anti-modification provision under § 1322(b)(2) does not apply because the mortgage note balloons in 2018, which is during the five-year commitment period of the Plan.

14

Doc. 54.

15

Doc. 57. The Trustee originally objected to the Amended Plan—not the Proposed Plan. However, Debtors’ Proposed Plan did not resolve the Trustee’s student loan separate-classification objection.

16

Doc. 52, at 9–10 ¶ 11.

17

Claim 8–1. PLUS loans are federal loans for graduate students and parents of dependent undergraduate students.

18

Parents cannot transfer a Direct PLUS Loan to a child. The parent is responsible for repaying the loan. See Direct PLUS Loan Basics for Parents, http://www.studentaid.ed.gov/sa/sites/default/files/direct-loan-basics-parents.pdf.

19

Claim 24–1. The private creditor claim bar date was June 9, 2015, and August 5, 2015, for government creditors.

20

Doc. 52, at 9 ¶ 11. A special class creditor is synonymous with a separately classified or separate class creditor under § 1322(b)(1).

21

Under the Kansas Form Chapter 13 Plan, “general unsecured claims” refers to non-priority unsecured claims.

22

Doc. 52, at 10 ¶ 11.

23

Doc. 52, at 9–10 ¶ 11 and 12.

24

Doc. 62; Motion to Reconsider, Doc. 70.

25

It is unclear whether the beneficial interest existed on the petition date, which could affect the liquidation test under § 1325(a)(4); the beneficial interest was not listed on the Debtors’ schedules.

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26

Doc. 27.

27

In re Knowles, 501 B.R. 409 (Bankr. D. Kan. 2013).

28

Doc. 27.

29

Doc. 41.

30

Id. at 4.

31

Doc. 41–1, at 2.

32

Id. at 2–3.

33

Doc. 41, at 4.

34

Id.

35

Id.

36

Claim 6–2. For tax years 2011, 2012, 2013, and 2014. The Court was informed at the most recent hearing by the Trustee that additional liability is due for the tax year 2015. However, a proof of claim has not been filed by the obligee.

37

Claim 2–2. For tax years 2012 and 2014. The Court was informed at the most recent hearing by the Trustee that additional liability is due for the tax year 2015. However, a proof of claim has not been filed by the obligee.

38

In re Knowles, 501 B.R. 409, 415 (Bankr. D. Kan. 2013).

39

Doc. 41, at 4–5.

40

Id. at 5.

41

An exception to this requirement for assigned Domestic Support Obligations does not apply here. See § 1322(a)(4).

42

§ 1325(b)(1)(B).

43

§ 1328(a) incorporates § 523(a)(8) by reference.

44

Jennifer Grant & Lindsay Anglin, Student Loan Debt: The Next Bubble?, 32–DEC AM. BANKR. INST. J. 44, 44 (2013). See also Brendan Baker, Deeper Debt, Denial of Discharge: The Harsh Treatment of Student Loan Debt in Bankruptcy, Recent Developments, and Proposed Reforms, 14 U. PA. J. BUS. L. 1213, 1218 (2012) (“[L]egislation ... shows a clear progression towards complete nondischargeability of all forms of student loans in bankruptcy.”).

45

Educ. Credit Mgmt. Corp v. Polleys (In re Polleys), 356 F.3d 1302, 1309 (10th Cir. 2004). See also Santa Fe Med. Svcs., Inc. v. Segal (In re Segal), 57 F.3d 342, 348 (3rd Cir. 1995) (“Congress sought principally to protect government entities and nonprofit


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In re Engen, 561 B.R. 523 (2016)


institutions of higher education ... from bankruptcy discharge.”).

46

Polleys, 356 F.3d at 1306. But see Baker, supra note 44, at 1217 (indicating that when the 1970 Bankruptcy Act Commission considered the issue “less than one percent of government-backed loans were discharged in bankruptcy) (citing H.R. Doc. No. 93–137, pt. 1, at 178 n.5 (1973)).

47

Grant, supra note 44, at 44.

48

Id.

49

§ 523(a)(8).

50

But see United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 262, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010) (finding that “[a]lthough the Bankruptcy Court’s failure to find undue hardship was a legal error, the confirmation order is enforceable and binding on [the creditor] because it had actual notice of the error and failed to object or timely appeal.”). Unless otherwise noted, all references to Rules herein are to the Federal Rules of Bankruptcy Procedure.

51

Daniel A. Austin, Student Loan Debt in Bankruptcy: An Empirical Assessment, 48 SUFFOLK U.L. REV. 577, 582 (2015).

52

§ 1328(a). See also Bender v. Educ. Credit Mgmt. Corp. (In re Bender), 368 F.3d 846 (8th Cir. 2004) (stating that undue hardship should be determined at the time of discharge, not at commencement of the § 523(a)(8) proceeding); Raisor v. Educ. Loan Serv. Ctr., (In re Raisor), 180 B.R. 163 (Bankr. E.D. Tex. 1995) (dismissing as premature a student loan dischargeability action when filed seven months after the Chapter 13 plan, but three years before the plan’s scheduled completion).

53

Grant, supra note 44, at 45. In the 10th Circuit, the test is less rigorous. In re Polleys, 356 F.3d at 1308.

54

Wallace v. Educ. Credit Mgmt. Corp. (In re Wallace), 443 B.R. 781 (Bankr. S.D. Ohio 2010).

55

In re Cummins, 266 B.R. 852, 855 (Bankr. N.D. Iowa 2001).

56

Jane Quinn, Student Loans: Time to Reform the Law That Treats Debtors Like Crooks (Sept. 24, 2010, updated Dec. 13, 2013), http://www.cbsnews.com/news/student-loans-time-to-reform-the-law-that-treats-debtors-likecrooks/.

57

Baker, supra note 44, at 1217 (quoting H.R. Rep. No. 94–1232, at 75 (1976), reprinted in H.R. Rep. No. 95–595, at 149 (1977), and 1978 U.S.C.C.A.N. 5963, 6110).

58

United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 277 n.13, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010) (italics in original); 3 BANKR. SERVICE L. ED. § 27:1524 (citing cases holding that student loans are presumptively nondischargeable).

59

Grant, supra note 44, at 88.

60

See § 1322(b)(1).

61

Id.

62

§ 1129(b)(1).

63

Stephen L. Sepinuck, Rethinking Unfair Discrimination in Chapter 13, 74 AM. BANKR. L.J. 341, 341 (2000).












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64

D. Kan. Standing Order No. 12–1, printed in D. Kan. Rules of Practice and Procedure at 119 (March 2016), available at http://www.ksb.uscourts.gov/images/local rules/SO 12 1.pdf.

65

7 COLLIER ON BANKRUPTCY ¶ 1122.03[1], at 1122–6 to 1122–7 (Alan N. Resnick & Henry J. Sommer, eds. 16th ed. 2016).

66

In re City of Colorado Springs Spring Creek Gen. Improv. Dist., 187 B.R. 683, 687 (Bankr. D. Colo. 1995).

67

In re Bentley, 266 B.R. 229, 236 (1st Cir. BAP 2001).

68

In re Kovich, 4 B.R. 403, 407 (Bankr. W.D. Mich. 1980).

69

James B. McLaughlin, Jr., and Robert W. Nelms, Classification of Unsecured Claims in Chapter 13 of the Bankruptcy Reform Act of 1978: What is Fair?, 7 CAMPBELL L. REV. 329, 346 (1985).

70

This is a seldom used procedure in Chapter 13.

71

See In re Gregg, 179 B.R. 828 (Bankr. E.D. Tex. 1995) (finding that separate classification for nondischargeable student loans was not unfairly discriminatory against other unsecured creditors); In re Boggan, 125 B.R. 533 (Bankr. N.D. Ill. 1991) (holding that a Chapter 13 plan properly placed an educational loan into a special class and allowed payment at a higher rate than other unsecured debts); In re Freshley, 69 B.R. 96 (Bankr. N.D. Ga. 1987) (holding that Congressional intent encouraging repayment of student loans is a sufficient basis for separate classification and is not unfairly discriminatory to other unsecured creditors).

72

8 COLLIER ON BANKRUPTCY ¶ 1322.05[2], at 1322–18–19 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. 2016). See also Freshley, 69 B.R. at 98.

73

See In re Sullivan, 195 B.R. 649 (Bankr. W.D. Tex. 1996) (prompt payment of some student loans may warrant separate classification and more favorable treatment because nonpayment of federally guaranteed loans imposes a direct burden on taxpayers); Freshley, 69 B.R. 96 (underlying policy choices of Congress to encourage repayment of student loans provides a sufficient basis for the debtor’s separate classification).

74

DANIEL A. AUSTIN & SUSAN E. HAUSER, GRADUATING WITH DEBT: STUDENT LOANS UNDER THE BANKRUPTCY CODE 69–70 (ABI, 2013). See also In re Potgieter, 436 B.R. 739, 743 (Bankr. M.D. Fla. 2010) (“[T]he separate classification of the debtor’s student loan obligations does not violate Section 1122.”); In re Coonce, 213 B.R. 344, 345 (Bankr. S.D. Ill. 1997) (separate classification of student loan debt is permissible).

75

See McCullough v. Brown (In re Brown), 162 B.R. 506, 508 (N.D. Ill. 1993) (explaining that the right to separately classify student loans is not an issue; the only issue is that of unfair discrimination, which is different from classification).

76

Groves v. LaBarge (In re Groves), 39 F.3d 212, 214 (8th Cir. 1994); In re Janssen, 220 B.R. 639, 643 (Bankr. N.D. Iowa 1998).

77

§§ 1129(b) and 1322(b).

78

Sepinuck, supra note 63, at 348.

79

Id. at 349. See also Bruce A. Markell, A New Perspective on Unfair Discrimination in Chapter 11, 72 Am. Bankr. L.J. 227, 245 (1998) (indicating that Chapter 11 unfair discrimination analysis needs a tougher standard than Chapter 13 because the Chapter 13 standard needs to address stalwarts raising unfair discrimination as an absolute right).

80

Sepinuck, supra note 63, at 349. See also Markell, supra note 79, 245 (indicating that a Chapter 13 creditor or the standing trustee may “holdup confirmation if a court adopts a strict test of unfair discrimination.”).





















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81


82

Id.

83

Id.

84

ROBERT J. ROSENBERG, ET AL., A LENDER’S PARTICIPATION IN A CHAPTER 11 CASE § 13[2] at 72–73 n.5 (2009); DAVID R. KUNEY & ALEX R. ROVIRA, THE SINGLE ASSET REAL ESTATE CASE BASIC PRINCIPLES AND STRATEGIES 127–131 (2012).

85

See 2 COLLIER ON BANKRUPTCY ¶ 105.02[4][a], at 105–20 to 105–24 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. 2016).

86

DEBRA I. GRASSGREEN, ET AL. FIRST DAY MOTIONS 58–68 (3rd ed. 2012).

87

In re Knowles, 501 B.R. 409, 415 (Bankr. D. Kan. 2013); In re Bentley, 266 B.R. 229, 237 (1st Cir. BAP 2001). See also Sepinuck, supra note 63, at 342.

88


89

In re Hill, 4 B.R. 694, 697 (Bankr. D. Kan. 1980).

90


91

Knowles, 501 B.R. at 416 (quoting In re Crawford, 324 F.3d 539, 542 (7th Cir. 2003)).

92

Knowles, 501 B.R. at 415.

93

2 B.R. 256 (Bankr. D. Utah 1980).

94

In 1984, Congress amended § 1322(b)(1) allowing separate classification of codebtor claims as part of the Bankruptcy Amendments and Federal Judgeship Act of 1984 (“BAFJA”), H.R. 5174, 98th Cong. (1984).

95

3 B.R. 420 (Bankr. W.D. Ark. 1980).

96

Sepinuck, supra note 63, at 353. See also In re Cook, 26 B.R. 187, 189 (D.N.M. 1982); In re Dziedzic, 9 B.R. 424, 426 (Bankr. S.D. Tex. 1981).

97


98

McCullough v. Brown (In re Brown), 162 B.R. 506 (N.D. Ill. 1993).

99

Id. at 517–18.

100


101

See, e.g., In re Alicea, 199 B.R. 862, 866 (Bankr. D.N.J. 1996); Lawson v. Lackey (In re Lackey), 148 B.R. 626, 632 (Bankr. N.D. Ala. 1992); In re Lawson, 93 B.R. 979, 982 (Bankr. N.D. Ill. 1988); In re Furlow, 70 B.R. 973, 978 (Bankr. E.D. Pa. 1987).




















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102


103

Id.

104

Courts advanced various bright-line tests so creditors would know when discrimination was unfair to avoid litigating every disparate treatment. See In re Chandler, 210 B.R. 898 (Bankr. D.N.H. 1997); In re Taylor, 137 B.R. 60 (Bankr. W.D. Okla. 1992); In re Strickland, 181 B.R. 598 (Bankr. N.D. Ala. 1995); In re Colley, 260 B.R. 532 (Bankr. M.D. Fla. 2000).

105

Courts apply tests based on the percentage of repayment of student loan debt and other unsecured debt to determine when unfair discrimination occurs. See In re Sullivan, 195 B.R. 649 (Bankr. W.D. Tex. 1996), In re Williams, 253 B.R. 220 (Bankr. W.D. Tenn. 2000).

106

Courts allowed discrimination as fair if it rationally furthered an articulated, legitimate interest of the debtor. See In re Hamilton, 102 B.R. 498 (Bankr. W.D. Va. 1989), In re Lawson, 93 B.R. 979 (Bankr. N.D. Ill. 1988).

107


108

In re Kovich, 4 B.R. 403 (Bankr. W.D. Mich. 1980).

109

Id. at 407 (bracketed numbers added).

110

Sepinuck, supra note 63, at 355. See also McLaughlin, supra note 69, at 345.

111

3 B.R. 420.

112

2 B.R. 256.

113

McLaughlin, supra note 69, at 344–45.

114

Id. at 345 (emphasis in original).

115

In re Hill, 4 B.R. 694, 698 (Bankr. D. Kan. 1980).

116

In re Thibodeau, 248 B.R. 699 (Bankr. D. Mass. 2000); In re Christophe, 151 B.R. 475 (Bankr. N.D. Ill. 1993); In re Chapman, 146 B.R. 411 (Bankr. N.D. Ill. 1992); Matter of Keel, 143 B.R. 915 (Bankr. D. Neb. 1992);(In re Labib–Kiyarash), 271 B.R. 189 (9th Cir. BAP 2001); McDonald v. Sperna (In re Sperna), 173 B.R. 654 (9th Cir. BAP 1994); In re Bernal, 189 B.R. 507 (Bankr. S.D. Cal. 1995); In re Carlson, 276 B.R. 653 (Bankr. D. Mont. 2002); In re Tucker, 159 B.R. 325 (Bankr. D. Mont. 1993); In re Anderson, 173 B.R. 226 (Bankr. D. Colo. 1993); In re Pora, 353 B.R. 247 (Bankr. N.D. Cal. 2006); In re Webb, 370 B.R. 418 (Bankr. N.D. Ga. 2007); In re Brown, 500 B.R. 255 (Bankr. S.D. Ga. 2013); In re Leser, 939 F.2d 669 (8th Cir. 1991); In re Wolff, 22 B.R. 510, (9th Cir. BAP 1982).

117

In re Bentley, 266 B.R. 229, 238 (1st Cir. BAP 2001) (internal quotations omitted).

118

In re Knowles, 501 B.R. 409, 416 (Bankr. D. Kan. 2013); In re Mason, 300 B.R. 379, 383 n.9 (Bankr. D. Kan. 2003).

119

939 F.2d 669.








































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120

22 B.R. 510.

121

266 B.R. 229.

122


123

Bentley, 266 B.R. at 240–43.

124

See In re Brown, 500 B.R. 255 (Bankr. S.D. Ga. 2013) (debtor curing default complies with § 1322(b)(1) when separate classification pays 78 percent of student loan debt and only 1 percent of unsecured debt); Matter of Pracht, 464 B.R. 486 (Bankr. M.D. Ga. 2012) (discriminatory classification favoring student loan that decreased general unsecured recovery from 20 percent to 15 percent allowed to preserve debtor’s participation in the Public Service Loan Forgiveness program); In re Kalfayan, 415 B.R. 907 (Bankr. S.D. Fla. 2009) (separate classification and more favorable treatment of long-term student loan debt over general unsecured creditors was not unfairly discriminatory, at least not when debtor’s default would potentially jeopardize her professional license); In re Webb, 370 B.R. 418, 425–26 (Bankr. N.D. Ga. 2007) (confirming debtors’ separate classification “because Debtors will suffer needless accrual of interest and penalties ... and unsecured creditors will enjoy a disproportionally small benefit otherwise.”); In re Cox, 186 B.R. 744 (Bankr. N.D. Fla. 1995) (while debtors’ proposal to pay nondischargeable student loans outside their plan may be discriminatory, it is not unfair since such treatment is specifically allowed by § 1322(b)(5)); In re Willis, 189 B.R. 203, 205 (Bankr. N.D. Okla. 1995) (quoting Lawson, 93 B.R. at 984) (“discrimination is ‘fair,’ and therefore permissible, to the extent, and only to the extent, that is rationally furthers an articulated, legitimate interest of the debtor”); In re Tucker, 159 B.R. 325 (Bankr. D. Mont. 1993) (holding that a Chapter 13 plan providing a 29 percent payment to unsecured creditors and 100 percent to student loan creditors did not discriminate unfairly because the unsecured creditors would receive nothing if debtors’ case were converted to a Chapter 7); In re Dodds, 140 B.R. 542, 543 (Bankr. D. Mont. 1992) (holding that the debtors’ plan satisfied §§ 1322(b)(1) and (5) because treating student loan debt as a long-term obligation is one possibility of satisfying the confirmation standard against unfair discrimination); Matter of Foreman, 136 B.R. 532 (Bankr. S.D. Iowa 1992) (holding that a Chapter 13 plan’s placement of student-loan debt in a separate class that provided for payment of that debt before other unsecured creditors did not unfairly discriminate against unsecured creditors because the plan provided for 100 percent of all unsecured claims and the student loan claims were nondischargeable); In re Boggan, 125 B.R. 533 (Bankr. N.D. Ill. 1991) (allowing a Chapter 13 plan to place student loans in a separate class and pay them 100 percent while only paying 15 percent to unsecured creditors as long as the unsecured creditors do not receive less than they would in a Chapter 7 liquidation); In re Freshley, 69 B.R. 96 (Bankr. N.D. Ga. 1987) (holding that Congressional intent encouraging the repayment of student loans is sufficient grounds for a debtor’s separate classification of those debts in a Chapter 13 plan and that such classification does not unfairly discriminate against unsecured creditors).

125

In re Crawford, 324 F.3d 539, 542 (7th Cir. 2003).

126

In re Salazar, 543 B.R. 669, 673–76 (Bankr. D. Kan. 2015); Knowles, 501 B.R. at 416–18; In re Stull, 489 B.R. 217, 220–21 (Bankr. D. Kan. 2013); Mason, 300 B.R. at 386–87.

127

§ 1322(b)(1). Sepinuck, supra note 63, at 341.

128

Doc. 41, at 4. This is the aggregate net payment after deduction of the administrative fee of $815.02. The total payments to MMI were $79,445.00.

129

In re Nittler, 67 B.R. 217 (D. Kan. 1986) (bankruptcy court failed to adequately consider prepetition conduct).

130

Absent a showing of undue hardship. See § 523(a)(8). See also § 1322(b)(1). Of course, the shadow of United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010), looms over Chapter 13 plan confirmation and the binding effects of confirmation.

131

In re Webb, 370 B.R. 418, 426 (Bankr. N.D. Ga. 2007).






































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132

In re Knowles, 501 B.R. 409, 419 (Bankr. D. Kan 2013). See also Sepinuck, supra note 63, at 386 (“[T]he vast majority of courts have recognized that at least in some contexts a nonpriority claim may be favored in Chapter 13.”).

133

266 B.R. at 241.

134

§ 523(a)(2).

135

§ 523(a)(4).

136

§ 523(a)(6).

137

§ 523(a)(13).

138

§ 523(a)(1).

139

§ 523(a)(5).

140

DEANNE LOONIN & PERSIS S. YU, ET AL., STUDENT LOAN LAW § 11.9.3, at 234 (National Consumer Law Center, 5th ed. 2015, updated at http://www.nclc.org).

141

Id.

142

H.R. Rep. No. 95–595, 95th Cong., 2d Sess. 133, reprinted in 1978 U.S. Code Cong. & Ad. News 5963, 6094.

143

Roger Roots, The Student Loan Crisis: A Lesson In Unintended Consequences, 29 SW. U. L. REV. 501, 513 (2000).

144

See In re Simmons, 288 B.R. 737 (Bankr. N.D. Tex. 2003).

145

In re Webb, 370 B.R. 418 (Bankr. N.D. Ga. 2007).

146

AUSTIN AND HAUSER, supra note 74.

147

In re Knowles, 501 B.R. 409, 419 (Bankr. D. Kan. 2013) (acknowledging that the nondischargeability rule combined with the nondiscrimination rule may result in debtors “owing more on their student loans after completion of their plan than before filing for Chapter 13 relief because of accumulation of equally nondischargeable interest that will accrue.”); In re Salazar, 543 B.R. 669, 670 (Bankr. D. Kan. 2015) (noting that “[b]ecause interest on nondischargeable debts continues to accrue while a debtor is performing under a Chapter 13 plan but cannot be paid unless the debtor is paying all the unsecured claims in full, a debtor with student loan debts runs a very real risk of paying into a plan for three to five years only to find that she finishes her plan owing more on those debts than she did when she filed bankruptcy.”).

148


149

Over the ten-year period from 2015 to 2024, the Congressional Budget Office projects a net gain (profit) of roughly $135 billion from the Department of Education’s student loan program based on the procedures currently used in the federal budget as prescribed by the Federal Credit Reform Act of 1990 (FCRA). Although, critics note a loss of $88 billion is projected using a fair-value approach. See Fair–Value Estimates of the Costs of Selected Federal Credit Programs for 2015 to 2024, CONGRESSIONAL BUDGET OFFICE, available at https://www.cbo.gov/publication/45383.





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150

See Sepinuck, supra note 63, at 385.

151

Kawaauhau v. Geiger, 523 U.S. 57, 62, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998).

152


153

Santa Fe Med. Svcs., Inc. v. Segal (In re Segal), 57 F.3d 342, 348 (3d Cir. 1995) (noting that student loans “are not based upon a borrower’s proven credit-worthiness”). There are few underwriting requirements for government-backed student loans. “The Stafford, Perkins and PLUS loans do not depend on your credit score. The Stafford and Perkins loans are available entirely without regard to your credit history. The PLUS loan, however, requires that the borrower not have an adverse credit history. An adverse credit history is defined as being more than 90 days late on any debt or having any Title IV debt within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off.” See How do Federal Student Loans Use Credit, THE SMART STUDENT GUIDE TO FINANCIAL AID, FINAID (2016), http://www.finaid.org/loans/creditscores.phtml (italics in original).

154

Sepinuck, supra note 63, at 385 n.241. Some courts allowed the separate classification of domestic support claimants before BAPCPA defined domestic support obligations under § 101(14A) and granted them priority status under § 507(a)(1). 198 A.L.R. Fed. 605 (originally published in 2004).

155

Sepinuck, supra note 63, at 385 n.241.

156

Id. at 385–86 n.241. They are usually incurred by young college students who are not at the pinnacle of their financial acumen, or by parents who are desperate to support their children’s aspirations for higher education.

157

In re Bateman, 515 F.3d 272, 279 (4th Cir. 2008) (quoting McDonald v. Master Financial (In re McDonald), 205 F.3d 606, 614 (3d Cir. 2000) (internal quotations omitted)). See also In re Jackson, 2006 Bankr. LEXIS 4327, at *3 (Bankr. N.D. Ga. Mar. 16, 2006).

158


159

Id.

160

HENRY J. SOMMER & MARGARET DEE MCGARITY, COLLIER FAMILY LAW AND THE BANKRUPTCY CODE ¶ 8.07[3], at 8–65 (2016).

161

See In re Stull, 489 B.R. 217, 224 (Bankr. D. Kan. 2013) (plan does not unfairly discriminate by allowing debtor to pay his student loan claim from funds he receives in excess of his projected disposable income); In re Knowles, 501 B.R. 409, 419–20 (Bankr. D. Kan. 2013) (Debtors’ discretionary income above their Code-computed projected disposable income can be voluntarily contributed to payment of student loans).

162

Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007).

163

In re Beaty, 306 F.3d 914, 922 (9th Cir. 2002) (citing In re Myrvang, 232 F.3d 1116, 1124 (9th Cir. 2000)).

164

Grogan v. Garner, 498 U.S. 279, 286–87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).

165

In re Bateman, 515 F.3d 272, 279 (4th Cir. 2008).

166

8 COLLIER ON BANKRUPTCY, supra note 72, ¶ 1322.05[2][a], at 1322–20.

167 Id. (Footnote omitted.) See also Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101–508 (1990).



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168

8 COLLIER ON BANKRUPTCY, supra note 72, ¶ 1322.05[2][a], at 1322–20.

169

Bentley, 266 B.R. at 241 (emphasis added).

170

In re Jackson, 2006 Bankr. LEXIS 4327, at *10 (Bankr. N.D. Ga. Mar. 16, 2006).

171

HENRY J. SOMMER, ET AL., CONSUMER BANKRUPTCY LAW AND PRACTICE § 12.4.3 at 339 (National Consumer Law Center, 11th ed. 2016) (citing In re Hill, 4 B.R. 694 (Bankr. D. Kan. 1980) (physicians, dentists, lawyers); In re Kovich, 4. B.R. 403 (Bankr. W.D. Mich. 1980) (landlord); In re Sutherland, 3 B.R. 420 (Bankr. W.D. Ark. 1980) (trade creditors, medical debts, banks)).

172

Josh Mitchell, Groups Push for Debt Relief–Farmers, real-estate agents and other say student-loan level threaten industries, WALL STREET JOURNAL, Sept. 14, 2016, at A3.

173

Josh Mitchell, THE OUTLOOK: College Loan Glut Turns Sour, WALL STREET JOURNAL, June 6, 2016, at A2.

174

See supra Analysis subpart C.

175


176

§ 523(a)(2).

177

See §§ 1325(a)(3) and (a)(7). Debtors must propose plans and file petitions in good faith.

178

It has been suggested that bankruptcy courts have a duty to review chapter 13 bankruptcy plans. See United Student Aid Funds, Inc., v. Espinosa, 559 U.S. 260, 276–77, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010) (“the Code makes plain that bankruptcy courts have the authority—indeed, the obligation—to direct a debtor to conform his plan to the requirements of §§ 1328(a)(2) and 523(a)(8)).

179

Analysis C.

180

Santa Fe Med. Svcs., Inc. (In re Segal), 57 F.3d 342, 348 (3rd Cir. 1995). See also Sepinuck, supra note 63, at 382.

181

Supra note 131, § 6.1.3.1, at 74.

182

20 U.S.C. § 1095a.

183

Halperin v. Reg’l Adjustment Bureau, Inc., 206 F.3d 1063 (11th Cir. 2000).

184

15 U.S.C. § 1673.

185

Michael J. Bologna, CFPB, Ags Confront Student Debt–Relief Scams, BNA’S BANKRUPTCY LAW REPORTER (March 24, 2016), http://www.bna.com/cfpb-ags-confront-n57982068778/.

186

Supra note 140, § 6.1.3.1, at 75 (emphasis added). The Higher Education Technical Amendments of 1991 (HETA) eliminated all statutes of limitations on actions to recover on defaulted federally guaranteed student loans. See also 20 U.S.C. § 1091a.





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187

20 U.S.C. § 1091a.

188

26 U.S.C. § 6502(a)(1).

189

Sepinuck, supra note 63, at 383 (footnote omitted).

190

Roots, supra note 143, at 504.

191

Id. at 523.

192

Rebecca Ungarino, Burdened with Record Amount of Debt, Graduates Delay Marriage (Oct. 7, 2014), http://www.nbcnews.com/business/personal-finance/burdened-record-amount-debt-graduates-delay-marriagen219371.

193

Halah Touryalai, Backlash: Student Loan Burden Prevents Borrowers From Buying Homes, Cars (June 26, 2013), http://www forbes.com/sites/halahtouryalai/2013/06/26/backlash-student-loans-keep-borrowers-from-buying-homes-cars/# 6d8275a477c5.

194

Id. Bob Bryan, Young Americans have gone from being home owners to student debt holders, (Dec. 1, 2015), http://www.businessinsider.com/student-debt-prevents-house-buying-2015-11.

195

American Student Assistance, Retirement Delayed: The Impact of Student Debt on the Daily Lives of Older Americans, at 3 (2015), http://www.asa.org/site/assets/files/3680/retirement delayed.pdf.

196

Karen Farkas, Student loan debt is viewed as ‘baggage’ in relationships, survey shows, CLEVELAND.COM (August 9, 2016 at 10:20 a.m.), http://www.cleveland.com/metro/index.ssf/2016/08/student loan debt is viewed as.html.; Nicole Audrey, Student Debt Puts a Damper on Dating After College, NBCNEWS.COM (August 7, 2016 at 2:25 p.m. ET, http://www.nbcnews.com/feature/college-game-plan/student-debt-puts-damper-dating-after-college-n623871.

197

Abby Abrams, How Student Loan Debt Hurts Your Health (June 11, 2014), http://time.com/2854384/studentloan-debt-health/.

198

Id.

199


200

Id. at 519.

201

Natalie Kitroeff, Student Debt May Be the Next Crisis Facing Elderly Americans (Dec. 18, 2015), http://www.bloomberg.com/news/articles/2015-12-18/student-debt-may-be-the-next-crisis-facing-elderly-americans.

202

Id.

203

Id.

204

Maggie McGrath, Discover Slammed By CFPB For Illegal Student Loan Servicing Practices (July 22, 2015), http://www.forbes.com/sites/maggiemcgrath/2015/07/22/discover-slammed-by-cfpb-for-illegal-student-loanservicing-practices/# 52662dcdc17c.

205

Will Dobbie & Jae Song, Debt Relief and Debtor Outcomes: Measuring the Effects of Consumer Bankruptcy Protection, 105(3) AMERICAN ECONOMIC REVIEW 1272 (2015).



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206

Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit, August 2016, available at: https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC 2016Q2.pdf.

207

Statistics Times, Projected GDP Ranking (2015–2020), http://statisticstimes.com/economy/projected-world-gdpranking.php (last visited Nov. 23, 2016).

208

Austin, supra note 51, at 577.

209

Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit, August 2016, available at: https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC 2016Q2.pdf.

210


211

Susan Dynarski, Why Students With Smallest Debts Have the Larger Problem (Aug. 31, 2015), http://www.nytimes.com/2015/09/01/upshot/why-students-with-smallest-debts-need-the-greatest-help html? r=0.

212

Jim Puzzanghera, Soaring student loan debt poses risk to nation’s future economic growth (Sept. 5, 2015), http://www.latimes.com/business/la-fi-student-debt-20150906-story html.

213

College Board 2013, trends in college pricing 2013.

214

20 U.S.C. § 1098(e).

215

See Jonathan M. Layman, Forgiven But Not Forgotten: Taxation of Forgiven Student Loans Under the Income–Based–Repayment Plan, 39 CAP. U. L. REV. 131, 151–52 (2011).

216

Id. at 151–52.

217

20 U.S.C. § 1078. See Layman, supra note 215, at 137–38.

218

I.R.C. § 108(f)(3). Demmons v. R3 Educ. Inc. (In re Demmons), 2016 WL 5874831, at *9 n.47 (Bankr. E.D. La. Oct. 7, 2016). See also Layman, supra note 215, at 147 (noting that with the exception of those instances specifically exempted from taxation, canceled student loans are subject to taxation as cancellation of indebtedness income). See also Ron Lieber, For Student Borrowers, Relief Now May Mean a Big Tax Bill Later (Dec. 14, 2012), http://www.nytimes.com/2012/12/15/your-money/for-student-borrowers-a-tax-time-bomb.html? r=0; Andrew Thompson, Ex-students with ‘Income–Based’ Loan Payments Face Huge Tax Bill (Feb. 15, 2016), http://www.nbcnews.com/business/personal-finance/ex-students-income-based-loan-payments-face-crushing-taxbill-n517566.

219

Layman, supra note 215, at 147; Ron Lieber, For Student Borrowers, Relief Now May Mean a Big Tax Bill Later (Dec. 14, 2012), http://www.nytimes.com/2012/12/15/your-money/for-student-borrowers-a-tax-time-bomb html? r=0; Andrew Thompson, Ex-students with ‘income-based’ loan payments face huge tax bill (Feb. 15, 2016), http://www nbcnews.com/business/personal-finance/ex-students-income-based-loan-payments-face-crushing-tax-bill-n517566.

220

Demmons v. R3 Educ. Inc. (In re Demmons), 2016 WL 5874831, at *9 note 47 (Bankr. E.D. La. Oct. 7, 2016).

221

Ron Lieber, For Student Borrowers, Relief Now May Mean a Big Tax Bill Later (Dec. 14, 2012), http://www.nytimes.com/2012/12/15/your-money/for-student-borrowers-a-tax-time-bomb.html? r=0.

222

Layman, supra note 215, at 152. See also 34 C.F.R. § 682.215(a)(2). See supra note 17.

223 Josh Mitchell, Government on Track to Forgive Up to $131,000 Each in Student Debt for Thousands of Doctors, THE WALL STREET JOURNAL (July 20, 2016, 10:45 a.m. ET),

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In re Engen, 561 B.R. 523 (2016)


http://blogs.wsj.com/economics/2016/07/20/government-on-track-to-forgive-up-to-131000-in-student-debt-forthousands-of doctors/ (last visited Aug. 8, 2016).

224

Charles Bovaird, Bonds Based On Student Loans Face Downgrades (JPM, NAVI) (Oct. 20, 2016) (quoting Mark Heppenstall, chief investment officer of Penn Mutual Asset), http://www.investopedia.com/news/bonds-basedstudent-loans-face-downgrades-jpm-navi/.

225

Id.

226

Josh Mitchell, U.S. to Forgive at Least $108 Billion in Student Debt in Coming Years, THE WALL STREET JOURNAL (Nov. 30, 2016) http://www.wsj.com/articles/u-s-to-forgive-at-least-108-billion-in-student-debt-in-coming-years-1480501802

227

U.S. CONST. Art. I, § 9.

End of Document


In re Kindle, 580 B.R. 443 (2017)


580 B.R. 443 United States Bankruptcy Court, D. South Carolina.

IN RE, Jeffery Richard KINDLE and Aislinn Sabrina Kindle, Debtors.

Case No. 17–01245–dd |

Signed 11/01/2017

Synopsis

Background: Trustee objected to confirmation of

debtors’ proposed Chapter 13 plan, under which debtors

would continue making their regular monthly payments

on their student loan debt outside plan.

Holdings: The Bankruptcy Court, David R. Duncan,

Chief Judge, held that:

[1] no adjustments to above-median-income Chapter 13

debtors’ “means” test “disposable income” were

necessary, in calculating the “projected disposable

income” that debtors would have to devote to payment of

unsecured creditors under plan, and

[2] debtors’ proposed cure-and-maintenance plan, under

which debtors’ proposed to continue making their regular

monthly student loan payments outside the plan, which

would result in the student loan creditors receiving a

44.51% distribution on their claims while general

unsecured creditors received only a 33% distribution

under plan, did not discriminate unfairly.

Objection overruled; plan confirmed.

West Headnotes (8)

[1]

Bankruptcy



Bankruptcy

Distribution

Twin aims of bankruptcy are to provide an

equitable distribution of assets for creditors, and

to provide a fresh start for debtor.


[2]

Bankruptcy

Distribution

Bankruptcy concept of equitable distribution of

assets does not mean all creditors must receive

an equal distribution, but merely that there must

be an equal distribution with respect to similarly

situated creditors.


[3]

Bankruptcy


Any separate classification of claims in Chapter

13 plan is “discrimination”; however, such

discrimination may be permissible, unless it is

unfair. 11 U.S.C.A. § 1322(b)(1).


[4]

Bankruptcy

Claims and assets; propriety and feasibility in

general

For an above-median-income Chapter 13 debtor,

debtor’s “means” test “disposable income” is the

starting point for determining the “projected

disposable income” that debtor must devote to

payment of unsecured creditors under the plan,

to which adjustments should be made only to

account for those changes to debtor’s income or

expenses that are very likely or certain to occur.

11 U.S.C.A. § 1325(b)(1)(B), (b)(3).


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In re Kindle, 580 B.R. 443 (2017)


[5]

Bankruptcy

Claims and assets; propriety and feasibility in

general

No adjustments to above-median-income

Chapter 13 debtors’ “means” test “disposable

income” were necessary, in calculating the

“projected disposable income” that debtors

would have to devote to payment of unsecured

creditors in order to obtain confirmation of plan

that provided for less than a 100% distribution

on creditor claims over objection of trustee or

unsecured creditor, where trustee presented no

evidence indicating that changes to debtors’

income or expenses were likely to occur, and

where student loan payments to which trustee

objected, to extent made outside plan, were

payments that debtors had been making for at

least six months prior to their bankruptcy filing.

11 U.S.C.A. § 1325(b)(1)(B), (b)(3).


[6]

Bankruptcy


To determine whether a proposed Chapter 13

plan is unconfirmable, as “unfairly

discriminating” against or in favor of class of

creditors, courts must consider the totality of the

circumstances in each case. 11 U.S.C.A. §

1322(b)(1).


[7]

Bankruptcy


Bankruptcy

Payments outside plan

Above-median-income Chapter 13 debtors’

proposed cure-and-maintenance plan, under

which debtors’ proposed to continue making

their regular monthly student loan payments

outside the plan, which would result in the

student loan creditors receiving a 44.51%

distribution on their claims while general

unsecured creditors received only a 33%

distribution under plan, did not discriminate

unfairly against general unsecured creditors and

in favor of student loan creditors, so as to

prevent court from confirming proposed plan,

where this 33% distribution to unsecured

creditors was in excess of distribution to which

they were entitled based on debtors’ projected

disposable income, and where allowing debtors

to continuing making regular student loan

payments outside plan would minimize accrual

of interest on debtors’ student loan debt and

facilitate debtors’ fresh start. 11 U.S.C.A. §

1322(b)(1).


[8]

Bankruptcy

Payments outside plan

Bankruptcy court could confirm Chapter 13 plan

that provided for debtors to continue making

their regular monthly payments on their student

loan debt outside plan, despite difficulties of

monitoring whether student loan payments were

actually being made, where debtors indicated

that their certificate of completion of all plan

payments would include certification of their

having made payments to student loan creditors,

and that trustee, if necessary, could seek

verification of student loan payments at that

time.



*444 Lex Rogerson, Jr., Lexington, SC, for Debtors.




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In re Kindle, 580 B.R. 443 (2017)


ORDER CONFIRMING CHAPTER 13 PLAN

David R. Duncan, Chief US Bankruptcy Judge

This matter is before the Court to consider confirmation

of a chapter 13 plan filed by debtors Jeffery Richard

Kindle and Aislinn Sabrina Kindle (“Debtors”) on July

26, 2017 [Docket No. 21]. Pamela Simmons–Beasley, the

chapter 13 trustee (“Trustee”), objected to confirmation of

Debtors’ plan [Docket No. 17].1 A hearing was held on

September 18, 2017. At the conclusion of the hearing, the

Court took the matter under advisement and gave the

parties an additional ten (10) days to submit supplemental

briefs. Both parties submitted briefs on September 28,

2017 [Docket Nos. 32, 33]. The Court now issues this

order.

FACTS

1. Debtors filed their chapter 13 case on March 14, 2017

and filed their schedules on the same date.

2. Their Schedule F lists student loans owed to Navient in

the total amount of $64,249.05. Navient filed proofs of

claim for both Debtors’ student loans, reflecting that Mrs.

Kindle owes a total of $19,574.01, and Mr. Kindle owes a

total of $44,622.19, for a total amount owed of

$64,196.20. Mr. Kindle’s student loans were consolidated

in 2002, and Mrs. Kindle’s loans were consolidated in

2013. The proofs of claim filed by *445 Navient reflect

that Debtors made payments on both consolidated student

loans for at least the six months preceding their

bankruptcy filing. Interest totaling approximately $200.00

per month accrues on the student loans. The last payment

on the student loans is due after the date of Debtors’

proposed final plan payment.

3. Mr. Kindle testified that his student loans are not

eligible for deferment, but that Mrs. Kindle’s are.

However, Mr. Kindle testified that Debtors had not

attempted to defer her student loan payments because

interest would continue to accrue on the loans while they

were in deferment. Mr. Kindle further testified that

deferring the student loans would not have an effect on

his employment or on Debtors’ lifestyle or financial

circumstances.

4. Debtors enjoy income above the South Carolina

median. Debtors’ initial Form 122C, the means test form,

filed on March 14, 2017, showed monthly disposable

income of $855.09. Debtors filed an amended means test

form on August 28, 2017, showing monthly disposable

income of $830.09. There is no contention that the form is

not correctly completed. There is no liquidation value that

must be paid to creditors.

5. Debtors’ Schedule I and J list combined monthly

income of $6,408.08 and monthly expenses of $5,430.92,

leaving Debtors with $977.16 per month. Listed as an

expense on Schedule J is a student loan payment in the

amount of $476.21.

6. Debtors have three children, ages 13, 16, and 18. Mrs.

Kindle does not work outside the home; however,

Debtors’ Schedule I indicates that she is considering

seeking part-time at-home employment. At the time of the

hearing, Mrs. Kindle had not located any employment,

and Mr. Kindle testified that it did not appear she would

be likely to obtain employment in the near future due to

ongoing medical issues.

7. Mr. Kindle testified that Debtors did not anticipate any

significant changes to their income or expenses in the

next few years.

8. Debtors owe general unsecured claims in addition to

their student loans in the amount of $90,097.69.

9. Debtors’ July 26 plan proposes total trustee payments

of $900.00 per month for 5 months, followed by

payments of $975.00 per month for 55 months. Debtors’

July 26 plan also proposes that Debtors will continue to

directly pay the student loans, making payments of

$476.21 per month. Over the course of the 60–month

plan, this will result in Debtors’ student loan creditors

receiving 44.51% of their claims. Under this proposed

plan, other general unsecured creditors will receive

33.30% of their claims.

10. If Debtors’ student loan creditors were paid through

the plan along with the other general unsecured creditors,

the unsecured creditors would receive approximately

36.48% over the course of the plan. Because of the

standard order in which trustees in South Carolina

distribute payments to creditors,2 according to the parties’

stipulation of facts filed on September 15, 2017,

disbursements to general unsecured creditors would not

begin until approximately month thirty (30) of the plan.

11. Interest and fees will continue to accrue on the student

loans during the term of the bankruptcy case, including

during the time that unsecured creditors are awaiting

distribution.

In re Kindle, 580 B.R. 443 (2017)


*446 ARGUMENTS OF THE PARTIES

Debtors argue that their proposed chapter 13 plan does

not unfairly discriminate against non-student loan

unsecured creditors, because Debtors propose to pay more

than their means test disposable income into the plan for

non-student loan unsecured creditors. Therefore, Debtors

argue, even though their student loan creditor is receiving

a slightly higher percentage than other general unsecured

creditors by being paid outside the plan, the classification

does not unfairly discriminate because the non-student

loan unsecured creditors are receiving all they are entitled

to under the means test. Debtors also argue that the

separate classification of the student loan has a good faith,

reasonable basis because requiring Debtors to pay the

student loan with their other general unsecured creditors

would result in substantial interest and late fees accruing

on the student loans, increasing the amount owed on the

loans at the conclusion of the bankruptcy case and

interfering with the purpose of Debtors’ bankruptcy case,

obtaining a fresh start.

Trustee responds that the separate classification of the

student loan creditor does in fact unfairly discriminate

against other general unsecured creditors, because the

student loan creditor will receive more favorable

treatment than other unsecured creditors. Trustee also

asserts that Debtors’ means test disposable income is

merely a starting point, and that the income listed on

Schedules I and J, along with judicial discretion and

common sense, should be used to determine a debtor’s

projected disposable income. Trustee points out that

Debtors have options for lowering Mrs. Kindle’s student

loan payments, such as deferment, which have not been

taken advantage of, and that Debtors also have the option

of raising their plan payments even further to pay

non-student loan creditors at the same rate as the student

loan creditor.

Trustee argues that the purpose of chapter 13 is to ensure

that debtors pay their creditors the maximum that they can

afford to pay, not whatever figure results from means test

calculations. Trustee concedes that all separate

classification of student loans should not be disallowed,

but proposes a bright line rule that, in situations similar to

Debtors’, “where Debtors are above median, employed,

and have shown no exceptional circumstances for why the

student loan should be paid, that a difference of less than

10 percent between student loan creditor treatment versus

the general unsecured creditors is fair.” Because here, the

difference is approximately 11%, Trustee argues that

unfair discrimination exists.

ANALYSIS

[1] [2] [3]“The twin aims of bankruptcy are to provide

equitable distribution of assets for creditors, and to

provide a fresh start for a debtor.” In re Shelton, 370 B.R.

861, 868 (Bankr. N.D. Ga. 2007) (citing Burlingham v.

Crouse, 228 U.S. 459, 472–73, 33 S.Ct. 564, 57 L.Ed. 920

(1913) ). However, the bankruptcy concept of equal

distribution does not mean all creditors must receive equal

distribution; instead, this concept means that there must

be equal distribution with respect to similarly situated

creditors. One exception to this general concept is set

forth in 11 U.S.C. § 1322(b). Section 1322(b)(1) states

that a plan may “designate a class or classes of unsecured

claims, as provided in section 1122 of this title, but may

not discriminate unfairly against any class so designated.”

Any separate classification under section 1322(b) is

“discrimination”; however, such discrimination may be

permissible, unless it is unfair. See *447 Bentley v.

Boyajian (In re Bentley), 266 B.R. 229, 237 (1st Cir. BAP

2001) (“Discrimination among classes of creditors, on the

other hand, is subject to limitation. The plan ‘may not

discriminate unfairly against any class so designated.’

Before determining what this phrase prohibits, we note

first that it tacitly permits some measure of discrimination

between different classes. In prohibiting only such

discrimination as is unfair against any class, § 1322(b)(1)

signals that a plan may, to an extent, treat different classes

differently. So a plan may discriminate, but not

unfairly.”). Section 1322(b)(5) expressly allows a debtor

to cure a default and maintain direct payments on certain

claims, such as the student loan debts at issue here, stating

that a plan may “provide for the curing of any default

within a reasonable time and maintenance of payments

while the case is pending on any unsecured claim or

secured claim on which the last payment is due after the

date on which the final payment under the plan is due.”

Thus, the Bankruptcy Code expressly allows the

discrimination proposed here—the remaining issue then,

is whether the discrimination is unfair.

I. Projected Disposable Income

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In re Kindle, 580 B.R. 443 (2017)


Before determining whether the proposed separate

classification unfairly discriminates, the Court must

address the parties’ arguments regarding how to calculate

Debtors’ projected disposable income. 11 U.S.C. § 521

sets forth a variety of documents a debtor must file,

including:

(B)(ii) a schedule of current income and current

expenditures;

...

(iv) copies of all payment advices or other evidence of

payment received within 60 days before the date of the

filing of the petition, by the debtor from any employer

of the debtor;

(v) a statement of the amount of monthly net income,

itemized to show how the amount is calculated; and

(vi) a statement disclosing any reasonably anticipated

increase in income or expenditures over the 12–month

period following the date of the filing of the petition.

Additionally, Fed. R. Bankr. P. 1007(b)(6) provides:

A debtor in a chapter 13 case shall

file a statement of current monthly

income, prepared as prescribed by

the appropriate Official Form, and,

if the current monthly income

exceeds the median family income

for the applicable state and

household size, a calculation of

disposable income made in

accordance with § 1325(b)(3),

prepared as prescribed by the

appropriate Official Form.

Section 1325(b) provides, in relevant part:

(b)(1) If the trustee or the holder of an allowed

unsecured claim objects to the confirmation of the plan,

then the court may not approve the plan unless, as of

the effective date of the plan—

...

(3) Amounts reasonably necessary to be expended

under paragraph (2), other than subparagraph (A)(ii) of

paragraph (2), shall be determined in accordance with

subparagraphs (A) and (B) of section 707(b)(2), if the

debtor has current monthly income, when multiplied by

12, greater than –

(A) in the case of a debtor in a household of 1

person, the median family income of the applicable

State for 1 earner;

(B) in the case of a debtor in a household of 2, 3, or 4

individuals, the highest median family income of the

applicable State for a family of the same number or

fewer individuals; or

*448 (C) in the case of a debtor in a household

exceeding 4 individuals, the highest median family

income of the applicable State for a family of 4 or

fewer individuals, plus $700 per month for each

individual in excess of 4.

In sum, then, a chapter 13 debtor is required to file

schedules of current income and current

expenditures—Schedules I and J—as well as, if the

debtor’s income exceeds the median family income for

South Carolina, complete a “means test” calculation of

disposable income using the formula established for

chapter 7 cases. Debtors, who are above-median, have

filed all required forms and documentation in their

chapter 13 case.

11 U.S.C. § 1325, discussing the requirements for

confirmation of a chapter 13 plan, provides, in relevant

part:

(b) (1) If the trustee or the holder of an allowed

unsecured claim objects to the confirmation of the plan,

then the court may not approve the plan unless, as of

the effective date of the plan—

(A) the value of the property to be distributed under

the plan on account of such claim is not less than the

amount of such claim; or

(B) the plan provides that all of the debtor’s

projected disposable income to be received in the

applicable commitment period beginning on the date

that the first payment is due under the plan will be

applied to make payments to unsecured creditors

under the plan.

(2) For purposes of this subsection, the term

“disposable income” means current monthly income

received by the debtor (other than child support

payments, foster care payments, or disability payments

for a dependent child made in accordance with

applicable nonbankruptcy law to the extent reasonably

necessary to be expended for such child) less amounts

reasonably necessary to be expended—

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In re Kindle, 580 B.R. 443 (2017)


(A)(i) for the maintenance or support of the debtor or a

dependent of the debtor, or for a domestic support

obligation, that first becomes payable after the date the

petition is filed; and

(ii) for charitable contributions (that meet the definition

of “charitable contribution” under section 548(d)(3) ) to

a qualified religious or charitable entity or organization

(as defined in section 548(d)(4) ) in an amount not to

exceed 15 percent of gross income of the debtor for the

year in which the contributions are made; and

(B) if the debtor is engaged in business, for the

payment of expenditures necessary for the

continuation, preservation, and operation of such

business.

In Hamilton v. Lanning, 560 U.S. 505, 130 S.Ct. 2464,

177 L.Ed.2d 23 (2010), the United States Supreme Court

considered how to calculate a chapter 13 debtor’s

projected disposable income. In Lanning, the debtor had

received a one-time buyout from her former employer in

the six months prior to the filing of her chapter 13

petition. Id. at 511, 130 S.Ct. 2464. This caused her

means test disposable income to be $1,114.98 per month.

Id. However, the debtor only received income of

$1,922.00 per month from her new job, leaving her, after

expenses, with disposable income listed on Schedule J of

$149.03 per month. Id. As a result of the debtor’s means

test disposable income, the chapter 13 trustee argued that

the debtor was required to make plan payments of

$756.00 per month for 60 months; however, both the

debtor and the trustee conceded that the debtor’s actual

income was insufficient to allow her to make payments in

that amount. Id. at 512, 130 S.Ct. 2464. The debtor

proposed a plan that would require *449 payments of

$144.00 per month for 36 months. Id. at 511, 130 S.Ct.

2464. The Supreme Court held that the best approach in

determining an above-median debtor’s projected

disposable income is to use the debtor’s disposable

income from the means test as a starting point, and then

make any necessary adjustments for “changes in the

debtor’s income or expenses that are known or virtually

certain at the time of confirmation.” Id. at 524, 130 S.Ct.

2464.

After Lanning, the Fourth Circuit twice considered the

question of how to calculate projected disposable income.

First, in Morris v. Quigley (In re Quigley), 673 F.3d 269

(4th Cir. 2012), the debtor proposed a chapter 13 plan that

surrendered two all-terrain vehicles. The payments on the

ATVs were included as expenses in the debtor’s means

test calculation of disposable income, as were payments

on a truck that were actually being made by the debtor’s

ex-boyfriend. Id. at 270. The trustee objected on the basis

that the debtor’s proposed plan did not allot all of the

debtor’s projected disposable income to plan payments,

since the debtor had deducted the amount of the ATV and

truck payments. Id. at 271. The bankruptcy court found

that the truck payments should not have been deducted

from the calculation of the debtor’s income, because the

debtor’s ex-boyfriend was already making those

payments. Id. at 271. However, the bankruptcy court

found that the ATV payments could be deducted because

projected disposable income could only be based on the

six months prior to the bankruptcy filing. Id. The district

court affirmed. Id. However, the Fourth Circuit reversed,

citing Lanning. The Fourth Circuit found that when

calculating projected disposable income, Lanning requires

adjustments be made to disposable income to account for

any known or virtually certain changes in either income

or expenses. Id. at 273.

The Fourth Circuit again considered the issue of the

calculation of projected disposable income after Lanning

in Mort Ranta v. Gorman, 721 F.3d 241 (4th Cir. 2013).

The primary issue in Mort Ranta was whether Social

Security income should be included in the calculation of

projected disposable income. The Fourth Circuit found

that Social Security income is excluded from projected

disposable income. Id. at 251. In doing so, the Fourth

Circuit again discussed Lanning, and stated:

Following Lanning, a debtor’s

“projected disposable income” is

based on the debtor’s “disposable

income,” give or take any

adjustments necessary to account

for foreseeable changes in that

income. Because the Code

expressly excludes Social Security

income from “current monthly

income,” and thus, “disposable

income,” it follows that Social

Security income must also be

excluded from “projected

disposable income.” Indeed, every

other circuit to address this issue

has arrived at the same conclusion.

Id.

[4] [5]In sum, it appears that the law in the Fourth Circuit is

that for an above-median debtor, the debtor’s means test

disposable income is the starting point for determining






























In re Kindle, 580 B.R. 443 (2017)


projected disposable income, and that adjustments should

be made only to account for those changes to the debtor’s

income or expenses that are very likely or certain to

occur. Debtors made the student loan payments listed on

their schedules for at least the six months prior to their

bankruptcy filing. They propose to continue these

payments, as section 1322(b)(5) allows. Accordingly,

including these payments in Debtors’ forward-looking

budget does not constitute a change to Debtors’ income or

expenses that is likely or certain to occur in the

future—these expenses were part of Debtors’ budget *450

well before their bankruptcy case was filed and are

permitted as part of Debtors’ plan. Trustee presented no

evidence indicating that changes to Debtors’ income or

expenses were likely to occur, and in fact, Mr. Kindle

testified that he did not anticipate any significant changes

to Debtors’ income and expenses. The existence of

additional disposable income using Schedules I and J in

the event student loan payments are not continued by

Debtors is not a change in circumstances. As a result,

under Lanning and the Fourth Circuit’s subsequent

opinions, no adjustments to Debtors’ means test

disposable income are necessary in order to arrive at

Debtors’ projected disposable income. Debtors’ projected

disposable income, and the amount Debtors are required

to pay to unsecured creditors, is $830.09 per month, the

amount reflected on their means test.

II. Unfair Discrimination

The Court has determined that Debtors’ projected

disposable income in this case is limited to the amount set

forth in their means test. The Court must next determine

whether Debtors’ separate classification of their student

loan creditor unfairly discriminates against Debtors’ other

unsecured creditors. As set forth above, section

1322(b)(1) provides that a debtor’s chapter 13 plan may

“designate a class or classes or unsecured claims ... but

may not discriminate unfairly against any class so

designated.” Historically, South Carolina has used the

following five factor test to determine whether a chapter

13 plan’s proposed classification unfairly discriminates:

(1) whether there is a reasonable basis for the

classification;

(2) whether the classification is necessary to the

debtor’s rehabilitation under Chapter 13;

(3) whether the discriminatory classification is

proposed in good faith;

(4) whether there is a meaningful payment to the

class discriminated against; and

(5) the difference between what the creditors

discriminated against will receive as the plan is

proposed, and the amount they would receive if

there was no separate classification.

In re Belton, C/A No. 16-03040-JW, 2016 WL 7011570,

at *6 (Bankr. D.S.C. Oct. 13, 2016) (citations omitted).

However, in Belton, Judge Waites stated:

While the undersigned is unwilling to abandon the

framework established by my predecessors on the

Court, it appears that factor five, the difference in

payment percentage, has been unduly emphasized in

prior cases. Therefore, in my view, the following

streamlined test better reflects the balance of factors

pursuant to which a debtor must submit evidence to

enable the Court to analyze the separate classification

of unsecured debt:

(1) Is there a good faith, rational basis for the

separate classification;

(2) Is the separate classification necessary to the

debtor’s rehabilitation under Chapter 13; and

(3) Is there a meaningful payment to the

discriminated class.

Id. at *7. Judge Waites also stated that “[h]elpful, but not

controlling to this analysis, is evidence indicating whether

the proposed distribution is greater than would be

received by the unsecured creditors in a Chapter 7

liquidation, and the degree of difference in distributions

between a plan containing separate classifications and one

without.” Id. at *7, n.11. Other courts have developed a

variety of tests. See *451 Labib–Kiyarash v. McDonald

(In re Labib–Kiyarash), 271 B.R. 189, 192 (9th Cir. BAP

2001) (utilizing four part test from Amfac Distribution

Corp. v. Wolff (In re Wolff), 22 B.R. 510 (9th Cir. BAP

1982): “(1) whether the discrimination has a reasonable

basis; (2) whether the debtor can carry out a plan without

the discrimination; (3) whether the discrimination is

proposed in good faith; and (4) whether the degree of

discrimination is directly related to the basis or rationale

for the discrimination.”); In re Pracht, 464 B.R. 486, 492

(Bankr. M.D. Ga. 2012) (citing In re Harding, 423 B.R.

568, 575 (Bankr. S.D. Fla. 2010) (adopting test that

requires a “fair balancing of: (1) the Debtor’s fresh start;

(2) the clear legislative objective of student loan

repayment; and (3) fair treatment of creditors as a

whole.”); In re Orawsky, 387 B.R. 128, 146–47 (Bankr.

E.D. Penn. 2008) (adopting framework using four

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In re Kindle, 580 B.R. 443 (2017)


“baselines” warranting consideration: 1. Equality of

distribution, 2. Nonpriority of student loans, 3. Mandatory

versus optional contributions, and 4. A fresh start for

honest debtors; stating that the degree of departure from

the baseline is relevant in determining whether

discrimination is unfair); In re Kolbe, 199 B.R. 569, 575

(Bankr. D. Md. 1996) (after discussing various tests

employed by courts, adopting a test which requires

consideration of the same five factors historically used in

South Carolina); In re Furlow, 70 B.R. 973, 978 (Bankr.

E.D. Penn. 1987) (“[D]ifferent treatment is permissible if

and only if the debtor is able to prove a reasonable basis

for the degree of discrimination contemplated by the

Plan.”).

[6]Although courts employ a variety of different tests and

approaches in considering what constitutes unfair

discrimination, nearly all tests involve considering the

totality of the circumstances in each case. A totality of the

circumstances approach is, and, based on the tests adopted

in South Carolina and other districts, has always been, the

proper framework for determining whether a

classification unfairly discriminates against other

creditors.

[7]In this case, the totality of the circumstances indicate

that Debtors’ proposed treatment of their student loan

creditor does not unfairly discriminate against their other

general unsecured creditors. As discussed above,

non-student loan unsecured creditors are actually

receiving more than a strict application of the means test

would yield—Debtors are voluntarily contributing their

discretionary income (the difference between their means

test disposable income and their Schedule J disposable

income) to increase the amount paid to those creditors.

This voluntary contribution above and beyond what

Debtors are required to pay under the means test indicates

good faith on the part of Debtors in seeking to repay their

creditors. Debtors’ voluntary contribution results in

non-student loan unsecured creditors receiving

approximately 33% on their claims—a significant

percentage in a chapter 13 case.

Additionally, and importantly, there are reasonable bases

for the proposed discrimination. Interest on Debtors’

student loans equals nearly $200.00 per month. If Debtors

are not allowed to continue making regular payments on

their student loans, interest will continue to accrue at this

significant rate. In addition, because distributions to

general unsecured creditors will not begin until about

thirty (30) months into the plan, default charges will also

be added to the loans until the student loan creditor begins

receiving payments from the trustee. Even once trustee

payments to the creditor begin, the payments may not be

sufficient to cover the default charges, much less the

regular payments. All of this will likely result in Debtors

*452 owing more on their student loans at the end of their

bankruptcy case than they did when the bankruptcy

began. Because student loans are nondischargeable,

Debtors’ successful completion of their bankruptcy case

will have put them in no better position—at least with

respect to their student loans—than they were in prior to

their bankruptcy filing. This result is not consistent with

the Bankruptcy Code’s purpose of providing debtors with

a fresh start. Although the fact that student loans are

nondischargeable alone does not justify separate

classification of those types of claims,3 their

nondischargeable character, taken with the rest of the

circumstances present, indicate that the student loans in

this case may be separately classified.

Trustee argues that the Court should adopt a bright line

rule that in situations where Debtors are above-median,

employed, and have not shown exceptional circumstances

relating to their student loans, any difference in payment

between student loan creditors and other unsecured

creditors of more than ten percent should be considered

unfair discrimination. First, as set forth above, whether a

classification discriminates unfairly should be determined

on a case by case basis using a totality of the

circumstances approach. Further, even if a bright line rule

were appropriate, using a percentage to determine what

constitutes unfair discrimination would not be proper. In

some cases, even a five percent difference between the

amounts a student loan creditor and other general

unsecured creditors are receiving could be large.

However, in other cases, such as this one, a ten percent

difference may be much less significant. In this case,

non-student unsecured claims will receive a total of

approximately 33%, or $30,003, over the life of the plan.

If Debtors’ student loan creditor were to be paid with

other general unsecured creditors, the unsecured creditors,

including the student loan creditor, would receive a total

of approximately 36.48%, or $56,289.79 over the life of

the plan. This means that, excluding the student loan

creditor, general unsecured creditors would receive

approximately $32,867.64 over the life of the plan—only

$2,864.64 more than they would receive if the student

loan creditor is paid outside the plan. In the circumstances

of this case only, the Court finds that the separate

classification of Debtors’ student loan creditor does not

unfairly discriminate against other unsecured creditors.

[8]Concern was also raised that if the student loan creditor

is being paid directly, it may be difficult to monitor

whether the student loan payments are actually being

made. While Federal Rule of Bankruptcy Procedure

3002.1 was recently adopted to impose various reporting





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In re Kindle, 580 B.R. 443 (2017)


requirements relating to claims secured by a debtor’s

principal residence and being paid directly to the creditor,

no such rule exists for other types of creditors, including

student loan creditors. The parties note that 11 U.S.C. §

1328(a) provides that a debtor is only entitled to a

discharge after completion of “all payments under the

plan”. Mr. Kindle testified that Debtors understand if they

do not continue to make their student loan payments, they

will not be entitled to a discharge at the end of their

chapter 13 case. Debtors indicate that their certificate of

completion of all plan payments will include certification

of making the payments to the student loan creditor. If

necessary, the trustee may seek verification of these

payments at that time. The Court was not asked to, and is

not ruling on, the section 1328(a) issue in the context of

student loan payments. This order simply reports *453 the

agreement of Debtors and Trustee.

CONCLUSION

For the reasons set forth above, Trustee’s objection to

confirmation is overruled, and Debtors’ chapter 13 plan

filed July 26, 2017 is confirmed. A separate order will

issue.

AND IT IS SO ORDERED.

All Citations

580 B.R. 443

Footnotes 1

Debtors’ original chapter 13 plan was filed on March 14, 2017 [Docket No. 7]. Trustee filed her objection to confirmation on May 4, 2017 [Docket No. 17]. Debtor’s amended plan filed July 26, 2017 contained numerous changes, but the basis for Trustee’s objection remained, and so her objection remained outstanding despite the filing of the amended plan.

2

Distributions are typically made first to administrative claims and secured claims, then to priority claims. Unsecured creditors only begin to receive distributions after these claims are fully paid.

3

See In re Kalfayan, 415 B.R. 907, 910 (Bankr. S.D. Fla. 2009) (“Most courts have concluded that discrimination based solely on nondischargeability is unfair.”).

End of Document


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Case 18-10503 Doc 26 Filed 03/05/19 Entered 03/05/19 12:34:17 Desc Main Document Page 1 of 6

With Order Approving Separate Classification of Student Loan Creditors' General Unsecured Claims

ORDER AFTER DUE CONSIDERATION of the foregoing Motion, and the attached documents, THE COURT FINDS (1) the Debtor has demonstrated student loan creditors Navient and Great Lakes (together, the "SL Creditors") received notice of both the Debtor's chapter 13 bankruptcy filing and her proposed treatment of their claims, via direct payments, and neither SL Creditor filed an objection to the plan or proposed treatment; (2) the proposed treatment of the SL Creditors' unsecured claims is a permissible separate classification and does not constitute unfair discrimination, under 11 U.S.C. § 1322(b)(1); and (3) it appears to be in the best interest of all creditors that the Debtor treat the SL Creditors this way. Therefore, IT IS HEREBY ORDERED the Debtor's Motion to pay student loan creditors directly is GRANTED.

Formatted for Electronic Distribution Not for Publication

___________________________________ March 6, 2019 Colleen A. Brown, U.S. Bankruptcy Judge

Filed & Entered On Docket

03/06/2019


Case 18-10503 Doc 13 Filed 12/07/18 Entered 12/08/18 00:23:09 Desc Imaged Certificate of Notice Page 1 of 10

United States Bankruptcy Court District of Vermont

In re: Case No. 18-10503-cabRebecca Moffat White Chapter 13 Debtor CERTIFICATE OF NOTICEDistrict/off: 0210-2 User: jmk Page 1 of 1 Date Rcvd: Dec 05, 2018 Form ID: pdf799 Total Noticed: 13

Notice by first class mail was sent to the following persons/entities by the Bankruptcy Noticing Center onDec 07, 2018.db +Rebecca Moffat White, PO Box 1316, Montpelier, VT 05601-1316cr ++NATIONSTAR MORTGAGE LLC, PO BOX 619096, DALLAS TX 75261-9096 (address filed with court: Nationstar Mortgage LLC, Attn: Bankruptcy Department, P.O. Box 619096, Dallas, TX 752619741)835694 +Great Lakes, PO Box 7860, Madison, WI 53707-7860835701 Great Lakes, PO Box 790321, St. Louis MO 63179-0321835695 IC System, Inc., PO Box 64378, St. Pau MN 55164-0378835702 +JCC Christensen and Associates, Inc., PO Box 519, Sauk Rapids, MN 56379-0519835703 Mr. Cooper, 8950 Cypress Road, Coppell, TX 75019835706 New York State Department of Taxation and Finance, OPTS-Corporate Tax Liability Resolution, W A Harriman Campus, Albany, NY 12227-0001

Notice by electronic transmission was sent to the following persons/entities by the Bankruptcy Noticing Center.835674 E-mail/Text: [email protected] Dec 05 2018 19:41:58 AFNI, Inc., PO Box 3517, Bloomington, IL 61702-3517835691 +E-mail/Text: [email protected] Dec 05 2018 19:41:59 Credit Collection Services, 725 Canton Road, Norwood, MA 02062-2679835696 E-mail/Text: [email protected] Dec 05 2018 19:41:58 Internal Revenue Service, PO Box 7346, Philadelphia, PA 19101-7346835704 E-mail/PDF: [email protected] Dec 05 2018 19:51:34 Navient, PO Box 9655, Wilkes-Barre, PA 18773-9655835705 E-mail/Text: [email protected] Dec 05 2018 19:41:59 Northfield Savings Bank, PO Box 7180, Barre, VT 05641-7180 TOTAL: 5

***** BYPASSED RECIPIENTS *****NONE. TOTAL: 0

Addresses marked ’+’ were corrected by inserting the ZIP or replacing an incorrect ZIP.USPS regulations require that automation-compatible mail display the correct ZIP.

Transmission times for electronic delivery are Eastern Time zone.

Addresses marked ’++’ were redirected to the recipient’s preferred mailing addresspursuant to 11 U.S.C. 342(f)/Fed.R.Bank.PR.2002(g)(4).

I, Joseph Speetjens, declare under the penalty of perjury that I have sent the attached document to the above listed entities in the mannershown, and prepared the Certificate of Notice and that it is true and correct to the best of my information and belief.

Meeting of Creditor Notices only (Official Form 309): Pursuant to Fed. R. Bank. P. 2002(a)(1), a notice containing the complete SocialSecurity Number (SSN) of the debtor(s) was furnished to all parties listed. This official court copy contains the redacted SSN as requiredby the bankruptcy rules and the Judiciary’s privacy policies.

Date: Dec 07, 2018 Signature: /s/Joseph Speetjens

_

CM/ECF NOTICE OF ELECTRONIC FILING

The following persons/entities were sent notice through the court’s CM/ECF electronic mail (Email)system on December 5, 2018 at the address(es) listed below: Grant C. Rees on behalf of Creditor Nationstar Mortgage LLC [email protected], [email protected] Jan M. Sensenich [email protected], [email protected];[email protected];[email protected];vermont [email protected] U S Trustee [email protected] TOTAL: 3


In re Decena, 549 B.R. 11 (2016)

75 Collier Bankr.Cas.2d 517


KeyCite Red Flag - Severe Negative Treatment Reversed in Part, Vacated in Part by Citizens Bank v. Decena, E.D.N.Y.,

November 29, 2016

549 B.R. 11 United States Bankruptcy Court, E.D. New York.

IN RE: Lorelei DECENA, Debtor, Lorelei Decena, Plaintiff,

v. Citizens Bank, Defendant.

Case No.: 15–72903–reg |

Adv. Proc. No. 15–8275–reg |

Signed April 4, 2016

Synopsis

Background: Chapter 7 debtor brought adversary

proceeding, seeking determination that obligation of

approximately $161,000 in education-related debt, which

she had incurred via private student loans to attend an

unaccredited, unlicensed foreign medical school, should

be discharged. When creditor did not file an answer,

debtor filed motion for default judgment.

Holdings: The Bankruptcy Court, Robert E. Grossman,

J., held that:

[1] the court declined to set aside creditor’s default for

“good cause,” despite debtor’s failure to serve her

amended complaint by certified mail;

[2] the term “educational benefit,” as used in the

subparagraph of the discharge exception for student loan

debt which excepts from discharge an obligation to repay

funds received as an educational benefit, scholarship, or

stipend, does not encompass loans;

[3] debtor’s loans were not obligations to repay funds

received as an educational benefit, scholarship, or

stipend; and

[4] debtor’s loans were not “qualified education loans,”

as defined by the Internal Revenue Code.

Motion granted; debt discharged.

West Headnotes (22)

[1]

Bankruptcy

Default

There is a two-step process for the court’s entry

of default judgment: entry of default, then entry

of default judgment. Fed. R. Bankr. P. 7055;

Fed. R. Civ. P. 55.


[2]

Bankruptcy

Default

Default occurs if defendant fails to respond to

the complaint within 30 days after issuance of

summons. Fed. R. Bankr. P. 7055; Fed. R. Civ.

P. 55.


[3]

Bankruptcy

Default

Bankruptcy court declined to set aside creditor’s

default for “good cause,” despite Chapter 7

debtor’s failure to serve her amended

dischargeability complaint by certified mail,

where supplemental summons was issued, and

served on creditor by regular mail, some 12

weeks earlier, and although creditor admitted

having had knowledge of the adversary

proceeding for some two to five weeks, it still

had not filed an answer or put forth any defense

to the allegations of the amended complaint.

Fed. R. Bankr. P. 7055(c); Fed. R. Civ. P. 55.


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In re Decena, 549 B.R. 11 (2016)



[4]

Bankruptcy

Hearing and Determination; Default

Creditor’s default, standing alone, did not entitle

Chapter 7 debtor to a default judgment on her

dischargeability complaint. Fed. R. Bankr. P.

7055; Fed. R. Civ. P. 55.


[5]

Bankruptcy

Default

Although, upon a default, the court generally

must take the well-pleaded allegations of a

complaint as true, the court must still decide

whether plaintiff’s complaint alleges a

legitimate cause of action, since a party in

default does not admit mere conclusions of law.

Fed. R. Bankr. P. 7055; Fed. R. Civ. P. 55.


[6]

Bankruptcy

Default

Upon a default, plaintiff must demonstrate a

prima facie case in order to obtain a default

judgment. Fed. R. Bankr. P. 7055; Fed. R. Civ.

P. 55.


[7]

Bankruptcy

Default

Upon a default, liability does not automatically

attach from the well-pleaded allegations of the

complaint, as it remains the court’s

responsibility to ensure that the factual

allegations, accepted as true, provide a proper

basis for liability and relief. Fed. R. Bankr. P.

7055; Fed. R. Civ. P. 55.


[8]

Bankruptcy



Bankruptcy Code is designed to provide a “fresh

start” to the discharged debtor.


[9]

Bankruptcy

Debts and Liabilities Discharged

Courts must limit the Bankruptcy Code’s

discharge exceptions to those “plainly

expressed.” 11 U.S.C.A. § 523(a).


[10]

Bankruptcy

Debts and Liabilities Discharged

Court must interpret exceptions to the broad

discharge presumption narrowly. 11 U.S.C.A. §

523(a).


[11]

Bankruptcy



Bankruptcy

Educational Loans

Bankruptcy Code’s purpose to give honest

debtors a fresh start does not automatically

apply to student loan debtors; rather, the interest





























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In re Decena, 549 B.R. 11 (2016)



in ensuring the continued viability of the student

loan program takes precedence. 11 U.S.C.A. §

523(a)(8).


[12]

Bankruptcy

Educational Loans

Bankruptcy

Hardship

Under the Bankruptcy Code, except in cases of

undue hardship, a bankruptcy discharge does not

discharge a debtor from any enumerated

education-related debt. 11 U.S.C.A. §

523(a)(8).


[13]

Bankruptcy

Educational Loans

Bankruptcy Code excepts four types of

educational debt from discharge: (1)

educational benefit overpayments or loans

made, insured, or guaranteed by a governmental

unit, (2) educational benefit overpayments or

loans made under any program partially or fully

funded by a governmental unit or nonprofit

institution, (3) obligations to repay funds

received as an educational benefit, scholarship,

or stipend, and (4) “qualified education

loan[s].” 11 U.S.C.A. § 523(a)(8).


[14]

Bankruptcy

Educational loans

It is incumbent upon a debtor seeking discharge

of an education-related debt to prove either (1)

that the debt does not fit within the parameters

of the four types of educational debts excepted

from discharge, or, if the debtor cannot prove

that, (2) that it would be an “undue hardship” to

repay the debt. 11 U.S.C.A. § 523(a)(8).


[15]

Bankruptcy

Educational Loans

In the Bankruptcy Abuse Prevention and

Consumer Protection Act (BAPCPA), Congress,

by separating an “educational benefit

overpayment or loan” and an “obligation to

repay funds received” into two separate

subparagraphs of the discharge exception for

student loan debt, indicated an intention to give

each subsection a distinct function and to target

different kinds of educational debts. 11

U.S.C.A. §§ 523(a)(8), 523(a)(8)(A)(i),

523(a)(8)(A)(ii).


[16]

Bankruptcy

Educational Loans

For purposes of determining whether

education-related debt falls within the

subparagraph of the discharge exception for

student loan debt which excepts from discharge

an obligation to repay funds received as an

educational benefit, scholarship, or stipend,

“scholarships” and “stipends,” unlike loans, are

conditional educational grants, which are not

generally required to be repaid. 11 U.S.C.A. §§

523(a)(8), 523(a)(8)(A)(ii).


[17]

Bankruptcy

Educational Loans

Term “educational benefit,” as used in the

subparagraph of the discharge exception for


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In re Decena, 549 B.R. 11 (2016)




educational benefit, scholarship, or stipend,

refers to educational debts other than loans. 11

U.S.C.A. §§ 523(a)(8), 523(a)(8)(A)(ii).


[18]

Bankruptcy

Educational Loans

Subparagraph of the discharge exception for



educational benefit, scholarship, or stipend is

not a “catch-all” provision designed to

encompass any educational claim arising out of

any transaction that bestows an educational

benefit on a debtor. 11 U.S.C.A. §

523(a)(8)(A)(ii).


[19]

Bankruptcy

Educational Loans




educational benefit, scholarship, or stipend was

intended to encompass alternatives to the typical

debtor-creditor relationship in the education

context; these alternatives include cash benefit

programs, such as veteran educational benefits,

stipends for teaching assignments, conditional

grants, cash scholarships, and other obligations

that are distinct from traditional student loans.

11 U.S.C.A. § 523(a)(8)(A)(ii).


[20]

Bankruptcy

Educational Loans

Private loans obtained by Chapter 7 debtor to

attend unaccredited, unlicensed foreign medical

school were not obligations to repay funds

received as an educational benefit, scholarship,

or stipend, within meaning of the discharge

exception for student loan debt. 11 U.S.C.A. §

523(a)(8)(A)(ii).


[21]

Bankruptcy

Educational Loans


student loan debts which excepts from discharge

“any other educational loan that is a qualified

education loan” as defined in the Internal

Revenue Code excepts from discharge loans for

attending an “eligible educational institution,”

recognition of which is dictated by the Federal

School Codes List for the years 2004-05, which

identify all postsecondary schools that are

currently eligible for Title IV aid. 11 U.S.C.A. §

523(a)(8)(B); 26 U.S.C.A. § 221(d).


[22]

Bankruptcy

Educational Loans

Private loans obtained by Chapter 7 debtor to

attend unaccredited, unlicensed foreign medical

school were not “qualified education loans,” as

defined by the Internal Revenue Code, and so

did not fall within the subparagraph of the

discharge exception for student loan debts

which excepts from discharge “any other

educational loan that is a qualified education

loan.” 11 U.S.C.A. § 523(a)(8)(B); 26 U.S.C.A.

§ 221(d).























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In re Decena, 549 B.R. 11 (2016)



*14 Darren Aronow, Hicksville, NY, for Plaintiff.

Geoffrey J. Peters, Weltman Weinberg & Reis Co. LPA,

Grove City, OH, for Defendant.

MEMORANDUM DECISION

Robert E. Grossman, United States Bankruptcy Judge

Before the Court is the Debtor’s motion asking the Court

to find that an obligation of approximately $161,000 in

education-related debt should be discharged in this

bankruptcy case. The Defendant, Citizens Bank

(“Citizens”), did not file an answer. The Court noted the

default, and the Debtor filed the instant motion for default

judgment.

The Debtor does not argue that repaying debt would be an

“undue hardship” as that term is used under the Code.

Rather, she argues that the subject loans do not fit within

the parameters of student loan debt proscribed by section

523(a)(8) and therefore are eligible for a discharge. This

case involves private student loans—not made, insured or

guaranteed by the government—to attend an

unaccredited, unlicensed foreign medical school.

The Court finds that the debt in this case is dischargeable

in that the loans do not fall within section 523(a)(8)’s

“student loan” discharge exception, and default judgment

in favor of the Debtor is appropriate. Although the loans

underlying this debt were (arguably) used for educational

purposes, the uncontested facts of this case are that the

loans were not made, insured or guaranteed by the

government and thus the debt does not fall within section

523(a)(8)(A)(i); nor were these loans “qualified

education loans” as that term is defined by the Internal

Revenue Code, because the foreign medical school was

unlicensed and unaccredited, and thus the debt does not

fall within section 523(a)(8)(B). Finally, the Court finds

that the debt does not fall within section 523(a)(8)(A)(ii)

because it did not arise from “an obligation to repay funds


stipend.” Although there is some case law authority to

suggest that section 523(a)(8)(A)(ii) should be read

broadly to encompass any debt resulting from an

educational endeavor, the Court finds that the provision

cannot be interpreted to include private loans such as the

loans we have in this case. The Court is fully aware of

*15 Congress’s expansion over the years of the category

of education-related debt which is not subject to

discharge in bankruptcy.1 However, this expansion is not

limitless. Congress certainly can amend the statute to

reflect its intent; but until such time, the Court is bound

by the existing language of the statute and the guiding

principle that exceptions to discharge must be construed

narrowly in favor of a debtor.

For the reasons set forth in this Memorandum Decision,

the debt to Citizens is discharged.

FACTS

In June of 2004, the Debtor completed a three-year course

of study at St. Christopher’s College of Medicine (“St.

Christopher’s”) in Senegal, West Africa. Upon

completion of the program and the receipt of a medical

“degree,” the Debtor returned to the United States to take

the medical boards. However, she was ineligible to sit for

the medical boards in multiple states due to the fact that

St. Christopher’s was not an accredited medical school.

(Amended Complaint ¶¶ 33–37). The Debtor alleges that

St. Christopher’s falsely represented to her that it was

licensed and accredited, and her medical degree would

qualify her to sit for U.S. medical boards. (Amended

Complaint ¶¶ 5–6).

Prior to beginning her course of study, St. Christopher’s

provided the Debtor with a loan application from Citizens

to borrow the funds necessary to fund her studies.

(Amended Complaint ¶ 7). The loan application reflects

“St. Christopher’s College of Medicine,” which is not on

the Federal School Codes List of eligible educational

institutions, as the school for which the Debtor incurred

the loan; however, the Department of Education Code

reflected in the application (no. 040085) is associated

with an unrelated school in Berlin, Germany—Steinbeis

Hoch Schulte Berlin, which is on the Federal School

Codes List of eligible educational institutions. (Amended

Complaint ¶ 23). It appears that the Debtor executed a

series of five loans from Citizens, the total outstanding

balance on which was approximately $161,592 on the

date of the bankruptcy filing. (Amended Complaint ¶ 9).

According to the Debtor, she made efforts to repay the

loans from 2006 to 2011, when she ceased making

payments and returned to school for a master’s degree.

(Amended Complaint ¶ 39). Citizens is neither a

governmental unit nor a non-profit institution; the loans

were not insured or guaranteed by a governmental unit;




In re Decena, 549 B.R. 11 (2016)



nor were the loans made under a program funded in

whole or in part by a governmental unit or nonprofit

institution. (Amended Complaint ¶ 10 and Exh. A).

On July 7, 2015, the Debtor filed a “no asset” voluntary

chapter 7 petition. The Debtor scheduled obligations to

Citizens in the total amount of $161,591.19. On August

11, 2015, the chapter 7 trustee issued a report of no

distribution, and on October 15, 2015, the Court granted

the Debtor’s discharge.

On October 13, 2015, the Debtor filed a complaint

seeking to declare the debt to Citizens discharged. The

complaint was served upon Citizens via regular mail at: 1

Citizens Plaza, Providence, RI 12903 Attn: *16 Bruce

Van Saun Chairman, CEO & President. Citizens failed to

answer or otherwise appear and the Clerk of Court noted

Citizens’ default on December 14, 2015. On January 9,

2016, the Debtor filed an amended complaint (“Amended

Complaint”). The Amended Complaint was served by the

same means and at the same address as the original

complaint. Citizens again failed to answer or otherwise

appear, and the Clerk noted the default on February 22,

2016.

On February 29, 2016, the Debtor filed this amended

motion for default judgment. On March 21, 2016, the

Court held a hearing on the motion and counsel for

Citizens appeared at the hearing in opposition. Although

it remains unclear when Citizens actually became aware

of this proceeding, at the hearing Citizens’ counsel

represented that it was contacted by Citizens on March

18, 2016—three days prior to the hearing. Citizens’

counsel did not argue that Citizens did not receive the

complaint, Amended Complaint or the motion for default

judgment. Rather, counsel argued that service of the

complaint and Amended Complaint were not made by

certified mail as required by Federal Rule of Bankruptcy

Procedure 7004(h). Citizens’ counsel requested additional

time to respond to the motion for default judgment, and

the Court granted Citizens fourteen days to file a reply.

Rather than answer the Amended Complaint or make any

substantive argument in defense of the allegations of the

Amended Complaint, on April 1, 2016 Citizens filed an

objection to the default motion asking for an additional 30

days to answer the Amended Complaint. In the objection,

Citizens argues that this Court lacks personal jurisdiction

over it due to the Debtor’s failure to serve the Amended

Complaint by certified mail. Yet, Citizens admits to

having received the Debtor’s amended motion for default

judgment, filed on February 29, 2016 (Objection ¶ 5),

which motion was served by the same means as the

complaint and Amended Complaint.

DISCUSSION

I. Default Judgment Under FRCP 55(b) [1] [2] [3]After a court notes a defendant’s default, a plaintiff

may seek entry of default judgment under Federal Rule of

Civil Procedure 55(b), made applicable in adversary

proceedings by Federal Rule of Bankruptcy Procedure

7055.2 A default occurs if the defendant fails to respond to

the complaint within thirty days after the issuance of the

summons. See Fed. R. Civ. P. 7012(a). Here, the

supplemental summons was issued, and served on

Citizens by regular mail, on January 11, 2016. Despite

having admitted knowledge of this adversary proceeding

sometime between February 29, 2016 and March 16,

2016, Citizens still has not filed an answer or put forth

any defense to the allegations of the Amended Complaint.

Based on these facts, the Court declines to set aside

Citizens’ default for “good cause” under Federal Rule of

Bankruptcy Procedure 7055(c) despite the Debtor’s

failure to serve the Amended Complaint by certified mail.

[4] [5] [6] [7]Citizens’ default does not, standing alone, entitle

the Debtor to a default judgment. See Nickolas v. Boccio

(In re Boccio), 281 B.R. 171, 174 (Bankr.E.D.N.Y.2002)

(non-defaulting party not entitled to default judgment as a

matter of right). Although “[u]pon a default, the Court

generally must take the well-pleaded *17 allegations of a

complaint as true,” In re Drexler Associates, 57 B.R. 312

(Bankr.S.D.N.Y.1986) (citing Trans World Airlines, Inc.

v. Hughes, 449 F.2d 51, 63–64 (2d Cir.1971), reversed on

other grounds, 409 U.S. 363, 93 S.Ct. 647, 34 L.Ed.2d

577 (1973)), the Court must still decide whether the

Amended Complaint alleges “a legitimate cause of action,

since a party in default does not admit mere conclusions

of law.” Microsoft Corp. v. Computer Care Ctr., Inc., No.

06–CV–1429 SLT RLM, 2008 WL 4179653, at *6

(E.D.N.Y. Sept. 10, 2008). The plaintiff must demonstrate

a prima facie case in order to obtain a default judgment.

See Oceanic Trading Corp. v. Vessel Diana, 423 F.2d 1, 4

(2d Cir.1970). “Put differently, liability does not

automatically attach from the well-pleaded allegations of

the complaint, as it remains the Court’s responsibility to

ensure that the factual allegations, accepted as true,

provide a proper basis for liability and relief.”

Rolls–Royce PLC v. Rolls–Royce USA, Inc., 688

F.Supp.2d 150, 153 (E.D.N.Y.2010) (citing Au Bon Pain

Corp. v. Artect, Inc., 653 F.2d 61, 65 (2d Cir.1981)).

Accordingly, the Court must determine whether the










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In re Decena, 549 B.R. 11 (2016)



Amended Complaint states a prima facie case under

section 523(a)(8).

II. Exceptions to Discharge—11 U.S.C. § 523(a)(8) [8] [9] [10]The Bankruptcy Code is designed to provide a

“fresh start” to the discharged debtor. United States v.

Sotelo, 436 U.S. 268, 280, 98 S.Ct. 1795, 56 L.Ed.2d 275

(1978). Courts must limit the Bankruptcy Code’s

discharge exceptions to those “plainly expressed.”

Bullock v. BankChampaign, N.A., ––– U.S. ––––, 133

S.Ct. 1754, 1760, 185 L.Ed.2d 922 (2013). Accordingly,

the Court must interpret exceptions to the broad discharge

presumption narrowly. Kawaauhau v. Geiger, 523 U.S.

57, 62, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998).

[11]Congress has determined that the Bankruptcy Code’s

purpose to give honest debtors a fresh start does not

automatically apply to student loan debtors. Nash v.

Connecticut Student Loan Foundation (In re Nash), 446

F.3d 188, 191 (1st Cir.2006). “[T]he interest in ensuring

the continued viability of the student loan program takes

precedence.” Id.

[12] [13]The Bankruptcy Code’s discharge exception for

student loans is found in section 523(a)(8), which

provides that, except in cases of undue hardship, a

bankruptcy discharge does not discharge a debtor from

any debt for:

(A)(i) an educational benefit overpayment or loan

made, insured, or guaranteed by a governmental unit,

or made under any program funded in whole or in

part by a governmental unit or nonprofit institution;

or




education loan, as defined in section 221(d)(1) of the

Internal Revenue Code of 1986, incurred by a debtor

who is an individual ...

11 U.S.C. § 523(a)(8). In short, section 523(a)(8) excepts

four types of educational debt from discharge:

(1) educational benefit overpayments or loans

made, insured, or guaranteed by a governmental unit;

(2) educational benefit overpayments or loans made

under any program partially or fully funded by a

governmental unit or nonprofit institution;

*18 (3) obligations to repay funds received as an

educational benefit, scholarship, or stipend; and

(4) “qualified education loan[s].”

See id.

[14]It is incumbent upon a debtor to prove either (a) that

the education-related debt does not fit within these

parameters, or (if they cannot prove (a))(b) that it would

be an undue hardship to repay the debt.

The current iteration of section 523(a)(8) was adopted as

part of BAPCPA in 2005. Prior to BAPCPA, section

523(a)(8) provided that a bankruptcy discharge would not

apply to a debt for:

an educational benefit

overpayment or loan made, insured

or guaranteed by a governmental

unit, or made under any program

funded in whole or in part by a

governmental unit, or nonprofit

institution, or for an obligation to

repay funds received as an

educational benefit, scholarship, or

stipend ...

11 U.S.C. § 523(a)(8) (1994). Congress’s addition of

subsection 523(a)(8)(B)’s discharge exception for

“qualified education loans” is the only obvious addition

to section 523(a)(8)’s language. However, Congress also

fragmented part of the statute which was previously an

“integrated whole.” That is, the creation of subsections

within section 523(a)(8) makes clear that the “obligation

to repay funds received as an educational benefit,

scholarship, or stipend” referenced in subsection

523(a)(8)(A)(ii), and previously part of the integrated

whole of section 523(a)(8), was intended to have its own

meaning separate and distinct from the “educational

benefit overpayment or loan” referenced in subsection

523(a)(8)(A)(i). But see Sensient Technologies Corp. v.

Baiocchi (In re Baiocchi), 389 B.R. 828, 831–32

(Bankr.E.D.Wis.2008) (finding that the decision to create

new subsection 523(a)(8)(A)(ii) “must be read as

encompassing a broader range of educational benefit

obligations”).

The Debtor is asking the Court to find that the loans

advanced by Citizens, although they did in fact fund the

Debtor’s course of studies at St. Christopher’s, do not fit

within the parameters of section 523(a)(8). There is a line

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In re Decena, 549 B.R. 11 (2016)



of cases, discussed later in this opinion, which have

interpreted section 523(a)(8)(A)(ii)—“obligation to repay

funds received as an educational benefit, scholarship, or

stipend”—to be effectively a catch-all provision

applicable to any loan the proceeds of which were used

for a debtor’s education regardless of government

involvement or a school’s accreditation. For the reasons

that follow, the Court disagrees with that interpretation

and finds that the Debtor’s loans from Citizens do not fall

within any subsection of section 523(a)(8).

A. Section 523(a)(8)(A)

Section 523(a)(8)(A)(i) excepts from discharge two types

of educational claims: (1) educational benefit

overpayments or loans made, insured, or guaranteed by a

governmental unit; and (2) educational benefit

overpayments or loans made under any program partially

or fully funded by a governmental unit or nonprofit

institution. In this case, the Debtor alleges that the loans

at issue were not made, insured, or guaranteed by a

governmental unit, or made under a program funded in

whole or in part by a governmental unit or nonprofit

institution. (Amended Complaint, Exh. A). Thus, the

uncontested allegations of the Amended Complaint

clearly establish a prima facie case under section

523(a)(8)(A)(i).

[15] [16] [17]Less clear is whether the loans at issue fall

within the parameters of section 523(a)(8)(A)(ii) which

excepts from discharge an “obligation to repay funds *19


stipend.” In 2005, Congress created a clear distinction

between an “educational benefit overpayment or loan”

and an “obligation to repay funds received” when it

separated those concepts into two separate subparagraphs

of section 523(a)(8)(A). In doing so, Congress indicated

an intention to give each subsection a distinct function

and to target different kinds of educational debts. See

Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296,

78 L.Ed.2d 17 (1983) (applying the familiar canon of

expressio unius est exclusio alterius ). Moreover, by

including “educational benefit” in section

523(a)(8)(A)(ii)’s list, Congress indicated an intention to

give “educational benefit” a meaning similar to

“scholarship” and “stipend.” See Gustafson v. Alloyd Co.,

513 U.S. 561, 576, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995)

(applying the familiar canon of noscitur a sociis under

which each word in a statute’s list presumptively has a

“similar” meaning). Unlike loans, “scholarships” and

“stipends” are conditional educational grants, which are

not generally required to be repaid. Campbell v. Citibank,

N.A. (In re Campbell), 547 B.R. 49, 55

(Bankr.E.D.N.Y.2016) (Craig, C.J.). It follows that

“educational benefit” does not encompass loans. Id.

Because loans are specifically mentioned in subsection

523(a)(8)(A)(i) and are not mentioned in subsection

523(a)(8)(A)(ii), and because “educational benefit” refers

to funds not required to be repaid, the Court finds that

Congress intended subsection 523(a)(8)(A)(ii) to refer to

educational debts other than loans.

[18]There is a line of cases holding that any

education-related debt, including those emanating from

“loans,” qualifies as an “educational benefit” under

section 523(a)(8)(A)(ii). See, e.g., Benson v. Corbin (In re

Corbin), 506 B.R. 287, 296 (Bankr.W.D.Wash.2014)

(relying on section 523(a)(8)(A)(ii) to except from

discharge debt owed to co-signor who repaid student loan

upon the debtor’s default); Beesley v. Royal Bank of

Canada (In re Beesley), No. 12–2444–CMB, 2013 WL

5134404 (Bankr.W.D.Pa. Sept. 13, 2013) (relying on

section 523(a)(8)(A)(ii) to except from discharge debt

owed to private lender for tuition, room and board, and

books); Roy v. Sallie Mae (In re Roy), No. 08–33318,

2010 WL 1523996 (Bankr.D.N.J. Apr. 15, 2010) (relying

on section 523(a)(8)(A)(ii) to except from discharge debt

owed to a private company for tutoring services provided

to the debtor’s child); Chase v. Student Loan Serv. (In re

Carow), No. ADV 10–7011, 2011 WL 802847

(Bankr.D.N.D. Mar. 2, 2011) (relying on section

523(a)(8)(A)(ii) to except from discharge debt owed

under promissory notes in which the debtor certified that

the proceeds would be used for educational expenses);

Skipworth v. Citibank Student Loan Corp. (In re

Skipworth), No. ADV. 09–80149–JAC–7, 2010 WL

1417964 (Bankr.N.D.Ala. Apr. 1, 2010) (relying on

section 523(a)(8)(A)(ii) to except from discharge debt

incurred for a bar review course). However, by focusing

solely on the stated educational purpose giving rise to the

debt—rather than the manner in which the debt arose—to

qualify the debt under subsection 523(a)(8)(A)(ii), these

cases effectively find that subsection 523(a)(8)(A)(i) is

subsumed by subsection 523(a)(8)(A)(ii). Such an

interpretation also results in subsection 523(a)(8)(B)

being subsumed by subsection 523(a)(8)(A)(ii), and

renders subsection 523(a)(8)(B) superfluous. See Nunez v.

Key Education Resources (In re Nunez), 527 B.R. 410,

415 (Bankr.D.Or.2015). It defies logic to suggest that

Congress added subsection 523(a)(8)(B) in 2005 to

encompass a subset of loans already covered under

subsection 523(a)(8)(A)(ii). See *20 Mackey v. Lanier

Collection Agency & Serv., Inc., 486 U.S. 825, 836, 108

S.Ct. 2182, 2189, 100 L.Ed.2d 836 (1988) (expressing

reluctance “to adopt an interpretation of a congressional

enactment which renders superfluous another portion of

that same law”). The Court finds that section

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In re Decena, 549 B.R. 11 (2016)



523(a)(8)(A)(ii) is not a “catch-all” provision designed to

encompass any educational claim arising out of any

transaction that bestows an educational benefit on a

debtor.

[19]The Court agrees with the reasoning of Chief Judge

Craig in the recent case of In re Campbell, and believes

that Congress intended section 523(a)(8)(A)(ii) to

encompass alternatives to the typical debtor–creditor

relationship in the education context. These alternatives

encompass cash benefit programs, such as veteran

educational benefits, stipends for teaching assignments,

conditional grants, cash scholarships and other obligations

that are distinct from traditional student loans. See 547

B.R. at 56; Inst. of Imaginal Studies v. Christoff (In re

Christoff), 527 B.R. 624, 634 n. 9 (9th Cir. BAP 2015). In

fact, legislative history unambiguously indicates that

Congress added the phrase “educational benefit” to

section 523(a)(8) in order to “add[ ] to the list of

non-dischargeable debts obligations to repay educational

funds received in the form of benefits (such as VA

benefits), scholarships (such as medical service corps

scholarships) and stipends.” See Campbell, 547 B.R. at 56

(citing Federal Debt Collection Procedures of 1990:

Hearing on P.L. 101–647 Before the H. Subcomm. on

Econ. and Commercial L., H. Judiciary Comm. 101st

Cong. 74–75 (June 14, 1990)). These “educational

benefit” programs trigger section 523(a)(8)(A)(ii)’s

“obligation to repay funds received” if the student fails to

comply with certain conditions such as grade

requirements and post-graduation employment

restrictions. See, e.g., Burks v. Louisiana (In re Burks),

244 F.3d 1245, 1246 (11th Cir.2001) (excepting from

discharge stipend repayment obligation triggered by the

debtor’s failure to comply with stipend’s underlying

condition). The Court believes this is the proper reading

of section 523(a)(8)(A)(ii).

[20]Applying this interpretation of section 523(a)(8)(A)(ii),

the Court finds that the allegations of the Amended

Complaint satisfy section 523(a)(8)(A)(ii) and finds that

the loans in this case are not “obligation[s] to repay funds


stipend.”

B. Section 523(a)(8)(B)

Section 523(a)(8)(B) excepts from discharge “any other

educational loan that is a qualified education loan, as

defined in section 221(d)(1) of the Internal Revenue Code

of 1986.” 26 U.S.C. § 221(d) provides in relevant part:

(1) Qualified education loan.—The term “qualified

education loan” means any indebtedness incurred

by the taxpayer solely to pay qualified higher

education expenses ...

(2) Qualified higher education expenses.—The term

“qualified higher education expenses” means the cost

of attendance ... at an eligible educational institution ...

For purposes of the preceding sentence, the term

“eligible educational institution” has the same

meaning given such term by [26 U.S.C.] section

25A(f)(2) ...

In turn, 26 U.S.C. § 25A(f)(2) provides:

(2) Eligible educational institution.—The term

“eligible educational institution” means an

institution—

(A) which is described in section 481 of the Higher

Education Act of 1965 (20 U.S.C. 1088), as in

effect on the date of enactment of this section, and

(B) which is eligible to participate in a program

under title IV of such Act.

*21 [21] [22]In short, section 523(a)(8)(B) excepts from

discharge loans for attending an “eligible educational

institution,” recognition of which is dictated by the

Federal School Codes List for the years 2004–05, which

identify “[a]ll postsecondary schools that are currently

eligible for Title IV aid.” St. Christopher’s does not

appear as an eligible educational institution on the

Federal School Codes List. For this reason, the Court

finds that the Debtor has established a prima facie case

that St. Christopher’s is not an “eligible educational

institution,” and thus the loans from Citizens are not

“qualified education loans,” as defined in 26 U.S.C. §

221(d)(1) and (2). Accordingly, the loans in this case are

not excepted from the Debtor’s discharge under section

523(a)(8)(B).

CONCLUSION

For the foregoing reasons, the Court grants the Debtor’s

amended motion for default judgment declaring that the

Debtor’s obligations to Citizens are discharged in this

bankruptcy. An order and judgment consistent with this

Memorandum Decision shall issue forthwith.

All Citations










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In re Decena, 549 B.R. 11 (2016)



549 B.R. 11, 75 Collier Bankr.Cas.2d 517

Footnotes 1

Compare, e.g., 11 U.S.C. § 523(a)(8) (1988) (discharge exception for “educational loan[s] made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit, or nonprofit institution”) with 11 U.S.C. § 523(a)(8) (1990) (additional discharge exception for “obligation[s] to repay funds received as an educational benefit”) and 11 U.S.C. § 523(a)(8) (2005) (additional discharge exception for “any other educational loan that is a qualified educational loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986”).

2

Subsections (a) and (b) of the Federal Rule of Civil Procedure 55 establish a two-step process for the Court’s entry of default judgment—entry of default, then entry of default judgment.

End of Document







In re Coelho, Slip Copy (2014)


2014 WL 3858514 Only the Westlaw citation is currently available. United States Bankruptcy Court, N.D. California.

In re Ann Coelho and Isoke Femi, Debtor(s). Institute of Imaginal Services, Plaintiff(s),

v. Ann Coelho and Isoke Femi, Defendant(s).

No. 13–10975 |

A.P. No. 13–1109 |

Signed August 4, 2014

Memorandum on Motion for Summary Judgment

Alan Jaroslovsky, Chief Bankruptcy Judge

*1 Plaintiff Institute of Imaginal Studies (“Meridian

University”) is a private educational institution licensed

under California’s Private Post Secondary Education Act

of 2009, and offers graduate degree programs in

psychology. Chapter 13 debtor and defendant Isoke Femi

attended Meridian University’s psychology PhD program

from 1996 to 2002. Meridian funded Femi’s tuition loans

each year pursuant to written promissory notes.

On May 13, 2013, Femi filed a petition for Chapter 13

relief. On August 26, 2013, Meridian commenced this

adversary proceeding seeking a declaration that Femi’s

obligation under the notes is nondischargeable pursuant to

§ 523(a)(8) of the Bankruptcy Code as an educational

benefit. It now seeks summary judgment. The parties

agree that there are no disputed material facts.

Section 523(a)(8) makes three types of educational

benefits nondischargeable. Two of them,

government/nonprofit loans and IRS-qualified

educational loans, are not applicable to this case. The

only issue here is whether Meridian’s notes are excepted

from discharge pursuant to § 523(a)(8)(A)(ii), which

makes nondischargeable “an obligation to repay funds

received as an educational benefit, scholarship or

stipend[.]”

The phrase repay funds received must be interpreted

according to its plain meaning and requires the court to

find that a debtor received actual funds in before

declaring an educational benefit nondischargable under §

523(a)(8)(A)(ii). In re Hawkins, 317 B.R. 104, 112 (9th

Cir. BAP 2004)[“We agree with the bankruptcy court’s

holding that the subsidy received by the Debtor does not

qualify as an ‘educational benefit’ under § 523(a)(8)

because the plain language ... requires that a debtor

receive actual funds in order to obtain a nondischargeable

educational benefit.”]. See also In re Christoff, 510 B.R.

876 (Bkrtcy.N.D.Cal.2014)(Montali, J.).

Meridian relies heavily on McKay v. Ingleson, 558 F.3d

888 (9th Cir.2009), but the court agrees with Judge

Montali that the 2005 amendments to the Code make that

case inapplicable where the governing law is section is §

523(a)(8)(A)(ii), which does not mention the word “loan.”

For the foregoing reasons, the court will deny Meridian’s

motion and, unless the parties request otherwise, will

enter a judgment in favor of Femi declaring his debt to

Meridian dischargeable. Counsel for Femi shall submit an

appropriate form of judgment when it is desired.

All Citations

Slip Copy, 2014 WL 3858514

End of Document


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In re Girdlestone, 525 B.R. 208 (2015)

73 Collier Bankr.Cas.2d 378, 314 Ed. Law Rep. 920


KeyCite Yellow Flag - Negative Treatment Distinguished by In re Hardy, Bankr.W.D.N.Y., August 13, 2015

525 B.R. 208 United States Bankruptcy Court,

W.D. New York.

In re Leonard P. and Briget M. Girdlestone, Debtors

D’Youville College, Plaintiff v.

Briget M. Girdlestone, Defendant

13–13398 B |

AP 14–1019 B |

Signed February 10, 2015

Synopsis

Background: College brought adversary proceeding for

determination of nondischargeability of Chapter 7

debtor’s obligation to it for tuition for attending classes at

college. Parties cross-moved for summary judgment.

Holdings: The Bankruptcy Court, Carl L. Bucki, Chief

Judge, held that:

[1] there was no “loan” to debtor from college that debtor

attended, such as might be excepted from discharge

except on showing of undue hardship, and

[2] Bankruptcy Abuse Prevention and Consumer

Protection Act (BAPCPA) amendments to student loan

nondischargeability provision did not so expand provision

to eliminate need for loan.

College’s motion denied; debtor’s motion granted.

West Headnotes (4)

[1]

Bankruptcy

Educational Loans

Bankruptcy

Hardship

To constitute an educational “loan,” such as

may be excepted from discharge except on

showing of undue hardship, there must be (1) a

contract, whereby (2) one party transfers a

defined quantity of money, goods or services to

another, and (3) the other party agrees to pay for

the sum or items transferred at a later date. 11

U.S.C.A. § 523(a)(8).


[2]

Bankruptcy

Educational Loans

Bankruptcy

Hardship

Educational “loan” does not occur, such as

may be excepted from discharge except on

showing of undue hardship, merely because

student unilaterally decides not to pay tuition

when it comes due; rather, loan relationship

requires that college enter into an agreement to

extend credit to student or to permit student to

attend classes in return for payment of tuition at

future date. 11 U.S.C.A. § 523(a)(8).


[3]

Bankruptcy

Educational Loans

Bankruptcy

Hardship

There was no “loan” to Chapter 7 debtor from

college that debtor attended, such as might be

excepted from discharge except on showing of

undue hardship, where debtor never received

any funds from college nor executed promissory

note in its favor, but at most signed documents

acknowledging her obligation for tuition for

having been allowed to take classes at college.

11 U.S.C.A. § 523(a)(8).


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[4]

Bankruptcy

Educational Loans

Bankruptcy Abuse Prevention and Consumer

Protection Act (BAPCPA) amendments to

student loan nondischargeability provision, to

add dischargeability exception for “any other

educational loan that is a qualified education

loan” as defined by provision of the Internal

Revenue Code, did not simply incorporate the

Internal Revenue Code’s broad definition of

“qualified education loan” as meaning “any

indebtedness” that a taxpayer incurs to pay

certain qualified higher education expenses,

but by specifying that dischargeability exception

applied only to “any other educational loan”

that met this broad definition, required that

alleged debt first meet the bankruptcy definition

of loan before provision of the Internal Revenue

Code came into play. 11 U.S.C.A. §

523(a)(8)(B); 26 U.S.C.A. § 221(d)(1).



*209 R. Thomas Burgasser, PLLC, R. Thomas Burgasser,

Esq., of counsel, 825 Payne Avenue, North Tonawanda,

New York 14120, Attorney for the Plaintiff

Jeffrey Freedman, Attorneys at Law, Kevin J. Bambury,

Esq., of counsel, 3445 Winton Place, Suite 202,

Rochester, New York 14623, Attorneys for the Defendant

DECISION & ORDER

Hon. Carl L. Bucki, Chief U.S.B.J.

In Cazenovia College v. Renshaw (In re Renshaw), 222

F.3d 82 (2d Cir.2000), the Court of Appeals held that the

mere obligation to pay tuition does not constitute a loan

that is non-dischargeable under the Bankruptcy Code. The

present adversary proceeding now presents the question

of whether a different result must follow from the

amendments to 11 U.S.C. § 523(a)(8) that Congress

adopted in 2005.

During the fall of 1995 and the spring of 1996, Briget

Kendziora was enrolled as a student at D’Youville

College in Buffalo, New York. Upon registering for class,

she signed documents acknowledging a liability to pay

tuition. However, she did not execute a note and did not

receive any cash distributions. Ms. Kendziora did not

return to D’Youville after the spring semester of 1996 and

never graduated from that college. She is now married

and has assumed the name of Briget Girdlestone. In May

of 2010, D’Youville College obtained a judgment against

Mrs. Girdlestone for the sum of $14,050.50. Then on

December 31, 2013, Leonard and Briget Girdlestone filed

a joint petition for relief under Chapter 7 of the

Bankruptcy Code. In schedules filed with their

bankruptcy petition, the Girdlestones acknowledge

Briget’s liability for the amount due to D’Youville under

the outstanding judgment.

In the present adversary proceeding, D’Youville College

seeks a declaration that the liability of Briget Girdlestone

is a non-dischargeable obligation under 11 U.S.C. §

523(a)(8). Asserting the absence of any factual issues, the

parties have cross moved for summary judgment.

Section 523(a) of the Bankruptcy Code identifies the

various obligations which are not dischargeable in

bankruptcy. In particular, subsection (a)(8) generally

prohibits the discharge of educational loans that are

made, insured or guaranteed by the government, or that

are made under any program funded by the government or

any nonprofit institution. However, the Bankruptcy Code

does not define the word “loan.” As a consequence,

judges have expressed divergent views with regard to its

meaning and with regard to the issue of whether the

non-payment of tuition makes for the existence of a loan

for purposes of the statute. See Institute of Imaginal

Studies v. Christoff (In re Christoff), 510 B.R. 876

(Bankr.N.D.Cal.2014)(reviewing the conflicting decisions

on these issues). In the Second Circuit, however, we are

bound to give due recognition to the authority of

Cazenovia College v. Renshaw.

[1] [2]Cazenovia College v. Renshaw involved claims by

two colleges that obligations for unpaid tuition should be

deemed non-dischargeable under *210 11 U.S.C. §

523(a)(8).1 In particular, the court addressed the issue of



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whether the indebtedness was an “educational loan” that

would be exempt from discharge: “To constitute a loan

there must be (i) a contract, whereby (ii) one party

transfers a defined quantity of money, goods, or services,

to another, and (iii) the other party agrees to pay for the

sum or items transferred at a later date.” 222 F.3d at 88.

Thus, a loan does not occur merely because students

“unilaterally decided not to pay tuition when it came

due.” Id. Rather, a loan relationship would require that

the colleges enter “into an agreement to extend credit to

its student or to permit the student to attend classes in

return for a payment of tuition at a future date.” Id.

Holding that exceptions to discharge must be narrowly

construed, the Court concluded “that the colleges in the

two appeals before us failed to prove that the transactions

between them and the debtors constituted educational

loans excepted from discharge in bankruptcy.” Id. at 90.

[3]In the present instance, D’Youville College has

submitted no better evidence of a loan relationship, as

opposed to the existence of a mere receivable. Mrs.

Girdlestone never executed a promissory note and she did

not receive any advance of cash proceeds. At most, she

signed documents that served only as an acknowledgment

of indebtedness. Thus, under the standard of Cazenovia

College v. Renshaw, D’Youville College holds not the

status of a lender, but only the rights of an unpaid

provider of educational services.

[4]In 2005, Congress enacted the Bankruptcy Abuse

Prevention and Consumer Protection Act, Pub.L. No.

109–8, 119 Stat. 23 (2005) (codified as amended

throughout 11 U.S.C. and scattered sections of 18 U.S.C.

and 28 U.S.C.). By reason of this statute, section 523(a)

of the Bankruptcy Code was amended to read as follows:

A discharge under section 727 ... of this title does not

discharge an individual debtor from any debt—... (8)

unless excepting such debt from discharge under this

paragraph would impose an undue hardship on the

debtor and the debtor’s dependents, for—



or made under any program funded in whole or in part

by a governmental unit or nonprofit institution; or (ii)

an obligation to repay funds received as an educational

benefit, scholarship, or stipend; or




who is an individual.

The question now at issue is whether the current statute

compels a result different from that in Cazenovia College

v. Renshaw.

As now reformulated, section 523(a)(8) recognizes three

exceptions to the discharge of indebtedness resulting from

the finance of educational expenses. The first two of

these exceptions follow the prior text and are recited in

subparagraphs (A)(i) and (A)(ii). The language of

subparagraph (B) is new. Section 523(a)(8)(A)(i) deals

with certain kinds of educational *211 benefit

overpayments and loans. In the present instance,

D’Youville College makes no claim to any overpayment

of an educational benefit. Meanwhile, on the authority of

Cazenovia v. Renshaw, the obligations of Mrs.

Girdlestone do not hold the status of “loans.” Section

523(a)(8)(A)(ii) addresses obligations “to repay funds


stipend.” D’Youville College may have provided services,

but the debtor never received any funds that she is now

obligated to repay. See Cazenovia v. Renshaw, 222 F.3d

at 92. Consequently, any claim of non-dischargeability

must follow, if at all, from section 523(a)(8)(B).

Section 523(a)(8)(B) of the Bankruptcy Code precludes

the discharge of “any other educational loan that is a

qualified education loan, as defined in section 221(d)(1)

of the Internal Revenue Code of 1986, incurred by a

debtor who is an individual.” Section 221(d)(1) then

defines a “qualified education loan” to mean “any

indebtedness” that a taxpayer incurs to pay certain

qualified higher education expenses. However, we need

not now consider whether the debtor’s obligation to

D’Youville College might satisfy the Internal Revenue

Code’s definition of a “qualified education loan.” Under

the Bankruptcy Code, nondischargeability extends not to

any such “qualified education loan,” but only to “any

other educational loan that is a qualified education

loan.” Thus, section 523(a)(8)(B) will deny discharge to

certain types of educational indebtedness, but only if the

obligation can satisfy the prerequisite of being a “loan.”

Because Cazenovia College v. Renshaw would deny this

status to the claim of D’Youville College, the claim is not

excepted from discharge under 11 U.S.C. § 523(a)(8).

We agree with the analysis of Judge Carr in In re Oliver,

499 B.R. 617 (Bankr.S.D.Ind.2013). Courts may not

ignore the opening words of 11 U.S.C. § 523(a)(8)(B).

“[B]y retaining the phrase ‘any other educational loan,’

it appears that Congress has not departed from the notion

that a ‘student loan’ excepted from discharge must still be

a loan.”

For the reasons stated herein, Briget Girdlestone is

discharged from her debt to D’Youville College.

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Accordingly, the plaintiff’s motion for summary

judgment is denied, and the debtor’s cross motion for

summary judgment is granted.

So ordered.

All Citations

525 B.R. 208, 73 Collier Bankr.Cas.2d 378, 314 Ed. Law

Rep. 920

Footnotes 1

Pursuant to the then applicable text of section 523(a)(8), subject to exceptions not here at issue, a discharge under Chapter 7 did not discharge an individual debtor from any debt “for an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution, or for an obligation to repay funds received as a education benefit, scholarship, or stipend....” 11 U.S.C. § 523(a)(8)(1994).

End of Document




In re Christoff, 510 B.R. 876 (2014)

305 Ed. Law Rep. 326


510 B.R. 876 United States Bankruptcy Court, N.D. California.

In re Tarra Nichole Christoff, Debtor. Institute of Imaginal Studies dba Meridian

University, Plaintiff, v.

Tarra Nichole Christoff, Defendant.

Bankruptcy Case No. 13–10808DM |

Adversary Proceeding No. 13–3186DM |

Signed June 11, 2014 |

Entered June 13, 2014

Synopsis

Background: Private university which, in order to assist

Chapter 7 debtor in taking classes at university, had

allowed her to sign promissory notes in favor of

university in exchange for receiving tuition credits in like

amounts, brought adversary proceeding for determination

of nondischargeability of debtor’s resulting repayment

obligation. University moved for summary judgment.

[Holding:] The Bankruptcy Court, Dennis Montali, J.,

held that, as matter of apparent first impression, debtor’s

obligation to repay university was not “obligation to repay

funds received as an educational benefit, scholarship or

stipend,” given that no funds had actually changed hands,

and did not come within terms of dischargeability

exception.

So ordered.

West Headnotes (2)

[1]

Statutes

Absence of Ambiguity; Application of Clear

or Unambiguous Statute or Language

Statutes

Unintended or unreasonable results;

absurdity

In construing statute, court must begin its

analysis with the words of statute when those

words are not ambiguous or will not lead to

absurd results.


[2]

Bankruptcy

Educational Loans

Chapter 7 debtor’s obligation to repay private

university which, in order to assist debtor in

taking classes at university, had allowed her to

sign promissory notes in favor of university in

exchange for receiving tuition credits in like

amounts, was not “obligation to repay funds

received as an educational benefit, scholarship

or stipend,” given that no funds had actually

changed hands, and because this extension of

credit to debtor did not involve any insurance or

guarantees by governmental units or nonprofit

institutions, and was not a qualified education

loan under the Internal Revenue Code, debtor’s

obligation to repay university did not come

within terms of any of dischargeability

exceptions for educational obligations and could

be discharged in bankruptcy without need for

showing any undue hardship. 11 U.S.C.A. §

523(a)(8)(A)(ii).



Edward Joseph Donnelly, Law Office of Edward

Donnelly, San Francisco, CA, Scott D. Schwartz, Rust,

Armenis and Schwartz, San Francisco, CA, for Plaintiff.

Lindsay Smith, Wine Country Family Law & Bankruptcy

Office, P.C., Cloverdale, CA, for Defendant.

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Chapter 7

MEMORANDUM DECISION REGARDING

DISCHARGEABILITY OF EDUCATION LOAN

DENNIS MONTALI, U.S. Bankruptcy Judge

I. INTRODUCTION

The court is presented with an apparent case of first

impression in this circuit: *877 when a private

educational institution finances a deferred payment of its

tuition and related fees owed by one of its students that

did not involve a third party loan or an exchange of funds,

is that debt excepted from discharge under section

523(a)(8)?1

[1]In addressing the issue court must consider two

powerful competing principles: the need to give the

honest debtor a fresh start2 and the seemingly endless

desire of Congress to except more and more student loans3

from discharge absent undue hardship.4 At the same time

it must adhere to the well-settled principle to begin its

analysis with the words of the statute when those words

are not ambiguous or will not lead to absurd results.

Hartford Underwriters Ins. Co. v. Union Planters Bank,

N.A., 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1 (2000)

(“when [a] statute’s language is plain, the sole function of

the courts—at least where the disposition required by the

text is not absurd—is to enforce it according to its terms”)

(internal quotation marks omitted).

Despite the dire consequences, real or imagined,

suggested by plaintiff’s counsel that a ruling in

defendant’s favor may put his client out of business, the

plain words of the applicable statute lead the court to

conclude that the debt in question in this case, which did

not include any receipt of funds by the student or the

institution, is not excepted by § 523(a)(8) and is

discharged in the student’s bankruptcy.

II. FACTS

There are no material facts in dispute.

Plaintiff, Institute of Imaginal Studies dba Meridian

University (“Meridian”), is a California corporation

licensed to do business in California. It is a private

university licensed under California’s Private Post

Secondary Education Act of 2009 (Cal. Educ.Code §

94800, et seq.), by which hundreds of post secondary

schools in California provide education to hundreds of

thousands of students attending those schools. A graduate

of Meridian could be eligible to become licensed by the

State of California and practice as an independent,

unsupervised psychologist.

Tarra Nichole Christoff (“Debtor”) applied for admission

to Meridian in 2002. In response, Meridian offered Debtor

$6,000 in financial aid to pay a portion of her tuition. In

connection with that application and acceptance process,

Debtor signed an enrollment agreement acknowledging a

$6,000 financial aid award and a 2002–03 promissory

note in the principal amount of $6,000. Debtor did not

receive any funds, but instead received a tuition credit.

Repayment of the loan was to be made at $350 per month

upon completion of Debtor’s course work or her

withdrawal from Meridian, and interest accrued at nine

percent, compounded monthly.

The following year Debtor submitted a similar application

and Meridian responded *878 in a similar fashion. Debtor

signed similar documents, including a 2003–04

promissory note in the principal amount of $5,000.5

Again, Debtor did not receive any funds, but instead

received a tuition credit.

Debtor completed her course work in 2005. Later, in

2009, she sought an extended deferral of her loan

payments for one year. That same year she withdrew from

Meridian and since then, although completing her course

work and clinical hours, has not completed her

dissertation. She has failed to pay the balance due on the

notes.

Pursuant to an arbitration clause in the underlying

documentation, Meridian and Debtor litigated Debtor’s

obligations and in July 2012, an arbitrator ordered Debtor

to pay the unpaid balance of $5,950, plus interest. At

present the accrual of interest brings the total amount

owed to Meridian to just over $7,000.

Debtor filed her chapter 7 petition on August 19, 2013,

and Meridian thereafter filed this adversary proceeding to

determine that the amount owed to it by Debtor was

nondischargeable under § 523(a)(8). Meridian filed a

motion for summary judgment on April 30, 2014. That

motion came on for hearing on May 30, 2014, and, after

hearing arguments of counsel, the court took the matter


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under submission.

III. DISCUSSION

A. Applicable Statutory Law.

Section 523(a)(8) provides, in pertinent part:

(a) A discharge under section 727, 1141, 1228(a),

1228(b), or 1328(b) of this title does not discharge an

individual debtor from any debt—

* * *

(8) unless excepting such debt from discharge under

this paragraph would impose an undue hardship on the

debtor and the debtor’s dependents, for—



or made under any program funded in whole or in part

by a governmental unit or nonprofit institution; or






who is an individual;

11 U.S.C.A. § 523.

The foregoing statute describes and addresses different

types of debtor-creditor relationships.6 First, subsection

(A)(i) deals with an educational benefit overpayment

*879 or loan made, insured or guaranteed by a

governmental unit, or made under any program funded by

a governmental unit or nonprofit institution. Meridian

concedes it does not fit that description.

Another type of relationship is found in subsection (B),

and includes an educational loan qualified as such as

defined in section 221(d)(1) of the Internal Revenue

Code. Meridian also concedes that it is not protected by

that subsection.

[2]The critical type of relationship for this case is found in

subsection (A)(ii) and covers “an obligation to repay


stipend.” Meridian relies on these words in contending

that Debtor’s student loans are nondischargeable. Debtor

concedes that subsection (A)(ii) is the applicable

subsection but argues convincingly that since she did not

receive funds from Meridian or anyone else, she can

discharge the debt.7

Meridian argues that when Debtor obtained the loans to

pay her tuition “the loan proceeds went directly to

Meridian and she received the education. Meridian

received the loan funds ...” Opening Brief at 18:12–13.

But no facts in the record support that statement; in fact

Meridian simply agreed to be paid the tuition later. It did

not receive any funds, such as from a third party financing

source. Meridian is denominated the lender in the two

promissory notes Debtor signed. Thus Meridian’s

examples of a loan to purchase a house or a car with funds

paid directly to the seller are not applicable.

Meridian also argues that when a student receives a

federally backed Stafford loan for tuition the funds are

paid to the school, not the student. That is true, and

leaving aside that a Stafford loan likely comes within the

first category of nondischargeable student loans because

of the federal backing (subsection (A)(i)), it also involved

“funds received” by the school. Not so here.

Prior to the 2005 amendments generally known as

BAPCPA8 section 523(a)(8) divided nondischargeable

loans into two categories (not three as noted above).

BAPCPA divided those two categories into subsections

(A)(i) and (ii) and added subsection (B).9

The restructuring of § 523(a)(8) gives rise to the statutory

interpretation issues presented in this case. Of critical

importance is the fact that student loans backed by

governmental units or made by nonprofit organizations

are specifically described as “educational benefit

overpayment(s) or loan(s)” and student loans that qualify

under the Internal Revenue Service under § 523(a)(8)(B)

are referred to as “any other educational loan.”

Conversely, newly separated subsection (A)(ii) refers to

“an obligation to repay funds received as an educational

benefit, scholarship or stipend,” without reference to

educational loans or any other kind of loan.

*880 B. The Case Law.

At first blush it would appear that the issue is well settled

in Meridian’s favor because case after case deals with

whether or not particular arrangements between students

and their educational providers did or did not constitute a

“loan” under § 523(a)(8). For example, in McKay v.


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Ingleson, 558 F.3d 888 (9th Cir.2009), the court examined

an agreement between the debtor and Vanderbilt

University referred to as a Professional Student Account

and Deferred Agreement, concluding that under the

ordinary meaning of the term loan, what that debtor

entered into with her university was a loan. McKay, 558

F.3d at 889. The court also relied on dictionary definitions

and heavily on Johnson, where the court was faced with a

similar issue.

The Johnson court presented the issues squarely:

Applying these definitions to the

facts before us, we conclude that

the arrangement between Johnson

and the College constitutes a loan.

Johnson’s promise to remit the cost

of tuition to the College in

exchange for the opportunity to

attend classes created a

debtor/creditor relationship. She

signed a promissory note to

evidence her debt. By allowing

Johnson to attend classes without

prepayment, the College was, in

effect, “advancing” funds or credits

to Johnson’s student account.

Johnson drew upon these advances

through immediate class

attendance. It is immaterial that no

money actually changed hands.

Johnson, 218 B.R. at 457 (emphasis added)quoted by

McKay, 558 F.3d at 890.

Note that the Johnson court, and thus the Ninth Circuit in

McKay by its adoption of that reasoning, did not say that

the institution had advanced funds to the student, but only

“in effect” had, and therefore the court believed that it is

“immaterial that no money actually changed hands.”

But Johnson and McKay both apply the law prior to

BAPCPA and construe the agreements they were

presented with in a different statutory context. More

specifically, the question before those courts, and others

mentioned below, was whether the arrangements

constituted an educational loan (as those two did). In each

case the applicable statute, in one sentence, blended

overpayments, loans, and obligations to repay funds:

11 U.S.C. § 523(a)(8) excepts from discharge a debt

“for an educational benefit overpayment or loan made,

insured or guaranteed by a governmental unit, or made

under any program funded in whole or in part by a

governmental unit or nonprofit institution, or for any

obligation to repay funds received as an educational

benefit, scholarship or stipend....” Since the parties

stipulate that the College is a non-profit institution and

that the credit was extended for educational purposes

under a program, the only issue presently on appeal is

whether the College’s extension of credit was a loan.

Johnson, 218 B.R. at 450–51.

Johnson concluded that the transaction was an

educational loan. In contrast, In re Chambers, 348 F.3d

650 (7th Cir.2003), involved a situation where no funds

changed hands between the institution and the debtor, nor

was there a prior or contemporaneous agreement to pay

tuition at a later date. Rather, the court, relying on

Cazenova College v. Renshaw (In re Renshaw), 229 B.R.

552 (2d Cir. BAP 1999), aff’d, 222 F.3d 82 (2d Cir.

2000), concluded that in the absence of money changing

hands or an agreement to pay tuition at a later date in

exchange for the extension of credit, there was no

educational loan for purposes of § 523(a)(8).

At oral argument counsel for Meridian cited an

unpublished decision from this *881 district, In re Weeks,

2000 WL 268466 (Bankr.N.D.Cal. Feb. 16, 2000)

(Jaroslovsky, J.). There the debtor had been a student at

McGeorge School of Law and had entered into a deferred

payment plan contract. At the time he filed chapter 7, the

amount owing to McGeorge was $5,009. When the debtor

requested his transcript and the University refused, the

debtor sought contempt for violation of the automatic

stay.10

The court opined that if this were a case of first

impression, it might find § 523(a)(8) inapplicable where,

as here, no funds had changed hands. But the court chose

to rely on decisions in other jurisdictions that concluded

that arrangements made by the educational institutions

and the debtors in those cases came within the words of

the statute. Specifically the court chose to follow Andrews

Univ. v. Merchant (In re Merchant), 958 F.2d 738 (6th

Cir.1992); U.S. v. Smith, 807 F.2d 122 (8th Cir.1986), and

DePasquale v. Boston Univ. School of Law (In re

DePasquale), 225 B.R. 830 (1st Cir. BAP 1998). None of

those decisions, however, analyze the phrase “funds

received,” but instead focused on whether certain

arrangements constituted loans. Thus, though the court in

Weeks felt bound by prior case law, this court does not,

principally because of the statutory changes by BAPCPA

in 2005.


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It is worth noting that the court in Weeks did cite to

Renshaw, 229 B.R. at 552, a decision it noted was in the

minority but declined to follow because to do so would

create a conflict with the two court of appeals decisions

cited above. The Renshaw court was asked to consider

what was described as a Reservation Agreement between

a student and Cazenova College. The Second Circuit BAP

concluded that the agreement was not an educational

benefit overpayment, nor any educational loan made, but

instead constituted a purchase and sale of goods and

services. Of note, however, is what was not before the

court:

At oral argument, Cazenova conceded that, since there

were no funds actually received by Renshaw, the last

portion of Section 523(a)(8), which reads “or for an

obligation to repay funds received as an educational

benefit, scholarship or stipend,” was not applicable.

This is consistent with the statement in the Bankruptcy

Court Order that “It is undisputed by the parties that

there was no transfer of funds ...” and the Court’s

factual finding, which was not clearly erroneous, that

“there is no advance of funds ...” (Order at page 11.)

Based upon this concession and the Bankruptcy Court’s

factual finding, the requirements for

nondischargeability that are set forth in the last portion

of Section 523(a)(8) have not been legally satisfied.

Renshaw, 229 B.R. at 555, n.5.11

In Renshaw, the Court of Appeals had before it two cases,

each of which involved nonprofit colleges that had

brought adversary proceedings against debtors to

determine the nondischargeability of obligations that they

characterized as nondischargeable student loans. Both

were nonprofit institutions, and therefore the key question

before the court was whether under § 523(a)(8) the

transactions constituted educational loans.12

*882 For each college the court rejected the arguments

that the transactions were educational loans. Of relevance

to this case, the court referred to an alternative that would

have rendered nondischargeable “obligation[s] to repay


stipend.” The court commented that:

The colleges wisely do not rely on

the ‘obligation to repay funds

received’ provision because it is

undisputed that neither student

received funds.13

Renshaw, 222 F.3d at 92.

The Second Circuit concluded that the debtor (Mr.

Renshaw) was obligated to pay his tuition on a date in the

future, and thus was not obligated to repay a loan. His

default created the debt. Because the college had not

advanced money or promised goods or services in return

for a promise of payment in the future, § 523(a)(8) was

not available to save the debt from discharge. Renshaw,

222 F.3d at 89.

The Second Circuit referred to other cases that found that

the nonpayment of tuition qualifies as a nondischargeable

student loan in two situations: where funds have changed

hands (not the present case) and where there is a

pre-exiting agreement between the student and the

institution whereby the institution extends credit in return

for the student’s promise to pay in the future, such as by a

promissory note (plainly the present case). Renshaw, 222

F.3d at 90, citing Merchant, 958 F.2d at 738.

The analysis changes, however, because BAPCPA

amended § 523(a)(8) to separate “funds changing hands”

or “funds received” into a separate category delinked

from the phrases “educational benefit or loan” in §

523(a)(8)(A)(i) and “any other educational loan” in §

523(a)(8)(B). Thus, although the promissory notes signed

by Debtor constitute a loan, loans are addressed only in

subsections (A)(i) and (B), which Meridian concedes are

inapplicable. Subsection (A)(ii) does not cover loans, but

only “funds received” for an educational benefit,

scholarship or stipend.

Cases either cited by the parties or located by the court

are largely distinguishable except one (In re Oliver),

discussed below.

One category of cases involves situations where a third

party’s advance of funds comes within § 523(a)(8)(A)(ii)

as “funds received.” Thus, in Sensient Technologies Corp.

v. Baiocchi (In re Baiocchi), 389 B.R. 828

(Bankr.E.D.Wis.2008), the debtor sought to discharge

obligations owing to her employer under an educational

expense reimbursement program. Because the employer

had granted requests by the debtor for tuition and book

expenses, the unpaid amounts she owed were found to be

an obligation to pay funds received as an educational

benefit.

Similarly, the case of Benson v. Corbin (In re Corbin),

506 B.R. 287 (Bankr.W.D.Wa.2014), involved a

co-signed student loan that was paid by the co-signor who

sought to have her reimbursement rights determined

nondischargeable. While the court rejected a subrogation

theory based upon what it felt was controlling precedent,

it concluded that the debtor’s obligation to the co-signor

was an obligation to repay “funds received” for an














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educational debt within the meaning of § 523(a)(8)(A)(ii).

Brown v. Rust (In re Rust), 2014 WL 1796154

(Bankr.E.D.Ky. May 6, 2014), is similar to Corbin and

thus equally distinguishable. See also *883 Maas v.

Northstar Education Financing, Inc. (In re Maas), 497

B.R. 863 (Bankr.W.D.Mich.2013).

In Beesley v. Royal Bank of Canada (In re Beesley), 2013

WL 5134404 (Bankr.W.D.Pa. Sept. 13, 2013), the court

reached a similar result where the debtor had drawn on a

line of credit from a private lender in order to pay her

expenses for attending medical school. The debtor had

used the proceeds of a line of credit to pay educational

expenses, and the court had no trouble following Maas

and other courts that correctly recognize third party loans

as falling into the “funds received” reach of §

523(a)(8)(A)(ii).

Beesley and Belforte, 2012 WL 4620987 at 4–5, each

involve third party loans that were held nondischargeable.

Each decision cites Rumer, 469 B.R. at 561, which stated

that § 523(a)(8) protects four categories of educational

loans, including “loans received as an educational benefit,

scholarship or stipend.” In fact, what is excepted from

discharge as “an educational benefit, scholarship or

stipend” is “funds received” not “loans received.” Thus,

those decisions are not helpful here.

In Carow v. Chase Student Loan Service (In re Carow),

2011 WL 802847 (Bankr.D.N.D. Mar. 2, 2011) the court

faced the same conclusion in determining that loans from

a financial institutions to allow a debtor to pay for

educational expenses and living expenses were

nondischargeable. Again, the presence of a third party

lender who actually advanced funds to the debtor makes

that case completely distinguishable.

Several courts rely on Roy v. Sallie Mae (In re Roy), 2010

WL 1523996 (Bankr.D.N.J. April 15, 2010), for the

proposition that a loan for educational training falls within

the same statutory reach. But Roy simply stated that “it is

enough that the debt at issue be ‘an obligation to repay

funds received as educational benefit’ ” without

describing whether there was a third party loan, or

whether funds actually changed hands, or just what the

situation was. It simply stated that the loan at issue here,

which provided an educational benefit to the debtor’s

child in the form of tutoring, was not dischargeable.

Thus that case is of no particular help to the court in the

present matter. See also The Rabbi Harry H. Epstein

School, Inc. v. Goldstein (In re Goldstein), 2012 WL

7009707 (Bankr.N.D.Ga., Nov. 26, 2012). There the court

concluded that the school’s agreement to defer alternative

payments constituted an educational loan for purposes of

§ 523(a)(8)(A)(ii), but made no analysis as to whether or

not they were “funds received.”

The court has located only one decision that appears to be

on point, In re Oliver, 499 B.R. 617

(Bankr.S.D.Ind.2013). There Ball State University

withheld the debtor’s transcript because she had not paid

certain tuition charges and related fees. Ball State had not

advanced any money to the debtor nor had it reimbursed

any federal agency for any of the student loan proceeds.

The court felt that In re Chambers, supra, would be

binding but for BAPCPA. Although Ball State had

advanced no funds, it argued that the terms of a

registration contract with the debtor met the Chambers

test for a loan prior to the provision of educational

services.

Oliver examined Renshaw and Chambers and concluded

that

Congress has not departed from the

notion that a ‘student loan’

excepted from discharge still must

be a loan.

499 B.R. at 623 (emphasis added).

Finally, Oliver noted that in order to be obligated to repay

funds received, the debtor has to have received funds in

the first place. Ball State did not advance its own funds to

or for the benefit of the *884 debtor nor did it receive

funds from a third party lender.

This court concurs completely with the Oliver’s court

conclusion that:

Because the court finds that debtor

did not receive funds from Ball

State, she has no obligation to

repay funds she did not receive.

Thus, the Debt was not excepted

from discharge pursuant to §

523(a)(8)(A)(ii).

499 B.R. at 625.











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IV. CONCLUSION

Because Meridian is not a governmental unit nor did its

extension of credit to Debtor involve any insurance or

guaranties by governmental units or nonprofit institutions,

and because the extension of credit was not a qualified

education loan under the Internal Revenue Code,

Meridian’s sole source of protection is in §

523(a)(8)(A)(ii). Because Debtor’s obligations under

applicable documents were to pay the amount under the

Promissory Notes, and thereafter by the arbitration award,

but did not flow from “funds received” either by her as

the student or by Meridian from any other source, the debt

is not covered by this section and is therefore eligible for

discharge in Debtor’s discharge.

Counsel for Debtor should submit an order denying

Meridian’s motion for summary judgment, and because

the matter presented is fully resolved as a matter of law,

that form of order should also grant Debtor summary

judgment in her favor, discharging her obligation to

Meridian. At the same time counsel for Debtor should

prepare and upload a judgment in this adversary

proceeding discharging all of the debts owed to Meridian.

Counsel should comply with BLR 9021–1.

All Citations

510 B.R. 876, 305 Ed. Law Rep. 326

Footnotes 1

Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101–1532.

2

See Central Va. Comm. College v. Katz, 546 U.S. 356, 364, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006) (“one of the [c]ritical features of every bankruptcy proceeding [is] ... the ultimate discharge that gives the debtor the ‘fresh start’ by releasing him, her or it from further liability for old debts”), citing Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934).

3

The court uses this simple term for convenience to refer to loans covered by § 523(a)(8).

4

See, e.g., Nash v. Conn. Student Loan Fdn. (In re Nash), 446 F.3d 188, 191 (1st Cir.2006) (“Congress has made the judgment that the general purpose of the Bankruptcy Code to give honest debtors a fresh start does not automatically apply to student loan debtors. Rather, the interest in ensuring the continued viability of the student loan program takes precedence.”).

5

Although these critical documents were signed before the 2005 amendments to the Bankruptcy Code, Meridian does not contend that the pre–2005 bankruptcy law applies here.

6

Some courts have said that under § 523(a)(8) there are actually four relationships excepted from discharge: loans made, insured or guaranteed by a governmental unit; loans made under any program partially or funded by a government unit or nonprofit institution; loans received as an educational benefit, scholarship or stipend; and any qualified educational loan as that term is defined in the Internal Revenue Code. See, Rumer v. Am. Educ. Servs. (In re Rumer), 469 B.R. 553 (Bankr.N.D.Pa.2012), quoted in Liberty Bay Credit Union v. Belforte (In re Belforte), 2012 WL 4620987 (Bankr.D.Mass. Oct. 1, 2012). For these purposes whether there are three or four different types of relationships that are implicated is immaterial. It is worthy to note, however, that Rumer, supra, alluded to § 523(a)(8)(A)(ii) as “loans received” as an educational benefit, scholarship or stipend when in fact the statute refers to “an obligation to repay funds received” under those circumstances.

7

Meridian has conceded that if the court determines that subsection (A)(ii) applies, Debtor will be given an opportunity to amend her answer to plead “undue hardship” in an attempt to discharge her obligation to it. Because the court agrees with Debtor, there is no need for such an amendment. Debtor also argued that she had not incurred any obligation from Meridian “as an educational benefit, scholarship or stipend,” but the court does not need to reach that issue.

8

BAPCPA refers to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109–8, 119 Stat. 23.

9 A concise history of the several amendments to these provisions prior to BAPCPA is found in Johnson v. Missouri Baptist College













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(In re Johnson), 218 B.R. 449 (8th Cir. BAP 1998).

10

The court noted that rather than the automatic stay, the debtor was really seeking to enforce his discharge injunction under § 524(a)(2), but there could be no contempt in any event if the debt was nondischargeable.

11

The Second Circuit’s affirmance of its own circuit’s BAP decision, of course, created the circuit conflict the Weeks author sought to avoid.

12

Renshaw was decided prior to BAPCPA. Under the present statutory scheme, those colleges would have been relying on § 523(a)(8)(A)(i).

13

Under the current law, that argument would have been made, as it has been made in the instant case, under § 523(a)(8)(A)(ii).

End of Document






of 4

BANKRUPTCY TRUSTEES AND THE AVOIDANCE OF TUITION PAYMENTS

I. Introduction

An interesting trend has developed in which bankruptcy trustees, using their “strong-arm”

powers are seeking to avoid or claw back tuition payments made to schools on behalf of debtors’

children for the benefit of the bankruptcy estate. When addressing tuition payments to colleges

and universities on behalf of adult children, the source of these payments often stem from student

loan disbursements.

A Chapter 7 trustee has a fiduciary duty to investigate the financial affairs of the debtor

which includes pre-petition transfers and recover those transfers for the benefit of creditors. 11

U.S.C. §§ 704, 726.

The primary theory the trustees are relying on is that the payments to the institutions were

made without receiving reasonably equivalent value and are therefore constructively fraudulent.

II. Fraudulent Transfers and Avoidance of Tuition Payments by Trustees

Although trustees have recovered payments in bankruptcy cases in which tuition was paid

within 90 days prior to a bankruptcy filing pursuant to Bankruptcy Code Section 547 on a

preference theory, the more common approach involves the trustee utilizing Section 548 of the

Bankruptcy Code, which provides in pertinent part:

[t]he trustee may avoid any transfer . . . of an interest of the debtor in

property, or any obligation . . . incurred by the debtor, that was made or

incurred on or within 2 years before the date of the filing of the petition, if

the debtor voluntarily or involuntarily—

(B) (i) received less than a reasonably equivalent value in exchange for such

transfer or obligation.

11 U.S.C § 548(a)(1)(B).

A. Reasonably Equivalent Value/Split in Authority

The litigation in these cases primarily revolves around the meaning of “reasonably

equivalent value” and whether there is a direct economic benefit to the debtor-parent-transferor(s).

Unfortunately, the Bankruptcy Code does not define the term and hence the courts are left to

interpret it and, as in many other areas of bankruptcy law, a split of authority has developed. This

is an extremely fact intensive inquiry.

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B. Cases Permitting Trustee’s Avoidance of Transfers

• “[M]oral or familial obligations cannot be considered in the value analysis for the obvious

reason that the depletion of resources available to creditors cannot be offset by the

satisfaction of moral obligations.” Boscarino v. Bd. of Trs. of Conn. State Univ. Sys. (In re

Knight), No. 15–02064, 2017 WL 4410455, at *3 (Bankr. D. Conn. Sept. 29, 2017)

(quoting Coan v. Fleet Credit Card Servs., 225 B.R. 32, 37 (Bankr. D. Conn. 1998)).

• Zeddun v. Griswold (In re Wierzbicki), 830 F.3d 683, 689–90 (7th Cir. 2016) (“As cold

and unsentimental as that rule might seem, it is easier to understand from the perspective

of creditors, most of whom would probably be unwilling to volunteer to provide a financial

subsidy to enhance the insolvent debtor’s family relationships by allowing the debtor to

put valuable property beyond their reach.”).

• Dietz v. St. Edward’s Catholic Church (In re Bargfrede), 117 F.3d 1078, 1080 (8th Cir.

1997) (“[N]on-economic benefits in the form of a release of a possible burden on the

marital relationship and the preservation of the family relationship” cannot confer

reasonably equivalent value under Section 548 because they are “sufficiently analogous

to other intangible, psychological benefits.”).

• In re Treadwell, 699 F.2d 1050, 1051 (11th Cir. 1983) (concluding love and affection do

not constitute “reasonably equivalent value” under Section 548).

• Gold v. Marquette Univ. (In re Leonard), 454 B.R. 444, 457 (Bankr. E.D. Mich. 2011)

(finding that the satisfaction of a parent’s moral obligation to pay for their child’s college

education only confers “peace of mind,” which does not qualify as “value” because the

benefit to the parent-debtor is, at best, speculative and not economic, concrete, or

quantifiable). **This case involved a payment of tuition using student loan proceeds that

were first deposited into parent-debtor’s bank accounts.

• See Boscarino v. Bd. of Trs. of Conn. State Univ. Sys. (In re Knight), No. 15–02064, 2017

WL 4410455, at *3 (Bankr. D. Conn. Sept. 29, 2017) (finding the discharge of a familial

obligation to pay college tuition for an adult child does not confer “value” to a debtor under

Section 548).

• Roach v. Skidmore Coll. (In re Dunston), 566 B.R. 624, 637 (Bankr. S.D. Ga. 2017)

(Coleman, J.) (finding that satisfaction of a moral or familial obligation to pay a child’s

college tuition does not provide any “economic” benefit to the debtor—debtor was not

under any legal duty or obligation to pay for the child’s college tuition and the transfers

did not increase debtor’s assets in any way that could be used to pay her creditors).

of 4

C. Cases Denying Trustee’s Avoidance of Transfers

• Although authority is limited, it is safe to say that trustees have not been successful when

attempting to avoid alleged fraudulent transfers made by parents for the education of their

minor children. See Geltzer v. Xaverian High School (In re Akanmu), 502 B.R. 124 (Bankr.

E.D.N.Y. 2013); McClarty v. University Liggett School (In re Karolak), 2013 WL 4786861

(Bankr. E.D. Mich. Sept. 6, 2013). Both courts that were confronted with this factual

scenario held that because debtor-parents have a statutory duty to educate children under

applicable state law, the transfers to educational institutions conferred a direct, if not

indirect, benefit to the debtors. Minors have no independent economic life distinct from

their parents. Decisions to educate minor children at non-public schools revealed that they

simply chose to exceed the minimum standard of care.

• DeGiacomo vs. Sacred Heart University, Inc. (In re Palladino), 556 B.R. 10 (Bankr. D.

Mass. 2016). The court concluded that a parent receives “reasonably equivalent value” in

exchange for the payment of college tuition:

I find that the [parents] paid [the university] because they believed that a

financially self-sufficient daughter offered them an economic benefit and

that a college degree would directly contribute to financial self-sufficiency.

I find that motivation to be concrete and quantifiable enough. The operative

standard used in both the Bankruptcy Code and the UFTA is “reasonably

equivalent value.” The emphasis should be on “reasonably.” Often a parent

will not know at the time she pays a bill, whether for herself or for her child,

if the medical procedure, the music lesson, or the college fee will turn out

to have been “worth it.” But future outcome cannot be the standard for

determining whether one receives reasonably equivalent value at the time

of a payment. A parent can reasonably assume that paying for a child to

obtain an undergraduate degree will enhance the financial well-being of the

child which in turn will confer an economic benefit on the parent. This, it

seems to me, constitutes a quid pro quo that is reasonable and reasonable

equivalence is all that is required.

Id. at 16.

• Sikirica v. Cohen (In re Cohen), No. 07–02517, 2012 WL 5360956, at *10 (Bankr. W.D.

Pa. Oct. 31, 2012) (finding that undergraduate college tuition payments are reasonable

and necessary for the maintenance of the debtor’s family for purposes of the fraudulent

transfer statutes), aff’d in relevant part, 487 B.R. 615 (W.D. Pa. 2013).

• Shearer v. Oberdick (In re Oberdick), 490 B.R. 687, 712 (Bankr. W.D. Pa. 2013) (“[T]his

Court has little hesitation in recognizing that there is something of a societal expectation

that parents will assist with such expense if they are able to do so.”). The trustee in this

case also argued that parents have no legal obligation to provide for the education of their

children past the age of 18. The parent debtors countered by stating that they viewed the

educational expenses as a family obligation. The court agreed with the parents recognizing

that there is something of a societal expectation that parents will assist with such expense

of 4

if they are able to do so and found that the expenditures in this case were made out of a

reasonable sense of parental obligation.

• Novak v. University of Miami (In re Demitrus), 586 B.R. 88 (Bankr. CT 2018). This case

involved a direct payment to the University through a Direct Parent PLUS Loan. Court

held that the Higher Education Act of 1965 and its regulations made abundantly clear that

the funds disbursed to the University could not have been the debtor’s property and the

funds could not have been within the reach of creditors.

D. Conclusion

The case law continues to develop in this controversial area with bankruptcy court

decisions at opposite ends of the spectrum. The courts must wrestle with an apparent

dichotomy between the centuries long standing debtor-creditor laws regarding fraudulent

conveyances and the benefits realized by today’s society when parents financially assist their

children beyond the traditionally recognized age of adulthood. Proposed legislation seeking

to amend the Bankruptcy Code to prevent trustees from avoiding tuition payments made by

debtors has lingered in Congress and eventually died, but it is likely that more bills will be

forthcoming.

III. Impact on Debtors

A. Presumptively Non-Dischargeable.

B. Interest

As a presumptively non-dischargeable debt, there does not appear to be any great

dispute that interest can and will continue to accrue on a debtor’s student loan debt

post-petition. See Leeper v. Pennsylvania Higher Education Asst. Agency, 49 F.3d 98

(3rd Circuit 1995); see also United States Dept. of Education v. Harris, 339 B.R. 673

(Bankr. W.D. TN 2006). Therefore, it is crucial that any bankruptcy practitioner be

prepared to adequately advise a debtor on the potential impact of interest accrual on

student loans while in bankruptcy if the Plan does not provide for full repayment of

the student loan and any accruing interest.

C. Moreover, even if the Plan provides for full payment of a student loan debt, on the

balance owed as of the petition date, debtors may still owe a balance to their student

loan lender after exiting bankruptcy. “The student loan creditor cannot compel the

payment of post-petition interest on its claim from the bankruptcy estate, but may

compel the payment of interest from the debtor after completion of the Chapter 13

plan because interest on nondischargeable debts is a nondischargeable.” In re

Williams, 253 B.R. 220, 227 (Bankr. W.D. TN 2000) (emphasis added), citing Leeper

v. Pennsylvania Higher Education Asst. Agency, 49 F.3d 98, 101-103 (3rd Circuit

1995).

Chapter 13 Plan Non-Standard Section Template for

Student Loan IDR Plans During Bankruptcy

For use by a debtor not in default on Federal student loans who wants to enroll in or remain in an

IDR repayment plan while in a Chapter 13 bankruptcy plan.

Part 8 [or Insert Local Chapter 13 Plan Section Number] Nonstandard Plan Provisions

1) Student Loan Debt Non-Dischargeable

In accordance with 11 U.S.C. § 523(a)(8), this Chapter 13 plan of reorganization (“Chapter

13 Plan”) cannot and does not provide for a discharge, in whole or in part, of the Debtor’s

federal student loan debt authorized pursuant to Title IV of the Higher Education Act of

1965, as amended (“Federal Student Loan(s)”).

2) Identification of Federal Student Loan Debt

a) Only Federal Student Loans that are currently in an income-driven repayment (“IDR”)

plan, or which Debtor is eligible to repay under an IDR plan during the pendency of this

Chapter 13 case, are listed in subsection (2)(b), below. Debtor could owe other student

loan obligations. The special provisions contained in this ___ [Insert “Part 8” or Plan

Section Number] of the Chapter 13 Plan only apply to the Federal Student Loans listed in

subsection (2)(b), below.

b) As of [Insert date bankruptcy petition was filed], the Debtor’s Federal Student Loan debt

includes the following Title IV Student Loans:

Title IV Loan Holder Date Loan Obtained Type of Loan (Direct,

FFEL, Subsidized,

Unsubsidized)

Original Loan

Amount

c) The Federal Student Loans identified in subsection (2)(b), above, are held by the United

States Department of Education (“Education”) and / or [insert here other Title IV Student

Loan Holders if applicable], pursuant to Title IV of the Higher Education Act of 1965, as

amended, 20 U.S.C. 1070, et seq. Hereinafter, Education and other Title IV Student

Loan Holders are referred to individually and collectively as “Title IV Loan Holder.”

Chapter 13 Plan Non-Standard Section IDR Template -- P. 2

3) Federal Student Loans not in Default

As of [Insert date bankruptcy petition was filed], the Debtor is not in default, as defined in 34

CFR 682.200(b) or 685.102, as applicable, on any Federal Student Loans listed in subsection

(2)(b) of this Section.

4) Proof of Claim

The Debtor affirms that a timely proof of claim has been filed with the Bankruptcy Court for

each Federal Student Loan listed in subsection (2)(b) of this Section. If a Title IV Loan

Holder has not filed a proof of claim for a Federal Student Loan listed by the Debtor in

subsection 2(b), the Debtor will file a proof of claim for that Federal Student Loan within

fifteen (15) days in advance of the date scheduled for the §1324 confirmation hearing on this

Chapter 13 Plan. Such proof of claim is subject to later amendment by the Title IV Loan

Holder.

5) Continuation of Pre-Petition Federal Student Loan IDR Plan

a) During the course of this Chapter 13 bankruptcy case until its dismissal or closure, the

Debtor may continue participating in the IDR plan in which the Debtor participated pre-

petition and for which Debtor otherwise continues to be qualified as determined by the

Title IV Loan Holder.

i) The Debtor’s monthly IDR plan payment is, as of the date of Debtor’s bankruptcy

petition, $______________.

ii) The Debtor’s monthly IDR plan payment is due to the Title IV Loan Holder on the

[Insert day of the month] day of each month.

b) Debtor’s Monthly Payments for Pre-Petition IDR Plan [use if Debtor will make IDR plan

payment directly to Title IV Loan Holder]

i. Until confirmation of this Chapter 13 Plan, the Debtor will make full and timely IDR

plan payments directly to the Title IV Loan Holder identified in subsection (2)(b) of

this Section.

ii. Following confirmation of this Chapter 13 Plan, the Debtor will make full and timely

IDR plan payments directly to the Title IV Loan Holder identified in subsection

(2)(b) of this Section, outside of the Debtor’s scheduled plan payments to the Chapter

13 Trustee.


ALTERNATIVE Subsection 5(b) [use if Debtor will make IDR plan payment through

Chapter 13 Trustee’s office]

b) Debtor’s Monthly Payments for Pre-Petition IDR Plan

i. Until confirmation of this Chapter 13 Plan, the Debtor will make full and timely IDR

plan payments directly to the Title IV Loan Holder identified in subsection (2)(b) of

this Section.

ii. In order for the Chapter 13 Trustee to transfer timely the Debtor’s first post-

confirmation payment on the IDR plan, the Debtor must remit that IDR plan payment

to the Chapter 13 Trustee in advance of the first post-confirmation payment due date,

and in good funds (money order, bank check, TFS payment, or payroll deduction), so

as not to delay the Chapter 13 Trustee’s transfer of those funds to the Title IV Loan

Holder.

iii. The Title IV Loan Holder will be paid through the Chapter 13 plan as a Class _____

Creditor.

iv. Following confirmation of this Chapter 13 Plan and in addition to the Debtor’s

scheduled Chapter 13 Plan payment to the Chapter 13 Trustee’s office, the Debtor

will remit to the Chapter 13 Trustee the monthly IDR plan payment. The Chapter 13

Trustee will transfer the IDR plan payment funds to the Title IV Loan Holder.

v. The Debtor must remit each post-confirmation IDR plan payment to the Chapter 13

Trustee in advance of the IDR payment due date, and in good funds (money order,

bank check, TFS payment, or payroll deduction), so as not to delay the Chapter 13

Trustee’s transfer of the IDR plan payment to the Title IV Loan Holder.

vi. If the Debtor does not timely or fully remit sufficient funds to the Chapter 13 Trustee

for Debtor’s monthly IDR plan payment, the Chapter 13 Trustee is not required or

responsible to transfer funds to the Title IV Loan Holder from the Debtor’s general

bankruptcy estate for that monthly payment. The Chapter 13 Trustee is not

responsible for the Debtor’s late or missing IDR plan payments caused by Debtor’s

failure to remit funds to the Chapter 13 Trustee for transfer of the IDR plan payment

by the Chapter 13 Trustee’s office.

vii. Upon request of the Chapter 13 Trustee, the Debtor will request the Title IV Loan

Holder modify Debtor’s monthly IDR plan payment due-date to accommodate the

Chapter 13 Trustee’s disbursement schedule.


viii. The Chapter 13 Trustee may request the Title IV Loan Holder establish an

automated clearinghouse (ACH) account with the Chapter 13 Trustee’s office for

deposit of the Debtor’s monthly IDR plan payment directly into the Title IV Loan

Holder’s account.

ALTERNATIVE Paragraph 5 (use if Debtor will apply to and enroll in an IDR plan during

Debtor’s Chapter 13 plan)

5) Initial Participation in an IDR Plan

a) During the course of this Chapter 13 bankruptcy case until its dismissal or closure, the

Debtor may submit an application for participation in any IDR plan for which the Debtor

is otherwise qualified to any Title IV Loan Holder pursuant to 34 CFR 685.208, 34 CFR

685.209, 34 CFR 685.221 or 34 CFR 682.215.

b) The Title IV Loan Holder is not required to place the Debtor in an IDR plan.

c) The Debtor will provide notice to the United States Bankruptcy Court for the _________

District of ___________ (“Bankruptcy Court”) and the Chapter 13 Trustee of Debtor’s

application for participation in an IDR plan.

d) If the Debtor submits an application for participation in an IDR plan and the Title IV

Loan Holder determines the Debtor is qualified under the standard terms for participation

specified in 34 CFR 685.208, 34 CFR 685.209 34, CFR 685.221, or 34 CFR 682.215, the

Title IV Loan Holder may place the Debtor in an IDR plan while this Chapter 13 case is

open.

(i) If the Title IV Loan Holder places the Debtor in an IDR plan, it is expressly

understood and agreed by the Debtor that the Debtor’s monthly IDR plan payments

will be due to the Title IV Loan Holder while this Chapter 13 case is open, and will

continue to be due monthly for a set period of time that extends beyond the

Bankruptcy Court’s entry of a Chapter 13 discharge and / or an order closing this

Chapter 13 case.

(ii) If the Title IV Loan Holder places the Debtor in an IDR plan, it is expressly

understood and agreed by the Debtor that the Debtor’s full IDR plan monthly

payments must be received timely by the Title IV Loan Holder.

(e) Within thirty (30) days of Debtor’s receipt of a notice that the Title IV Loan Holder has

determined Debtor’s qualification for participation in an IDR plan and calculated


Debtor’s monthly IDR plan payment, the Debtor shall notify the Chapter 13 Trustee of

the IDR participation and the amount of the IDR plan monthly payment. Debtor is

responsible to file with the Bankruptcy Court a motion to modify the Chapter 13 Plan to

permit monthly payment under the IDR plan, indicating whether the payments will be

made directly by the Debtor or through the Chapter 13 Trustee’s office, and adjusting the

Chapter 13 plan dividends, if necessary.

(f) [Use for Direct IDR Payment to Title IV Loan Holder]

The Debtor will make full and timely IDR plan payments directly to the Title IV Loan

Holder outside of the Debtor’s scheduled plan payments to the Chapter 13 Trustee.

ALTERNATIVE SUBSECTION (f)

[Use for IDR Payments Inside the Chapter 13 Plan]

The Debtor will remit to the Chapter 13 Trustee the monthly IDR plan payment for the

Chapter 13 Trustee to transfer to the Title IV Loan Holder.

In order for the Chapter 13 Trustee to transfer Debtor’s monthly IDR plan payment to the

Title IV Loan Holder timely, the Debtor must remit each IDR plan payment in full to the

Chapter 13 Trustee in advance of the IDR payment due date, and in good funds (money

order, bank check, TFS payment, or payroll deduction).

i. The Title IV Loan Holder will be paid through the Chapter 13 Plan as a Class _____

Creditor.

ii. If the Debtor does not timely or fully remit sufficient funds to the Chapter 13 Trustee

for Debtor’s monthly IDR plan payment, the Chapter 13 Trustee is not required or

responsible to transfer funds to the Title IV Loan Holder from the Debtor’s general

bankruptcy estate for that monthly payment. The Chapter 13 Trustee is not

responsible for the Debtor’s late or missing IDR plan payments caused by Debtor’s

failure to remit funds to the Chapter 13 Trustee for transfer of the IDR plan payment

by the Chapter 13 Trustee’s office.

iii. Upon the request of the Chapter 13 Trustee, the Debtor will request the Title IV Loan

Holder modify Debtor’s monthly IDR plan payment due date in order to

accommodate the Chapter 13 Trustee’s disbursement schedule.


iv. The Chapter 13 Trustee may request the Title IV Loan Holder establish an ACH

account with the Chapter 13 Trustee’s office for deposit of the Debtor’s monthly IDR

plan payment directly into the Title IV Loan Holder’s account.

6) Waivers

a. Debtor expressly acknowledges and agrees that regarding an application for initial

participation and/ or continuing participation in an IDR plan while this Chapter 13 case is

open, Debtor waives application of the automatic stay provisions of 11 U.S.C. § 362(a) to

all loan servicing, administrative actions, and communications concerning the IDR plan

by the Title IV Loan Holder, including but not limited to: determination of qualification

for enrollment in an IDR plan; loan servicing; transmittal to the Debtor of monthly loan

statements reflecting account balances and payments due; transmittal to the Debtor of

other loan and plan documents; transmittal of correspondence (paper and electronic) to

the Debtor; requests for documents or information from the Debtor; telephonic and live

communications with the Debtor concerning the IDR plan application, payments, or

balances due; transmittal to the Debtor of IDR participation documentation; payment

information; notices of late payment due and delinquency; default prevention activities;

and other administrative communications and actions concerning the Debtor’s IDR plan.

b. Debtor expressly waives any and all causes of action and claims against the Title IV Loan

Holder for any alleged violation of the automatic stay under 11 U.S.C. § 362(a) with

regard to and in consideration of the benefits of enrollment and participation in an IDR

plan.

7) Annual Certification of Income and Family Size

Pursuant to 34 CFR 685.209, 34 CFR 685.221, or 34 CFR 682.215, as applicable, the Debtor

shall annually certify (or as otherwise required by the Title IV Loan Holder) the Debtor’s

income and family size, and shall notify the Chapter 13 Trustee of any adjustment (increase

or decrease) to the Debtor’s monthly IDR plan payment resulting from annual certification.

a. Debtor expressly acknowledges and agrees that while this Chapter 13 case is open,

Debtor waives application of the automatic stay provisions of 11 U.S.C. § 362(a) to all

loan servicing, administrative actions, communications, and determinations concerning

the certification of income and family size taken or effected during and for the

certification process by the Title IV Loan Holder, including but not limited to:

administrative communications and actions from the Title IV Loan Holder for the

purpose of initiating certification; requests for documentation from the Debtor;

determination of qualification for participation; and any action or communication listed

in subsection (6) above, which is incorporated herein by reference.


b. Debtor expressly waives any and all causes of action and claims against the Title IV Loan

Holder for any alleged violation of the automatic stay under 11 U.S.C. § 362(a)

associated with the IDR plan certification process, in consideration of the voluntary

participation of and benefits to the Debtor of continued participation in an IDR plan.

c. If Debtor’s annual certification of income and family size for an IDR plan results in

changes to the Debtor’s required monthly IDR plan payment amount, the Debtor will

notify the Chapter 13 Trustee within seven (7) days of Debtor’s receipt of notice from the

Title IV Loan Holder of the revised monthly IDR plan payment amount. Either the

Debtor or the Chapter 13 Trustee may file an 11 U.S.C. §1329(a) motion to modify this

Chapter 13 plan to reflect the Debtor’s revised monthly IDR plan payment.

d. If the Debtor fails to satisfy the requirements for annual certification for continued

participation in the IDR plan, the Title IV Loan Holder will recalculate the monthly

repayment amount according to the requirements of the IDR program.

(i) Debtor expressly acknowledges and agrees that while this Chapter 13 case is open the

Title IV Loan Holder’s recalculation of the Debtor’s repayment amount does not

violate the automatic stay provisions of 11 U.S.C. § 362(a) as set forth in subsections

(6) and (8) of this Section.

(ii) Debtor expressly waives any and all causes of action and claims against the Title IV

Loan Holder for any alleged violation of the automatic stay under 11 U.S.C. § 362(a)

with regard to the recalculation of Debtor’s Federal Student Loan repayment

obligation while this Chapter 13 bankruptcy case is open.

8) Discontinuation of Participation in IDR

a. If during the course of this Chapter 13 case the Debtor no longer desires to participate in

the IDR plan and seeks administrative forbearance status on the Federal Student Loans

identified in subsection (2)(b) of this Section, the Debtor must contact the Title IV Loan

Holder in writing by letter to inform the Title IV Loan Holder of this decision.

b. If during the course of this Chapter 13 case the Debtor ceases making payments on the

Federal Student Loan, Debtor shall contact and inform the Title IV Loan Holder in

writing by letter. Based on the Debtor’s information, the Title IV Loan Holder will place

the Federal Student Loan into an appropriate status, such as administrative forbearance,

and will stay collection action until after this Chapter 13 case is closed.

c. If during the course of this Chapter 13 case the Debtor ceases making payments on the

Federal Student Loan without notice to the Title IV Loan Holder, Debtor will incur a


delinquency and may default on the Federal Student Loan as defined in CFR 34 CFR

682.200(b) and 685.102.

i. Debtor expressly acknowledges and agrees that while this Chapter 13 case is open the

Title IV Loan Holder’s administrative communication and actions on the defaulted

debt, which are the routine administrative processes that occur upon delinquency and

default on Federal Student Loans, do not violate the automatic stay provisions of 11

U.S.C. § 362(a) as set forth in subsections (6) and (8) of this Section.

ii. The Title IV Loan Holder’s administrative communication and actions do not include

any form of active debt collection.

d. Debtor expressly waives any and all causes of action and claims against the Title IV Loan

Holder for any alleged violation of 11 U.S.C. § 362(a) with regard to the default status of

Debtor’s Federal Student Loan based on Debtor’s non-payment while this Chapter 13

case is open, including communications with, correspondence to, or transmittal of

statements to the Debtor, and telephonic and email contact with the Debtor, concerning

and resulting from Debtor’s Federal Student Loan default.

9) Opportunity for Title IV Loan Holder to Cure

Debtor first shall give notice to the Title IV Loan Holder in writing by letter of any alleged

action by the Title IV Loan Holder concerning the Federal Student Loans and IDR plan that

is contrary to the provisions of this Section and or 11 U.S.C. § 362(a). Debtor shall not

institute any action in the Bankruptcy Court against the Title IV Loan Holder under 11

U.S.C. § 362(a) and (d) until after the Title IV Loan Holder has been given a reasonable

opportunity to review, and, if appropriate, correct such actions. Notices provided to the Title

IV Loan Holder under this subsection must include a description or identification of the

actions that Debtor alleges to be in violation of this Section of the Chapter 13 Plan and/or 11

U.S.C. § 362(a).

10) Notice

Any Notice required to be given to the Title IV Loan Holder under this Section must include

the Debtors’ name(s), Debtor’s bankruptcy case number and Chapter 13 designation, and

identification of the Federal Student Loans, and must be made in writing by letter to:

[Title IV Loan Holder Name]

c/o The United States Attorney’s Office

[_____DISTRICT of ______]

[Mailing Address]

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BANKRUPTCY CONSIDERATIONS for Debtors with FEDERAL STUDENT LOANS

VBA MID-WINTER MEETING - March 22, 2019

Melissa A.D. Ranaldo, Assistant U.S. Attorney, District of Vermont

I. Federal Student Loan Programs A. WILLIAM D. FORD DIRECT LOAN PROGRAM (“DIRECT LOAN PROGRAM”)

1. The Basics: a. Established in 1994 b. Authorized by title IV, part D of the Higher Education Act (“HEA”), 20 USC 1087a,

et seq. c. Regulations at 34 CFR part 685 d. Loan Conditions/Terms Same as Federal Family Education Loan Program (FFELP,

title IV, Part B) unless specifically stated otherwise in Part D

2. Loan Characteristics: a. Loans are made by ED and always held by ED. b. before default, loans are serviced by ED contractors:

i. Prior to July 1, 2010 by ACS/Xerox known as Direct Loan Servicing Center (DLSC)

ii. After July 1, 2010 by one of several ED contractors, such as Sallie Mae, PHEAA/AES, and Nelnet

c. Defaulted loans are collected by ED in the same manner as other defaulted student loans.

d. Loans are made to students and parents: i. Students: Subsidized Stafford Loans, Unsubsidized Stafford Loans,

Consolidation Loans, Grad PLUS ii. Parents: PLUS (parent loans for undergraduate students), Consolidation

Loans e. Loans may be administratively discharged by the Secretary on various bases,

including the borrower’s death or disability, the closure of the borrower’s school, an unpaid refund, or a school’s false certification of a student’s ability to benefit from the program or use of an unauthorized signature, or identify theft (HEA § 437, 34 CFR 685.212 - 685.216).

f. Under certain very limited circumstances, some portion of loans may be eligible for forgiveness based on a borrower’s teaching service or public service.

B. FEDERAL FAMILY EDUCATION LOAN PROGRAM (“FFELP”) 1. The Basics:

a. Formerly called the Guaranteed Student Loan Program. b. Authorized by title IV, part B of the Higher Education Act (“HEA”), 20 USC 1071,

et seq. c. Regulations at 34 CFR part 682 d. No new loans were made under the FFELP after July 1, 2010.

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e. ED is legal holder of a loan only if the loan is in default and guaranty agency has assigned the loan to ED or if ED purchased the loan through a loan purchase program.

2. Loan Characteristics: a. Loans are made by banks, guaranteed by guaranty agencies and reinsured by

ED. b. Loans are made to students and parents:

i. Students: Subsidized Stafford Loans (formerly called Guaranteed Student Loans), Unsubsidized Stafford Loans (formerly called Supplemental Loans for Students (SLS), which before that were called Auxiliary Loan for Students (ALAS)), Consolidation Loans, Grad PLUS

ii. Parents: PLUS (parent loans for undergraduate students), Consolidation Loans

c. Loans may be administratively discharged by the Secretary on various bases, including the borrower’s death or disability, the closure of the borrower’s school, an unpaid refund, or a school’s false certification of a student’s ability to benefit from the program or use of an unauthorized signature, or identity theft (HEA § 437, 34 CFR 682.402).

C. CONSOLIDATION LOANS: WILLIAM D. FORD DIRECT LOAN PROGRAM (“DIRECT LOAN PROGRAM”) 1. The Basics:

a. Authorized by title IV, part D of the Higher Education Act (“HEA”), 20 USC 1087a, et seq.

b. Regulations at 34 CFR part 685 (specifically 34 CFR 685.220) 2. Loan Characteristics:

a. Loans are made by ED and always held by ED. b. Before default, loans are serviced by ED contractors:

i. Prior to July 1, 2010 by ACS/Xerox known as Direct Loan Servicing Center (DLSC)

ii. After July 1, 2010 by one of several ED contractors, such as Sallie Mae, PHEAA/AES, and Nelnet

c. ED pays off loans being consolidated, which may include other consolidation loans and loans a borrower obtained for attendance at an institution of higher education, such as Stafford loans or Perkins loans, on the borrower’s behalf.

d. A consolidation loan is legally considered a new loan, and upon consolidation, underlying loans are extinguished.

e. Loans may be administratively discharged by the Secretary on various bases, including the borrower’s death or disability, the closure of the borrower’s school, an unpaid refund, or a school’s false certification of a student’s ability to benefit from the program or use of an unauthorized signature, or identity theft (HEA § 437, 34 CFR 685.212-216).

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D. CONSOLIDATION LOANS: FEDERAL FAMILY EDUCATION LOAN PROGRAM (“FFELP”) 1. The Basics:

a. Authorized by title IV, part B of the Higher Education Act (“HEA”), specifically HEA § 428C, 20 USC 1078-3.

b. Regulations at 34 CFR part 682 c. No new loans were made under the FFELP after July 1, 2010. d. ED is legal holder of a loan only if the loan is in default and guaranty

agency has assigned the loan to ED or if ED purchased the loan through a loan purchase program.

2. Loan Characteristics:

a. Loans are made by banks, guaranteed by guaranty agencies and reinsured by ED.

b. The lender pays off loans being consolidated, which may include other consolidation loans and loans a borrower obtained for attendance at an institution of higher education, such as Stafford loans or Perkins loans, on the borrower’s behalf.

c. Consolidation loan is legally considered a new loan, and upon consolidation, underlying loans are extinguished.

d. Loans may be administratively discharged by the Secretary on various bases, including the borrower’s death or disability, the closure of the borrower’s school, an unpaid refund, or a school’s false certification of a student’s ability to benefit from the program or use of an unauthorized signature, or identity theft (HEA § 437, 34 CFR 682.402).

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II. Federal Student Loan Repayment Plans A. STANDARD/EXTENDED/GRADUATED REPAYMENT PLANS (10-30 Years) (FFELP, Direct

& Perkins) Regulatory Authority: 34 C.F.R. §§ 682.209(a)(7); 209(h)(2) (FFELP);

685.201(b)(1); 208(b)(1); 208(e) & (g)(4) (Direct); 34 C.F.R. 674.33(c) (Perkins)

Monthly payments can be level or graduated for the payment term

no payment larger than 3 x any other payment

Payment Term: generally 10 years

• FFELP & Direct: for balances over $30,000, payment period can

extend up to 30 years

• Perkins: if low-income borrower can extend to 20 years

B. INCOME BASED REPAYMENT PLAN (IBR) (FFELP & Direct)

Regulatory Authority: 34 C.F.R. § 682.215 (FFELP); 685.221 (Direct)

Loans NOT Eligible: loans in default, PLUS to Parent borrower and Consolidation if Parent PLUS loan included

Initial Eligibility Requirement: Partial Financial Hardship

• Calculation of PFH

o Annual Amount Due All Eligible Loans under 10 Year Repayment > 15% X

o X= AGI – 150% Poverty Guidelines For Family Size

• Consent by Borrower for Tax Information

• Certification of Family Size

Monthly Payment

• Maximum 15% of X/12

• If not all eligible loans are Direct Loans, then payment amount is prorated between loan types (FFEL and Direct)

• If < $5 payment is $0.00

• If > $5 but < $10 payment is $10

Payment Application: first to Interest Accrual, then to collection costs, then to late fees and then to principal

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Negative Amortization (Scheduled monthly payment amount doesn’t cover the monthly interest accrual): permitted for up to 3 years (doesn’t include time in an Economic Hardship Deferment)

Loan Forgiveness: after 25 year repayment terms AND if meet repayment requirements

• Public Service Loan Forgiveness (ONLY Direct Loan Program): after ten year repayment term if other requirements met

ED website allows estimate of monthly payments for IBR http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRCalc.jsp

ED website link to two-page PDF IBR Information is at http://studentaid.ed.gov/students/publications/factsheets/factsheet_IncomeBasedRepayment.pdf

C. INCOME CONTINGENT REPAYMENT PLAN (ICRP) (all Direct except Direct PLUS and Direct PLUS Consolidation) (NOT FFFELP)

ICRP is a formula-based approach to tailoring repayment burden to financial ability: available – currently – only under Direct Loan Program, not for FFELP. See 20 U.S.C. § 1087e(d)(1)(D).

• ICRP: borrower’s annual repayment amounts are based on the income of the borrower and, if married, his or her spouse, and allows for payment over a term of up to 25 years. Any amount not paid by end of 25th year is cancelled. Amount cancelled under current view of IRS is taxable income in the year cancelled. HEA § 455(e)(4) directs ED to establish the terms of the income contingent repayment schedules by regulation; the schedules must vary the amount of installment payments required in relation to "the appropriate portion" of the annual income of the borrower and the borrower's spouse. 20 U.S.C. § 1087e(e)(4).

• Under this option, borrowers provide authorization to ED to secure their adjusted gross income data directly from the Internal Revenue Service annually. 20 U.S.C. § 1087e(e)(1).

• ICRP’s flexibility was designed to make repayment affordable particularly for borrowers who take “lower-paying community service-type jobs.” H.R. Rep. No. 111, 103d Cong. 1st Sess. 112, 121 (1993).

• PLUS loan borrowers (parents of dependent undergraduate students) are not eligible for income contingent repayment.

• ICRP Regulations: The scheduled monthly repayment amount required under income contingent repayment is set annually, in the following manner: (34 C.F.R. § 685.209(b), (c)).

http://studentaid.ed.gov/PORTALSWebApp/students/english/IBRCalc.jsp

http://studentaid.ed.gov/students/publications/factsheets/factsheet_IncomeBasedRepayment.pdf

http://studentaid.ed.gov/students/publications/factsheets/factsheet_IncomeBasedRepayment.pdf

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To establish the ICRP installment amount for a loan balance: the practical way: go to ED website below, select Calculator button on left hand side of screen, and use the ICRP Calculator:

ED website allows estimate of monthly payments for a Direct Consolidation Loan: http://www.ed.gov/DirectLoan/index.html

D. Pay As You Earn Plan (“PAYE”)

• A new kind of income contingent repayment program that Ed first started offering on December 1, 2012. The regulations for PAYE will be effective on July 1, 2013, and will be included with the IRCP regulations in 34 C.F.R. § 685.209. Until that time, more information on the details of the plan is available at http://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn or in the Final Rule, 77 FR 66088 (November 1, 2012).

E. Income Sensitive Repayment Plan (FFELP): [“ICRP lite”]

• Payments not based on formula (as in ICR), but set by agreement with the holder of the loan; payments may vary, but no payment may be greater than 3 times any other payment

• installment amount adjusted annually, based on borrower’s expected income;

• loan must be repaid within otherwise applicable repayment timeframe, but lender can extend that timeframe for up to 5 years by exercise of forbearance. 34 C.F.R. § 682.209(a)(7), (8).

http://www.ed.gov/DirectLoan/index.html

http://studentaid.ed.gov/repay-loans/understand/plans/pay-as-you-earn

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III. Federal Student Loan Administrative Discharges A. TOTAL AND PERMANENT DISABILIITY (TPD) DISCHARGE CHANGES EFFECTIVE JULY 1 , 2013 Regulations governing disability discharge will change on July 1, 2013. The major change is for non-veteran borrowers. From July 1 forward, an application must contain either: (i) A certification by a physician, who is a doctor of medicine or osteopathy legally authorized to practice in a State, that the borrower is totally and permanently disabled; or (ii) An SSA notice of award for Social Security Disability Insurance (SSDI) or Supplemental Security Income “(SSI) benefits indicating that the borrower’s next scheduled disability review will be within five to seven years. This tie to SSA determinations is new, and should simplify the discharge process for borrowers who have already received an SSA determination of disability. Legal Authority: FFELP: 20 U.S.C. § 1087(a), 34 C.F.R. § 682.402(c)(1); Direct: 34 C.F.R. § 685.213; Perkins: 20 U.S.C. § 1087dd, 34 C.F.R. § 674.61

1. Definition of Total and Permanent Disability: As most recently amended, for the Title IV HEA loan programs, an individual is considered totally and permanently disabled only if the individual is

34 C.F.R. § 682.200 (b) (FFELP). See also 34 C.F.R. §§ 674.51(s) (Perkins) & 685.102(a)(3) (Direct Loan Program). A borrower cannot be considered totally and permanently disabled based on a condition that existed before receipt of the loan, unless that condition has substantially deteriorated since the submission of the loan application and has rendered the borrower totally and permanently disabled.

8

For FFELP and Direct Consolidation loans, this means that the Consolidation loan may be discharged only if the borrower would qualify for discharge of each and every one of the loans paid off by the Consolidation Loan.

2. Veteran’s TPD Discharge

• ED began reviewing under this standard Aug. 14, 2008 • VA must have determined student loan borrower disabled/unemployable due to service

connected disability • Borrower submits ED TPD application with the VA documentation • TPD Discharge is immediate, no post-discharge monitoring period

3. TPD Discharge for Non-Veteran Title IV HEA Borrowers

• Borrower submits original TPD application

o WITHIN 90 DAYS of doctor’s signature to ED o Doctor’s License Status Verified1 o Listed medical diagnosis Reviewed2 o Borrower must sign each original

• Loan Holder forwards to ED’s Disability Discharge Unit for Decision o Upon request, additional documentation to support a borrower’s application for loan

discharge in cases where the information provided in the initial application is not definitive, is illegible or is incomplete.

• APPROVAL FOR TPD DISCHARGE o ED notifies borrower o ED refunds monies paid after doctor’s certification date to person who made the

payment o POST DISCHARGE MONITORING PERIOD OF THREE YEARS

No new loans or TEACH grants after ED discharge date Earnings from employment cannot exceed 100% of poverty line for family size

of 2 o REINSTATEMENT OF DISCHARGED LOANS

• DENIED FOR TPD DISCHARGE 1 Doctors certifying a disability on a student loan must reside or be licensed to practice within the continental United States, American Samoa, the Commonwealth of Puerto Rico, the District of Columbia, Guam, the Virgin Islands, the Commonwealth of the Northern Mariana Islands, the Republic of the Marshall Islands, the Federated States of Micronesia, and the Republic of Palau. The latter three are also known as the Freely Associated States. Doctors from outside the US cannot certify a total and permanent disability for purposes of discharging a student loan debt, even if the borrower lives outside the United States. 2 ED requires a clear and complete diagnosis, in laymen’s terms, of borrower’s condition, including, as necessary, clarification (nature, severity and duration) of the diagnosis and how it will impact borrower’s ability to work because of a medically determinable impairment.

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4. Applying for a TPD Loan Discharge 1. SEE ATTACHMENT A 2. Applications are available from the current holder of the loan, and should be returned ED to initiate processing of TPD application. Applications can be downloaded from http://www.ed.gov/offices/OSFAP/DCS/forms/disable.pdf. B. OTHER ADMINISTRATIVE DISCHARGE RELIEF

1. Background of discharge relief under HEA § 437(c), 20 U.S.C. §1087(c). In the early 1990’s, a series of class actions were brought against holders of FFELP loans seeking relief on a variety of theories from loan liability by reason of school misconduct. In 1992 amendments to the HEA, Congress, unwilling to close off resolution of the pending lawsuits, yet reluctant to avoid any relief for borrowers injured by school misfeasance recently documented in the Nunn committee hearings, adopted the "loan discharge" provisions in HEA § 437(c). 20 U.S.C. § 1087(c). These discharge provisions, subsequently expanded in the 1998 HEA reauthorization, implicitly recognize that borrowers affected by school misconduct or non-performance (closure, failure to pay refunds, false certification of eligibility to borrow) were still legally obligated to repay the FFELP loans they had received to attend these schools. Relief is available for student borrowers, for parent borrowers if a student meets the eligibility standards, and for Consolidation Loan borrowers if a loan paid off by the Consolidation Loan would have qualified for discharge were it still outstanding. For unexplained reasons, the statute itself provided this relief only for loans made after January 1, 1986. Relief includes the following:

2. Closed School Discharge Borrowers who received FFELP, Perkins or Direct loans on or after January 1, 1986 may qualify for a discharge of their obligation on those loans if they were unable to complete their education because the school in which they (or, for parent borrowers, the students for whom the loans were received) were enrolled closed or if they withdrew during a 90-day period of "constructive closure" preceding the closing date. HEA § 437(c), 20 U.S.C. § 1087(c) (FFELP); §464(g), 20 U.S.C. § 1087dd(g) (Perkins); and 34 C.F.R. § 685.213 (Direct). Relief is available upon satisfactory showing of eligibility by application to ED, or, for loans not held by ED, to the cognizant guaranty agency. Eligibility and procedures are set forth at 34 C.F.R. § 682.402(d). Relief includes refund of any payments made on the loan, reinstatement of eligibility for future Title IV, HEA student assistance, and expunging of adverse information disseminated on the loan to credit bureaus. Older (pre-January 1986) FFELP loans may qualify for pro-rated relief.

http://www.ed.gov/offices/OSFAP/DCS/forms/disable.pdf

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3. False Certification Discharge Borrowers who received FFELP loans after January 1, 1986 may obtain a discharge of their obligation if the school for which the loans were received falsely certified their eligibility to borrow. 20 U.S.C. § 1087(c). Relief is available by application to ED, or, for loans not held by ED, to the cognizant guaranty agency through procedures set forth at 34 C.F.R. § 682.402(e). Relief includes refund of any payments made on the loan, reinstatement of eligibility for future Title IV, HEA student assistance, and expunging of adverse information disseminated on the loan to credit bureaus. The same relief is available for Federal Direct Loan borrowers. 34 C.F.R. § 685.214.

4. Ability to Benefit (ATB) ED applies the false certification discharge provision first to those determinations of student eligibility made by the school attended by the borrowers (or, for parent borrowers, the student for whom the loan was received) that the student, although lacking a high school diploma or GED, was nevertheless an "eligible student" under the FFELP because the student nevertheless had the ability to benefit from the training offered from the school. 34 C.F.R. § 682.402(e). A borrower qualifies for loan discharge if the school's determination that the student had the ability to benefit was improperly made.

5. False Signature Relief under §437(c) is also available, under ED regulations, for a FFELP or Direct loan borrower whose loan application or promissory note was signed by the school without the borrower's authorization, upon satisfactory application to ED or the guarantor. 34 C.F.R. §§ 682.402(e); 685.214(c)(2).

6. Forgery of Disbursement Check Loan relief is available under the False Certification procedure for forgeries on disbursement instruments. This includes claims that the school forged the FFELP or Direct loan borrower's endorsement on a loan disbursement check or on an authorization for the loan funds to be disbursed electronically. Relief is not given if the borrower received the proceeds of that loan either directly or by credit satisfying a tuition obligation owed to the school. 34 C.F.R. § 682.402(e)(1)(ii); § 685.214(c)(3).

7. Unpaid Refunds Borrowers who received FFELP or Direct loans on or after January 1, 1986 may, under § 437(c), obtain a partial discharge of their loan obligation if the school they attended failed to make a refund that would have been applied to reduce their loan balance. 20 U.S.C. § 1087(c). As with other discharge relief, the borrower must file an application with ED or the cognizant guaranty agency for discharge relief. 34 C.F.R. § 682.402(l)(FFELP); 34 C.F.R.R 685.212(f) (Direct).

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8. Identity Theft Loan relief is available for student loan borrowers (FFELP and Direct) whose identity has been stolen. As with other discharge relief, the borrower must file an application with ED. 34 C.F.R. § 682.402(c)(14) (FFELP) & 685.215(a)(iv) & (c)(4) (Direct Loan Program).

9. Administrative Relief Only Discharge relief claims of any kind must be presented through the administrative process created by ED regulations and cannot be obtained by a suit brought for affirmative relief or asserted as a defense to a collection claim in litigation. In re Scholl, 239 B.R. 345 (Bankr. N.D. Iowa 2001)(closed school claim); U.S. v. Wright, 87 F.Supp.2d 464 (D. Md. 2000); U.S. v. Bertucci, C.A. No. 00-0078, 2000 U.S. Dist. LEXIS 12877 (E.D. La., Aug. 30, 2000) (unpaid refund claim); In re Bega, 180 B.R. 642 (Bankr. D. Kan. 1995). There is no limitation period for such a claim, and no prohibition on relief even if the loan has been reduced to judgment; raising a claim for discharge relief is therefore no basis for delay in entry of judgment on the debt. U.S. v. Green, No. 1:99 CV 53-C, 2000 U.S. Dist. LEXIS 3297 (W.D. N.C. Feb. 9, 2000).

C. APPLICATIONS To download application forms for these administrative discharges, go to ED site at http://www.ed.gov/offices/OSFAP/DCS, select Forms, then select the application described for that discharge relief.

http://www.ed.gov/offices/OSFAP/DCS

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IV. Treatment of Federal Student Loans in Chapter 13 Cases A. General Unsecured Claim of US Dept of Ed cannot be separately classified unless it can

be done without discriminating against other general unsecured creditors.

B. If the Chapter 13 debtor does NOT make payments during the plan, interest will continue to accrue and he/she will not get credit for making payments.

C. Any Chapter 13 Plan seeking to continue or enroll in any Income Based Repayment Plan Requires Non-Standard Plan Language in Section 8 so that Dept of Ed can remove the BK Code and resume sending all notices and requests for annual certification of income without violating the automatic stay – otherwise the debtor will not get the normal notices, will not certify income annually and will be dropped from his/her Income Based Plan, even though they continue to make payments.

D. SEE ATTACHMENT B – Non-standard Plan Language

TPD-APP

DISCHARGE APPLICATION: TOTAL AND PERMANENT DISABILITY William D. Ford Federal Direct Loan (Direct Loan) Program / Federal Family Education Loan (FFEL) Program / Federal Perkins Loan (Perkins Loan) Program / TEACH Grant Program

OMB No. 1845-0065 Form Approved Exp. Date 09/30/2019

This is an application for a total and permanent disability discharge of your Direct Loan, FFEL, and/or Perkins Loan program loan(s), and/or your Teacher Education Assistance for College and Higher Education (TEACH) Grant Program service obligation.

Throughout this application, the words “we,” “us,” and “our” refer to the U.S. Department of Education.

Make sure that Section 2, Section 3, and (if required) Section 4 include all requested information. Incomplete or inaccurate information may cause your application to be delayed or rejected.

To qualify for this discharge, you must submit documentation from one of the following sources:

1. The U.S. Department of Veterans Affairs (VA) OR

2. The Social Security Administration (SSA) OR

3. A physician's certification in Section 4 of this form

Except for VA or SSA determinations described below, adisability determination by another federal or state agency does not qualify you for this discharge.

U.S. Department of Veterans Affairs Documentation

If you are a veteran who has been determined by the VA to be unemployable due to a service-connected disability, you may qualify for discharge by providing documentation from the VA showing that you have received one of the following two types of VA disability determinations:

1. A determination that you have a service-connecteddisability (or disabilities) that is 100% disabling.

2. A determination that you are totally disabled basedon an individual unemployability rating.

You do not qualify for discharge based on a VA disability determination if your disability is not service-connected.

Social Security Administration Documentation

If you are eligible for Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI), you may qualify for discharge by providing a copy of your notice of award or Benefits Planning Query (BPQY) from the SSA. You only qualify for a discharge based on this documentation if it shows that your next scheduled disability review will be 5 to 7 years or more from the date of your last SSA disability determination.

If you want to submit a BPQY but do not have one, contact the SSA office that issued your award and request form SSA-2459. You may also request a BPQY by calling 1-800-772-1213 or by visiting www.ssa.gov.

If you are granted a discharge based on SSA documentation, we will monitor your status during a 3-year monitoring period. Your discharged loans or TEACH Grant service obligation may be reinstated if you do not meet certain requirements, as explained in Section 6 of this form.

Physician Certification

You may qualify for discharge by having a physician complete Section 4 of this application. The physician must certify that you are unable to engage in any substantial gainful activity (see definition in Section 5) by reason of a medically determinable physical or mental impairment that:

1. Can be expected to result in death;

2. Has lasted for a continuous period of at least 60months; or

3. Can be expected to last for a continuous period of atleast 60 months.

If you are granted a discharge based on a physician's certification, we will monitor your status during a 3-year monitoring period. Your discharged loans or TEACH Grant service obligation may be reinstated if you do not meet certain requirements, as explained in Section 6 of this form.

Important Tax Information

Loan amounts discharged due to total and permanent disability may be considered taxable income by the Internal Revenue Service (IRS). Contact the IRS for more information.

How to Designate Someone to Represent You

If you wish to designate an individual or organization to represent you in matters related to your total and permanent disability discharge request, you must complete the Applicant Representative Designation: Total and Permanent Disability form. You may obtain this form from our Total and Permanent Disability Discharge Servicer (see below for contact information).

WHERE TO SEND YOUR COMPLETED APPLICATION AND DOCUMENTATION

U.S. Department of Education - TPD Servicing P.O. Box 87130 Lincoln, NE 68501-7130 Fax: 303-696-5250

IF YOU NEED HELP COMPLETING THE APPLICATION

Phone: 1-888-303-7818 (TTY: dial 711, then phone no.) Email: [email protected] Website: www.disabilitydischarge.com

Page 1 of 8

https://www.ssa.gov

mailto:[email protected]?subject=Help%20completing%20TPD%20application

https://www.disabilitydischarge.com/

TPD-APP

DISCHARGE APPLICATION: TOTAL AND PERMANENT DISABILITY William D. Ford Federal Direct Loan (Direct Loan) Program / Federal Family Education Loan (FFEL) Program / Federal Perkins Loan (Perkins Loan) Program / TEACH Grant Program

OMB No. 1845-0065 Form ApprovedExp. Date 09/30/2019

WARNING: Any person who knowingly makes a false statement or misrepresentation on this form or on any accompanying document is subject to penalties that may include fines, imprisonment, or both, under the U.S. Criminal Code and 20 U.S.C. 1097.

SECTION 1: APPLICANT INFORMATION

Please enter or correct the following information.

Check this box if any of your information has changed.

SSN

Date of Birth

Name

Address

City State Zip Code

Telephone - Primary

Telephone - Alternate

Email (Optional)

SECTION 2: TOTAL AND PERMANENT DISABILITY INFORMATIONCarefully read the entire application. Type or print in dark ink. Sign and date the application in Section 3.

1. Are you a veteran who has received a determinationfrom the U.S. Department of Veterans Affairs (VA) thatyou are unemployable due to a service-connecteddisability?

Yes - Attach documentation of the VA determination and complete Section 3. You do not need to have a physician complete Section 4.No - Continue to Item 2.

2. Are you currently receiving SSDI or SSI benefits, anddoes your most recent notice of award of BenefitsPlanning Query (BPQY) from the SSA state that yournext scheduled disability review will be 5 to 7 yearsor more from the date of your last SSA disabilitydetermination?

Yes - Attach a copy of your most recent SSA notice of award or BPQY and complete Section 3. You do not need to have a physician complete Section 4.No - Complete Section 3 and have a physician complete and sign Section 4.

SECTION 3: APPLICANT'S REQUEST, AUTHORIZATION, UNDERSTANDINGS, AND CERTIFICATIONSI request that the U.S. Department of Education discharge my Direct Loan, FFEL, and/or Perkins Loan program loan(s), and/or my TEACH Grant service obligation.I authorize any physician, hospital, or other institution having records about the disability that is the basis for my request for a discharge to make information from those records available to the U.S. Department of Education.I understand that:

1. If I am applying for a discharge based on a physician's certification in Section 4, I must submit this application to theU.S. Department of Education within 90 days of the date of my physician's signature in Section 4.

2. If I am a veteran who answered No to Item 1 in Section 2, and I obtained a certification from a physician in Section 4,that certification is only for purposes of determining my eligibility for a discharge of my loan(s) or TEACH Grant serviceobligation, and is not for purposes of determining my eligibility for, or the extent of my eligibility for, VA benefits.

I certify that: (1) I have a total and permanent disability, as defined in Section 5; and (2) I have read and understand the information in Sections 6 and 7.

Applicant's or Representative's Signature Date Representative Name (if applicable)

NOTE: You may designate someone to represent you in matters related to your application. If you wish to designate a representative, you must complete the Applicant Representative Designation: Total and Permanent Disability form.

Page 2 of 8

Applicant Name Applicant SSN

SECTION 4: PHYSICIAN'S CERTIFICATION

Print legibly and initial any changes. Return the form to the applicant or representative.Applicant Identification1. Provide the below information regarding the individual for

whom you are completing this Section: Name

Date of Birth

Medically Determinable Physical or Mental Impairment2. Does the applicant have a medically determinable physical or

mental impairment that prevents the applicant from engaging in any substantial gainful activity?

Substantial gainful activity means a level of work performed for pay or profit that involves doing significant physical or mental activities or a combination of both. If the applicant is able to engage in any substantial gainful activity in any field of work, you must answer "No".

Yes - Continue to Item 3.

No - Do not complete this application.

Severity/Duration of Physical or Mental Impairment3. Is the applicant's impairment expected to result in death?

Yes - Skip to Item 5.

No - Continue to Item 4.

4. Has the applicant's impairment lasted or is it expected to last for a continuous period of at least 60 months?

Yes - Continue to Item 5.

No - Do not complete this application.

Disabling ConditionDo not use insurance codes or abbreviations.

5. Provide your diagnosis of the applicant's impairment:

6. Describe the severity of the applicant's impairment, including, if applicable, the phase of the impairment:

LimitationsExplain how the condition prevents the applicant from

engaging in any substantial gainful activity in any field of work. Attach additional pages if needed. Enter "N/A" if not applicable. You may include additional information you believe is helpful in understanding the applicant's condition, such as medications or procedures used to treat the condition.

7. Limitations on sitting, standing, walking, or lifting:

8. Limitations on activities of daily living:

9. Residual functionality:

10. Social/behavioral limitations (if any):

11. Global Assessment Function Score (for psychiatric conditions):

Physician's CertificationI certify that, in my best professional judgment, the applicant identified in Item 1 has a medically determinable physical or mental impairment consistent with my responses in Items 2 through 10.

I understand that an applicant who is currently able to engage in any substantial gainful activity in any field of work does not have a total and permanent disability as defined on this form.

I am a doctor of: medicine osteopathy/osteopathic medicine

State Where Legally Authorized to Practice* Professional License Number (subject to verification; stamp is acceptable)

*If you are licensed to practice in American Samoa, Puerto Rico, the U.S. Virgin Islands, the Northern Mariana Islands, the Marshall Islands, Micronesia, or Palau, attach a copy of your professional license that clearly shows the expiration date.

Physician's Signature (a stamp is not acceptable) Date (mm-dd-yyyy) Physician Name (First, Middle, Last)

Address (a stamp is acceptable)

Email Telephone

FaxPage 3 of 8

SECTION 5: DEFINITIONS

If you have a total and permanent disability, this means that: (1) you are unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that can be expected to result in death, or that has lasted for a continuous period of not less than 60 months, or that can be expected to last for a continuous period of not less than 60 months; OR (2) you are a veteran who has been determined by the VA to be unemployable due to a service-connected disability. Except for certain individuals who have received SSA notices of award for SSDI or SSI benefits, or for certain veterans, a disability determination by another federal or state agency does not establish your eligibility for a discharge of your loan(s) and/or TEACH Grant service obligation due to a total and permanent disability.

Substantial gainful activity means a level of work performed for pay or profit that involves doing significant physical or mental activities, or a combination of both.

A discharge of a loan due to a total and permanent disability cancels your obligation (and, if applicable, an endorser's obligation) to repay the remaining balance on your Direct Loan, FFEL, and/or Perkins Loan program loans. A discharge of a TEACH Grant service obligation cancels your obligation to complete the teaching service that you agreed to perform as a condition for receiving a TEACH Grant.

The post-discharge monitoring period begins on the date we grant a discharge of your loan(s) or TEACH Grant service obligation and lasts for three years. If you fail to meet certain conditions at any time during or at the end of the post-discharge monitoring period, we will reinstate your obligation to repay your loan(s) or complete your TEACH Grant service. See Section 6 for more information. Note to Veterans: The post-discharge monitoring period does not apply if you are a veteran who receives a discharge based on a determination from the VA that you are unemployable due to a service-connected disability.

The William D. Ford Federal Direct Loan (Direct Loan) Program includes Federal Direct Stafford/Ford Loans (Direct Subsidized Loans), Federal Direct Unsubsidized Stafford/Ford Loans (Direct Unsubsidized Loans), Federal Direct PLUS Loans (Direct PLUS Loans), and Federal Direct Consolidation Loans (Direct Consolidation Loans).

The Federal Family Education Loan (FFEL) Program includes Federal Stafford Loans (both subsidized and unsubsidized), Federal Supplemental Loans for Students (SLS), Federal PLUS Loans, and Federal Consolidation Loans.

The Federal Perkins Loan (Perkins Loan) Program includes Federal Perkins Loans, National Direct Student Loans (NDSL), and National Defense Student Loans (Defense Loans).

The Teacher Education Assistance for College and Higher Education (TEACH) Grant Program requires individuals to complete a teaching service obligation as a condition for receiving a TEACH Grant.

The holder of your FFEL Program loan(s) may be a lender, a guaranty agency, or the U.S. Department of Education. The holder of your Perkins Loan Program loan(s) may be a school you attended or the U.S. Department of Education. The holder of your Direct Loan Program loan(s) and/or your TEACH Grant Agreement to Serve (if you received a TEACH Grant) is the U.S. Department of Education. Your loan holder may use a servicer to handle billing and other matters related to your loan. The term “holder” as used on this application means either your loan holder or, if applicable, your loan servicer.

The term “state” for purposes of the physician's certification in Section 4 (the physician must be licensed to practice in a state) includes the 50 United States, the District of Columbia, American Samoa, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, the Commonwealth of the Northern Mariana Islands, the Republic of the Marshall Islands, the Federated States of Micronesia, and the Republic of Palau.

A representative is a member of your family, your attorney, a law firm or legal aid society, or another individual or organization authorized to act on your behalf in connection with your total and permanent disability discharge application.

SECTION 6: DISCHARGE PROCESS / ELIGIBILITY REQUIREMENTS / TERMS AND CONDITIONS FOR DISCHARGE

Applying for discharge (all applicants):

Submission of discharge application. After you submit your completed application and documentation to us, we will send you a notice that will:

• Acknowledge receipt of your application;

• Explain the process for our review of your application; and

• Inform you that you are not required to make any payments on your loans while we review your application for discharge.

Consequences of failure to submit an application. If you do not submit an application to us within 120 days of notifying us that you intend to submit an application, collection activity will resume on your loans, and your loan holder may capitalize any unpaid interest. This means that the unpaid interest will be added to the principal balance of your loans, and interest will then be charged on the increased loan principal amount. However, if you have a FFEL Program loan and the loan holder is a guaranty agency, or if you have a Federal Perkins Loan, unpaid interest will not be capitalized.

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SECTION 6: DISCHARGE PROCESS / ELIGIBILITY REQUIREMENTS / TERMS AND CONDITIONS FOR DISCHARGE (CTD.)

Discharge process for veterans who have been determined by the VA to be unemployable due to a service-connected disability:

Our review of your discharge application. We will review the documentation from the VA to determine if you are totally and permanently disabled as described in item (2) of the definition of “total and permanent disability” in Section 5 of this application.

Determination of eligibility or ineligibility for discharge. If we determine that you are totally and permanently disabled, you will be notified that your loans and/or TEACH Grant service obligation has been discharged. The discharge will be reported to nationwide consumer reporting agencies, and any loan payments received on your loan on or after the effective date of the determination by the VA that you are unemployable due to a service-connected disability will be refunded to the person who made the payments.

If we determine that you are not totally and permanently disabled, you will be notified of that determination. The notification will include:

• The reason or reasons for the denial of your discharge application;

• An explanation that your loans are due and payable to the loan holder under the terms of the promissory note that you signed and that your loans will return to the status they were in at the time you applied for a total and permanent disability discharge;

• An explanation that your loan holder will notify you of the date you must resume making payments on your loans; and

• An explanation that if you applied for a discharge of a TEACH Grant service obligation, you must comply with all terms and conditions of your TEACH Grant Agreement to Serve.

The notification will also explain your ability to request reconsideration of this determination or to submit a new discharge application:

• You may request that we re-evaluate your discharge application by providing additional documentation from the VA that supports your eligibility for discharge. If you provide this documentation within 12 months of the date of our notification that you are ineligible for discharge, you do not have to submit a new application. After 12 months, a new application is required.

• If the documentation from the VA does not indicate that you are unemployable due to a service-connected disability, you may reapply for discharge under the “Discharge Process For All Other Applicants”. You must submit a new application with the required documentation from the SSA or a physician's certification in Section 4.

Discharge process for all other applicants:Our review of your discharge application. If you

submit a discharge application supported by an award of benefits notice from the SSA or an SSA Benefits Planning Query (BPQY), we will review that documentation to determine if it meets the requirements described in Section 2, Item 2 of this form.

If you submit a discharge application supported by a physician's certification in Section 4 of this application, we will review the physician's certification and any accompanying documentation to determine if you are totally and permanently disabled as described in item (1) of the definition of “total and permanent disability” in Section 5 of this application. We may also contact your physician for additional information, or may arrange for an additional review of your condition by an independent physician at our expense. Based on the results of this review, we will determine your eligibility for discharge.

If we determine during our review of your application that you received a Direct Loan or Perkins Loan program loan, or a TEACH Grant before the date we received the SSA notice of award (or BPQY) or before the date the physician certified your application in Section 4, and a disbursement of that loan or grant is made after that date, but before we have granted a discharge, we will suspend processing of your discharge request until you ensure that the full amount of the disbursement is returned to the loan holder or (for a TEACH Grant) to us.

If you apply for a total and permanent disability discharge and we determine as part of our review that a new Direct Loan or Perkins Loan program loan or a new TEACH Grant was made to you on or after the date we received the SSA notice of award (or BPQY) or the date the physician certified your application in Section 4, and before the date we grant a discharge, we will deny your discharge request. Collection will resume on your loans and you will again be responsible for complying with the terms and conditions of your TEACH Grant Agreement to Serve.

Determination of eligibility or ineligibility for discharge. If we determine that you are totally and permanently disabled, we will notify you that a discharge has been approved, and that you will be subject to a post-discharge monitoring period for three years beginning on the discharge date. The notification of discharge will explain the terms and conditions under which we will reinstate your obligation to repay your loan or to complete your TEACH service. The discharge will be reported to nationwide consumer reporting agencies, and any loan payments that were received after the date we received the SSA notice of award (or BPQY) or after the date the physician certified your discharge application will be returned to the person who made the payments.

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Discharge process for all other applicants (continued):Determination of eligibility or ineligibility for

discharge (continued). If we determine that you are not totally and

permanently disabled, you will be notified of that determination. The notification will include:

• The reason or reasons for the denial of your discharge application;

• An explanation that your loans are due and payable to the loan holder under the terms of the promissory note that you signed and that your loans will return to the status that would have existed if your total and permanent disability discharge application had not been received;

• An explanation that your loan holder will notify you of the date you must resume making payments on your loans;

• An explanation that if you applied for a discharge of a TEACH Grant service obligation, you must comply with all terms and conditions of your TEACH Grant Agreement to Serve;

• An explanation that you are not required to submit a new total and permanent disability discharge application if, within 12 months of the date of our notification to you that you are ineligible for discharge, you provide additional information regarding your disabling condition that supports your eligibility for discharge, and you request that we re-evaluate your discharge application; and

• An explanation that if you do not request re-evaluation of your prior discharge application within 12 months of the date of our notification of ineligibility for discharge, and you still wish to have us re-evaluate your eligibility for a total and permanent disability discharge, you must submit a new total and permanent disability discharge application to us.

• If you request a re-evaluation of your total and permanent disability discharge application or submit a new total and permanent disability discharge application, as described above, your request must include new information regarding your disabling condition that was not provided to us in connection with your prior application for discharge.

Post-discharge monitoring period. If you are granted a discharge, we will monitor your status during the 3-year post-discharge monitoring period that begins on the date the discharge is granted.

We will reinstate the requirement for you to repay your loans and/or complete your TEACH Grant service if, at any time during or at the end of the post-discharge monitoring period, you:

• Receive annual earnings from employment that exceed the poverty guideline amount (see Note below) for a family of two in your state, regardless of your actual family size;

• Receive a new loan under the Direct Loan Program or the Perkins Loan Program, or a new TEACH Grant;

• Receive a disbursement of a Direct Loan Program or Perkins Loan Program loan or a TEACH Grant that was initially disbursed prior to your discharge date and you fail to ensure that the disbursement is returned to the loan holder or (for a TEACH Grant) to us within 120 days of the disbursement date; or

• Receive a notice from the SSA indicating that you are no longer disabled or that your continuing disability review will no longer be the 5- to 7-year period indicated in the SSA notice of award or BPQY.

During the 3-year post-discharge monitoring period, you (or your representative) must:

• Promptly notify us of any changes in your address or telephone number;

• Promptly notify us if your annual earnings from employment exceed the poverty guideline amount for a family of two in your state (see Note below), regardless of your actual family size;

• Upon request, provide us with documentation of your annual earnings from employment, on a form that we will provide; and

• Promptly notify us if you receive a notice from the SSA indicating that you are no longer disabled or that your continuing disability review will no longer be the 5- to 7-year period indicated in the SSA notice of award or BPQY (after you had been previously determined to be disabled by the SSA, were receiving SSDI or SSI benefits, and had a continuing disability review period of 5 to 7 years or more from the date of your last SSA disability determination).

Note: The poverty guideline amounts are updated annually and may be obtained at http://aspe.hhs.gov/poverty. We will notify you of the current poverty guideline amounts during each year of the post-discharge monitoring period.

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http://aspe.hhs.gov/poverty

http://aspe.hhs.gov/poverty


Discharge process for all other applicants (continued):

Reinstatement of obligation to repay discharged loans or complete discharged TEACH Grant service obligation. If you do not meet the requirements described above at any time during or at the end of the post-discharge monitoring period, we will reinstate your obligation to repay your loans and/or to complete your TEACH Grant service. If your loans are reinstated, you will be responsible for repaying your loans to us in accordance with the terms of your promissory note(s). Your loans will be returned to the status that would have existed if we had not received your total and permanent disability discharge application. However, you will not be required to pay interest on your loans for the period from the date of the discharge until the date your repayment obligation was reinstated. We will be your loan holder. If your TEACH Grant service obligation is reinstated, you will again be subject to the requirements of your TEACH Grant Agreement to Serve. If you do not meet the terms of that agreement and the TEACH Grant funds you received are converted to a Direct Unsubsidized Loan, you must repay that loan in full, and interest will be charged from the date(s) that the TEACH Grant funds were disbursed.

If your obligation to repay your loans or to complete your TEACH Grant service is reinstated, we will notify you of the reinstatement. This notification will include:

• The reason or reasons for the reinstatement;

• For loans, an explanation that the first payment due date on the loan following the reinstatement will be no earlier than 60 days following the date of the notification of reinstatement; and

• Information on how you may contact us if you have questions about the reinstatement, or if you believe that your obligation to repay a loan or complete TEACH Grant service was reinstated based on incorrect information.

SECTION 7: ELIGIBILITY REQUIREMENTS TO RECEIVE FUTURE LOANS OR TEACH GRANTS

For veterans who receive a total and permanent disability discharge based on a determination by the VA that they are unemployable due to a service-connected disability:If you are a veteran who is granted a discharge based on a determination that you are totally and permanently disabled as described in item (2) of the definition of “total and permanent disability” in Section 5 of this application, you are not eligible to receive future loans under the Direct Loan Program or the Perkins Loan Program, or future TEACH Grants, unless:

• You obtain a certification from a physician that you are able to engage in substantial gainful activity; and

• You sign a statement acknowledging that the new loan or TEACH Grant service obligation cannot be discharged in the future on the basis of any injury or illness present at the time the new loan or TEACH Grant is made, unless your condition substantially deteriorates so that you are again totally and permanently disabled.

For all other individuals who receive a total and permanent disability discharge:

If you are granted a discharge based on a determination that you are totally and permanently disabled in accordance with item (1) of the definition of “total and permanent disability” in Section 5 of this application, you are not eligible to receive future loans under the Direct Loan Program or the Perkins Loan Program, or future TEACH Grants, unless:

• You obtain a certification from a physician that you are able to engage in substantial gainful activity;

• You sign a statement acknowledging that the new loan or TEACH Grant service obligation cannot be discharged in the future on the basis of any injury or illness present at the time the new loan or TEACH Grant is made, unless your condition substantially deteriorates so that you are again totally and permanently disabled; and

• If you request a Direct Loan Program or Perkins Loan Program loan, or a new TEACH Grant, within three years of the date that a previous loan or TEACH Grant was discharged, you resume payment on the previously discharged loan or acknowledge that you are once again subject to the terms of the TEACH Grant Agreement to Serve before receiving the new loan.

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SECTION 8: WHERE TO SEND THE COMPLETED DISCHARGE APPLICATION

Return the completed form and any documentation to:

U.S. Department of Education - TPD Servicing P.O. Box 87130 Lincoln, NE 68501-7130 Fax to: 303-696-5250 Email to: [email protected]

If you need help completing this form, contact us:

Phone: 1-888-303-7818 (TTY: dial 771, then phone no.) Email: [email protected] Website: www.disabilitydischarge.com

SECTION 9: IMPORTANT NOTICES

Privacy Act Notice. The Privacy Act of 1974 (5 U.S.C. 552a) requires that the following notice be provided to you:

The authorities for collecting the requested information from and about you are §421 et seq., §451 et seq., §461, or §420L of the Higher Education Act of 1965, as amended (20 U.S.C. 1071 et seq., 20 U.S.C. 1087a et seq., 20 U.S.C. 1087aa et seq., or 20 U.S.C. 1070g et seq.) and the authorities for collecting and using your Social Security Number (SSN) are §§428B(f) and 484(a)(4) of the HEA (20 U.S.C. 1078-2(f) and 1091(a)(4)) and 31 U.S.C. 7701(b). Participating in the Direct Loan,FFEL, Perkins Loan, or TEACH Grant program and giving us your SSN are voluntary, but you must provide the requested information, including your SSN, to participate.

The principal purposes for collecting the information on this form, including your SSN, are to verify your identity, to determine your eligibility to receive a loan or a benefit on a loan (such as a deferment, forbearance, discharge, or forgiveness) under the Direct Loan, FFEL, Federal Perkins Loan or TEACH Grant Programs, to permit the servicing of your loans, and, if it becomes necessary, to locate you and to collect and report on your loans if your loans become delinquent or default. We also use your SSN as an account identifier and to permit you to access your account information electronically.

The information in your file may be disclosed, on a case-by-case basis or under a computer matching program, to third parties as authorized under routine uses in the appropriate systems of records notices. The routine uses of this information include, but are not limited to, its disclosure to federal, state, or local agencies, to private parties such as relatives, present and former employers, business and personal associates, to consumer reporting agencies, to financial and educational institutions, and to guaranty agencies in order to verify your identity, to determine your eligibility to receive a loan or a benefit on a loan, to permit the servicing or collection of your loans, to enforce the terms of the loans, to investigate possible fraud and to verify compliance with federal student financial aid program regulations, or to locate you if you become delinquent in your loan payments or if you default. To provide default rate calculations, disclosures may be made to guaranty agencies, to financial and educational institutions, or to state agencies. To provide financial aid history information, disclosures may be made to educational institutions.

To assist program administrators with tracking refunds and cancellations, disclosures may be made to guaranty agencies, to financial and educational institutions, or to federal or state agencies. To provide a standardized method for educational institutions to efficiently submit student enrollment statuses, disclosures may be made to guaranty agencies or to financial and educational institutions. To counsel you in repayment efforts, disclosures may be made to guaranty agencies, to financial and educational institutions, or to federal, state, or local agencies.

In the event of litigation, we may send records to the Department of Justice, a court, adjudicative body, counsel, party, or witness if the disclosure is relevant and necessary to the litigation. If this information, either alone or with other information, indicates a potential violation of law, we may send it to the appropriate authority for action. We may send information to members of Congress if you ask them to help you with federal student aid questions. In circumstances involving employment complaints, grievances, or disciplinary actions, we may disclose relevant records to adjudicate or investigate the issues. If provided for by a collective bargaining agreement, we may disclose records to a labor organization recognized under 5 U.S.C. Chapter 71. Disclosures may be made to our contractors for the purpose of performing any programmatic function that requires disclosure of records. Before making any such disclosure, we will require the contractor to maintain Privacy Act safeguards. Disclosures may also be made to qualified researchers under Privacy Act safeguards.

Paperwork Reduction Notice. According to the Paperwork Reduction Act of 1995, no persons are required to respond to a collection of information unless such collection displays a valid OMB control number. The valid OMB control number for this information collection is 1845-0065. Public reporting burden for this collection of information is estimated to average 30 minutes per response, including time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. The obligation to respond to this collection is required to obtain a benefit in accordance with 34 CFR 674.61(b) or (c), 34 CFR 682.402(c)(2) or (c)(9), 34 CFR 685.213(b) or (c), and 34 CFR 686.42(b). If you have comments or concerns regarding the status of your individual submission of this form, please contact the U.S. Department of Education directly (see Section 6).

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mailto:[email protected]?subject=Completed%20TPD%20application

mailto:[email protected]?subject=Help%20completing%20TPD%20application

www.disabilitydischarge.com

INCOME-DRIVEN REPAYMENT (IDR) PLAN REQUEST 0MB No. 1845-0102

Form Approved For the Revised Pay As You Earn (REPAVE), Pay As You Earn (PAYE), Income-Based Repayment (IBR), and Income-Contingent Repayment (ICR) plans under the William D. Ford Federal Direct Loan (Direct Loan) Program

Exp. Date 10/31/2018

and Federal Family Education Loan (FFEL) Programs IDR WARNING: Any person who knowingly makes a false statement or misrepresentation on this form or on

any accompanying document is subject to penalties that may include fines, imprisonment, or both, under the U.S. Criminal Code and 20 U.S.C. 1097.

SECTION 1: BORROWER INFORMATION

Please enter or correct the following information.

D Check this box if any of your information has changed.

SSN

Name

Address

City

Telephone - Primary

Telephone - Alternate

Email (Optional)

SECTION 2: REPAYMENT PLAN OR RECERTIFICATION REQUEST

State Zip Code -----

It's faster and easier to complete this form on line at Studentloans.gov. You can learn more at StudentAid.gov/ lDR and by reading Sections 9 and 10. It's simple to get repayment estimates at StudentAid.gov/ repayment-estimator. If you need help with this form, contact your loan holder or servicer for free assistance. You can find out who your loan holder or servicer is at StudentAid.gov/login. You may have to pay income tax on any loan amount forgiven under an income-driven plan.

1. Select the reason you are submitting this form (Check only one): D I want to enter an income-driven plan - Continue to

Item 2. D I am submitting documentation for the annual

recertification of my income-driven payment - Skip to Item 5.

D I am submitting documentation early to have my income-driven payment recalculated immediately -Skip to Item 5.

D I want to change to a different income-driven plan -Continue to Item 2.

2. Choose a plan and then continue to Item 3.

D (Recommended) I want the income-driven repayment plan with the lowest monthly payment.

D REPAVE D IBR

D PAYE D ICR

SECTION 3: FAMILY SIZE INFORMATION

5. How many children, including unborn children, are in your family and receive more than half of their support from you?

3. Do you have multiple loan holders or servicers? ·

0Yes - Submit a request to each holder or servicer. Continue to Item 4.

0No - Continue to item 4.

4. Are you currently in deferment or forbearance? After answering, continue to Item 5.

D No.

D Yes, but I want to start making payments under my plan immediately.

D Yes, and I do not want to start repaying my loans until the deferment or forbearance ends.

Note: If you have FFEL Program loans, they are only eligible for IBR. However, you can consolidate your loans at Studentloans.gov to access more beneficial income-driven repayment plans.

6. How many other people, excluding your spouse and children, live with you and receive more than half of their support from you?

Note: A definition of "family size" is provided in Section 9. Do not enter a value for you or your spouse. Those values are automatically included in your family size, if appropriate.

Page 1 of 10

Borrower Name

SECTION 4A: MARITAL STATUS INFORMATION

7. What is your marital status?

D Single - Skip to Item 11 .

D Married - Continue to Item 8. D Married, but separated - You will be treated as

single. Skip to Item 11. D Married, but cannot reasonably access my spouse's

income information - You will be treated as single. Skip to Item 11 .

8. Does your spouse have federal student loans?

D Yes - Continue to Item 9.

D No - Skip to Item 10.

Borrower SSN

9. Provide the following information about your spouse and then continue to Item 1 O:

a. Spouse's SSN

b. Spouse's Name -------------

c. Spouse's Date of Birth

10. When you filed your last federal income tax return, did you file jointly with your spouse?


D No - Skip to Item 17.

SECTION 48: INCOME INFORMATION FOR SINGLE BORROWERS AND MARRIED BORROWERS TREATED AS SINGLE

11. Has your income significantly changed since you filed your last federal income tax return?

For example, have you lost your job, experienced a drop in income, or gotten divorced, or did you most recently file a joint return with your spouse, but you have since become separated or lost the ability to access your spouse's income information?


D No - Provide your most recent federal income tax return or transcript. Skip to Section 6.

D I haven't filed a federal income tax return in the last two years - Continue to Item 12.

12. Do you currently have taxable income? Check "No" if you do not have any income or receive

only untaxed income.

D Yes - Provide documentation of your income as instructed in Section 5. Skip to that Section.

D No - You are not required to provide documentation of your income. Skip to Section 6.

Note: Remember, any person who knowingly makes a false statement or misrepresentation on this form can be subject to penalties including fines, imprisonment, or both.

SECTION 4C: INCOME INFORMATION FOR MARRIED BORROWERS FILING JOINTLY


For example, have you lost your job or experienced a drop in income?

D Yes - Skip to Item 15.

D No - Continue to Item 14.

D We haven't filed a federal income tax return in the last two years - Skip to Item 15.

14. Has your spouse's income significantly changed since your spouse filed his or her last federal income tax return?

For example, has your spouse lost his or her job or experienced a drop in income?


D No - Provide your and your spouse's most recent federal income tax return or transcript. Skip to Section 6.

15. Do you currently have taxable income? Check "No" if you have no taxable income or receive

only untaxed income.

0 Yes - You must provide documentation of your income according to the instructions in Section 5. Continue to Item 16.

D No - You are not required to provide documentation of your income. Continue to Item 16.

16. Does your spouse currently have taxable income? Check "No" if your spouse has no taxable income or

receives only untaxed income.

D Yes - Skip to Section 5 and provide documentation of your spouse's income as instructed in that section.

D No - You are not required to provide documentation of your spouse's income. If you selected "Yes" to Item 15, skip to Section 5 and document your income. If you selected "No" to Item 15, skip to Section 6.


Page 2 of 10

Borrower Name Borrower SSN

SECTION 4D: INCOME INFORMATION FOR MARRIED BORROWERS FILING SEPARATELY


For example, have you lost your job or experienced a drop in income?


D No - Provide your most recent federal income tax return or transcript. Skip to Item 19.

D I haven't filed a federal income tax return in the past two years - Continue to Item 18.

18. Do you currently have taxable income? Check "No" if you have no taxable income or receive

only untaxed income. After answering, continue to Item 19.

D Yes - You must provide documentation of your income as instructed in Section 5.

D No.


19. Has your spouse's income significantly changed since your spouse filed his or her last federal income tax return?

For example, has your spouse lost a job or experienced a drop in income? D Yes - Continue to Item 20.

D No - Provide your spouse's most recent federal income tax return or transcript. This information will only be used if you are on or placed on the REPAYE Plan. Skip to Section 6.

D My spouse hasn 't filed a federal income tax return in the past two years - Continue to Item 20.

20. Does your spouse currently have taxable income? Check "No" if your spouse has no taxable income or

receives only untaxed income.

D Yes - Skip to Section 5 and provide documentation of your spouse's income as instructed in that section. This information will only be used if you are on or placed on the REPAYE Plan.

D No - You are not required to provide documentation of your spouse's income. If you selected "Yes" to Item 18, skip to Section 5 and document your income. If you selected "No" to Item 18, skip to Section 6.

SECTIONS: INSTRUCTIONS FOR DOCUMENTING CURRENT INCOME

You only need to follow these instructions if, based on your answers in Section 4, you and your spouse (if applicable) were instructed to provide documentation of your current income instead of a tax return or tax transcript.

This is the income you must document:

• You must provide documentation of all taxable income you and your spouse (if applicable) currently receive.

• Taxable income includes, for example, income from employment, unemployment income, dividend income, interest income, tips, and alimony.

• Do not provide documentation of untaxed income such as Supplemental Security Income, child support, or federal or state public assistance.

This is how you document your income:

• Documentation will usually include a pay stub or letter from your employer listing your gross pay.

• Write on your documentation how often you receive the income, for example, "twice per month" or "every other week."

• You must provide at least one piece of documentation for each source of taxable income.

• If documentation is not available or you want to explain your income, attach a signed statement explaining each source of income and giving the name and the address of each source of income.

• The date on any supporting documentation you provide must be no older than 90 days from the date you sign this form.

• Copies of documentation are acceptable.

After gathering the appropriate documentation, continue to Section 6. Page 3 of 10

Borrower Name Borrower SSN

SECTION 6: BORROWER REQUESTS, UNDERSTANDINGS, AUTHORIZATION, AND CERTIFICATION

If I am requesting an income-driven repayment plan or seeking to change income-driven repayment plans, I request:

• That my loan holder place me on the plan I selected in Section 2 to repay my eligible Direct Loan or FFEL Program loans held by the holder to which I submit this form.

• If I do not qualify for the plan or plans I requested, or did not make a selection in Item 2, that my loan holder place me on the plan with the lowest monthly payment amount.

• If I selected more than one plan, that my loan holder place me on the plan with the lowest monthly payment amount from the plans that I requested.

• If more than one of the plans that I selected provides the same initial payment amoun't, or if my loan holder is determining which of the income-driven plans I qualify for, that my loan holder use the following order in choosing my plan: REP AYE (if my repayment period is 20 years), PAYE, REP AYE (if my repayment period is 25 years), IBR, and then ICR.

If I am not currently on an income-driven repayment plan, but I did not complete Item 1 or I incorrectly indicated in Item 1 that I was already in an income-driven repayment plan, I request that my loan holder treat my request as if I had indicated in Item 1 that I wanted to enter an income-driven repayment plan.

If I am currently repaying my Direct Loans under the IBR plan and I am requesting a change to a different income-driven plan, I request a one-month reduced-payment forbearance in the amount of my current monthly IBR payment or $5, whichever is greater (unless I request another amount below or I decline the forbearance), to help me move from IBR to the new income-driven plan I requested.

D I request a one-month reduced-payment forbearance in the amount of: (must be at least $5).

I understand that:

• If I do not provide my loan holder with this completed form and any other required documentation, I will not be placed on the plan that I requested or my request for recertification or recalculation will not be processed.

• I may choose a different repayment plan for any loans that are not eligible for income-driven repayment.

• If I requested a reduced-payment forbearance of less than $5 above, my loan holder will grant my forbearance request in the amount of $5.

• If I am requesting a change from the IBR Plan to a different income-driven repayment plan, I may decline the one-month reduced payment forbearance described above by contacting my loan holder. If I decline the forbearance, I will be placed on the Standard Repayment Plan and must make one monthly payment under that plan before I can be placed on a different repayment plan.

• If I am requesting the ICR plan, my initial payment amount will be the amount of interest that accrues each month on my loan until my loan holder receives the income documentation needed to calculate my payment amount. If I cannot afford the initial payment amount, I may request a forbearance by contacting my loan holder.

• If I am married and I request the ICR plan, my spouse and I have the option of repaying our Direct Loans jointly under this plan. My loan servicer can provide me with information about this option.

• If I have FFEL Program loans, my spouse may be required to give my loan holder access to his or her loan information in the National Student Loan Data System (NSLDS). If this applies to me, my loan holder will contact me with instructions.

• My loan holder may grant me a forbearance while processing my application or to cover any period of delinquency that exists when I submit my application.

I authorize the loan holder to which I submit this request (and its agents or contractors) to contact me regarding my request or my loans, including the repayment of my loans, at any number that I provide on this form or any future number that I provide for my cellular telephone or other wireless device using automated dialing equipment or artificial or prerecorded voice or text messages.

I certify that all of the information I have provided on this form and in any accompanying documentation is true, complete, and correct to the best of my knowledge and belief.

Borrower's Signature

Spouse's Signature

Date

Date

If you are married, your spouse is required to sign this form unless you are separated from your spouse or you're unable to reasonably access your spouse's income information.

Page 4 of 10

SECTION 7: WHERE TO SEND THE COMPLETED FORM

Return the completed form and any documentation to: (If no address is shown, return to your loan holder.)

SECTION 8: INSTRUCTIONS FOR COMPLETING THE FORM

If you need help completing this form call: (If no phone number is shown, call your loan holder.)

Type or print using dark ink. Enter dates as month-day-year (mm-dd-yyyy). Example: March 14, 2015 = 03-14-2015. Include your name and account number on any documentation that you are required to submit with this form. Return the completed form and any required documentation to the address shown in Section 7.

SECTION 9: DEFINITIONS

COMMON DEFINITIONS FOR ALL PLANS:

Capitalization is the addition of unpaid interest to the principal balance of your loan. This will increase the principal balance and the total cost of your loan.

A deferment is a period during which you are entitled to postpone repayment of your loans. Interest is not generally charged to you during a deferment on your subsidized loans. Interest is always charged to you during a deferment on your unsubsidized loans.

The William D. Ford Federal Direct Loan (Direct Loan) Program includes Direct Subsidized Loans, Direct Unsubsidized Loans, Direct PLUS Loans, and Direct Consolidation Loans.

Family size always includes you and your children (including unborn children who will be born during the year for which you certify your family size), if the children will receive more than half their support from you.

For the PAYE, IBR, and ICR Plans, family size always includes your spouse. For the REPAYE plan, family size includes your spouse unless your spouse's income is excluded from the calculation of your payment amount.

For all plans, family size also includes other people only if they live with you now, receive more than half their support from you now, and will continue to receive this support for the year that you certify your family size. Support includes money, gifts, loans, housing, food, clothes, car, medical and dental care, and payment of college costs. Your family size may be different from the number of exemptions you claim for tax purposes.

The Federal Family Education Loan (FFEL) Program includes Federal Stafford Loans (both subsidized and unsubsidized), Federal PLUS Loans, Federal Consolidation Loans, and Federal Supplemental Loans for Students (SLS).

A forbearance is a period during which you are permitted to postpone making payments temporarily, allowed an extension of time for making payments, or temporarily allowed to make smaller payments than scheduled.

The holder of your Direct Loans is the U.S. Department of Education (the Department). The holder of your FFEL Program loans may be a lender, secondary market, guaranty agency, or the Department. Your loan holder may use a servicer to handle billing, payment, repayment options, and other communications. References to "your loan holder" on this form mean either your loan holder or your servicer.

A partial financial hardship is an eligibility requirement for the PAYE and IBR plans. You have a partial financial hardship when the annual amount due on all of your eligible loans (and, if you are required to provide documentation of your spouse's income, the annual amount due on your spouse's eligible loans) exceeds what you wou ld pay under PAYE or IBR.

The annual amount due is calculated based on the greater of (1) the total amount owed on eligible loans at the time those loans initially entered repayment, or (2) the total amount owed on eligible loans at the time you initially request the PAYE or IBR plan. The annual amount due is calculated using a standard repayment plan with a 10-year repayment period, regardless of loan type. When determining whether you have a partial financial hardship for the PAYE plan, the Department will include any FFEL Program loans that you have into account even though those loans are not eligible to be repaid under the PAYE plan, except for: (1) a FFEL Program loan that is in default, (2) a Federal PLUS Loan made to a parent borrower, or (3) a Federal Consolidation Loan that repaid a Federal or Direct PLUS Loan made to a parent borrower.

The poverty guideline amount is the figure for your state and family size from the poverty guidelines published annually by the U.S. Department of Health and Human Services (HHS). If you are not a resident of a state identified in the poverty guidelines, your poverty guideline amount is the amount used for the 48 contiguous states.

The standard repayment plan has a fixed monthly payment amount over a repayment period of up to 1 O years for loans other than Direct or Federal Consolidation Loans, or up to 30 years for Direct and Federal Consolidation Loans.

Page 5 of 10

SECTION 9: DEFINITIONS (CONTINUED)

DEFINITIONS FOR THE REPAVE PLAN:

The Revised Pay As You Earn {REPAVE) plan is a repayment plan with monthly payments that are generally equal to 10% of your discretionary income, divided by 12.

Discretionary income for the REPAVE plan is the amount by which your income exceeds 150% of the poverty guideline amount.

Eligible loans for the REPAVE plan are Direct Loan Program loans other than: (1) a loan that is in default, (2) a Direct PLUS Loan made to a parent borrower, or (3) a Direct Consolidation Loan that repaid a Direct or Federal PLUS Loan made to a parent borrower. DEFINITIONS FOR THE PAYE PLAN:

The Pay As You Earn {PAYE) plan is a repayment plan with monthly payments that are generally equal to 10% of your discretionary income, divided by 12.

Discretionary income for the PAYE plan is the amount by which your income exceeds 150% of the poverty guideline amount.

Eligible loans for the PAYE plan are Direct Loan Program loans other than: (1) a loan that is in default, (2)

a Direct PLUS Loan made to a parent borrower, or (3) a Direct Consolidation Loan that repaid a Direct or Federal PLUS Loan made to a parent borrower.

You are a new borrower for the PAYE plan if: (1) you have no outstanding balance on a Direct Loan or FFEL Program loan as of October 1, 2007 or have no outstanding balance on a Direct Loan or FFEL Program loan when you obtain a new loan on or after October 1, 2007, and (2) you receive a disbursement of an eligible loan on or after October 1, 2011, or you receive a Direct Consolidation Loan based on an application received on or after October l , 2011. DEFINITIONS FOR THE IBR PLAN:

The Income-Based Repayment {IBR) plan is a repayment plan with monthly payments that are generally equal to 15% (10% if you are a new borrower) of your discretionary income, divided by 12.

Discretionary income for the IBR plan is the amount by which your adjusted gross income exceeds 150% of the poverty guideline amount.

Eligible loans for the IBR plan are Direct Loan and FFEL Program loans other than: (1) a loan that is in default, (2) a Direct or Federal PLUS Loan made to a parent borrower, or (3) a Direct or Federal Consolidation Loan that repaid a Direct or Federal PLUS Loan made to a parent borrower.

You are a new borrower for the IBR plan if (1) you have no outstanding balance on a Direct Loan or FFEL Program loan as of July 1, 2014 or (2) have no outstanding balance on a Direct Loan or FFEL Program loan when you obtain a new loan on or after July 1, 2014.

DEFINITIONS FOR THE ICR PLAN:

The Income-Contingent Repayment {ICR) plan is a repayment plan with monthly payments that are the lesser of (1) what you would pay on a repayment plan with a fixed monthly payment over 12 years, adjusted based on your income or (2) 20% of your discretionary income divided by 12.

Discretionary income for the ICR plan is the amount by which your adjusted gross income exceeds the poverty guideline amount for your state of residence and family size.

Eligible loans for the ICR plan are Direct Loan Program loans other than: (1) a loan that is in default, (2) a Direct PLUS Loan made to a parent borrower, or (3) a Direct PLUS Consolidation Loan (based on an application received prior to July 1, 2006 that repaid Direct or Federal PLUS Loans made to a parent borrower). However, a Direct Consolidation Loan made based on an application received on or after July l , 2006 that repaid a Direct or Federal PLUS Loan made to a parent borrower is eligible for the ICR plan.

Page 6 of 10

SECTION 10: INCOME-DRIVEN PLAN ELIGIBILITY REQUIREMENTS AND GENERAL INFORMATION

Table 1. Income-Driven Pian Eligibility Requirements and General information

Payment Amount

Generally, 10% of discretionary income. I Generally, 10% of discretionary Never more than 15% of Lesser of 20% of discretionary income or what you would pay under a repayment plan with fixed payments over 12 years, adjusted based on your income.

income. discretionary income.

Capon Payment Amount

None. Your payment may exceed what What you would have paid under you would have paid under the 10-year the 10-year standard repayment

What you would have paid under the 10-year standard repayment plan when you entered the plan.

None. Your payment may exceed what you would have paid under the 10-year standard repayment plan.

standard repayment plan. plan when you entered the plan.

Married Borrowers

Your payment will be based on the combined income and loan debt of you and your spouse regardless of whether you file a joint or separate Federal income tax return, unless you and your spouse (1) are separated or (2) you are unable to reasonably access your spouse's income information.

Borrower On subsidized loans, you do not have to Responsibility pay the difference between your for Interest monthly payment amount and the

interest that accrues for your first 3 consecutive years in the plan. On subsidized loans after this period and on unsubsidized loans during all periods, you only have to pay half the difference between your monthly payment amount and the interest that accrues.

Forgiveness l'f you only have eligible loans that you Period received for undergraduate study, any

remaining balance is forgiven after 20 years of qualifying repayment. If you have any eligible loans that you received for graduate or professional study, any remaining balance is forgiven after 25 years of qualifying repayment on all of your loans. Forgiveness may be taxable.

Your payment will be based on the Your payment will be based on the Your payment will be based on the combined income and loan debt of combined income and loan debt combined income of you and your you and your spouse only if you of you and your spouse only if you spouse only if you file a joint file a joint Federal income tax file a joint Federal income tax Federal income tax return, unless return, unless you and your spouse return, unless you and your spouse you and your spouse (1) are (1) are separated or (2) you are (1) are separated or (2) you are separated or (2) you are unable to unable to reasonably access your unable to reasonably access your reasonably access your spouse's spouse's income information. spouse's income information. income information.

On subsidized loans, you do not have to pay the difference between your monthly payment amount and the interest that

On subsidized loans, you do not have to pay the difference between your monthly payment amount and the interest that

accrues for your first 3 consecutive I accrues for your first 3 consecutive years in the plan. years of in the plan.

Any remaining balance is forgiven after 20 years of qualifying repayment, and may be taxable.

age Io

Any remaining balance is forgiven after no more than 25 years of qualifying repayment, and may be taxable.

You are responsible for paying all of the interest that accrues.

Any remaining balance is forgiven after 25 years of qualifying repayment, and may be taxable

SECTION 10: INCOME-DRIVEN PLAN ELIGIBILITY REQUIREMENTS AND GENERAL INFORMATION

Income Eligibility

Borrower Eligibility

Recertify Income and Family Size

None.

You must be a Direct Loan borrower with eligible loans.

Annually. Failure to submit documentation by the deadline will result in capitalization of interest and increasing your payment to ensure that your loan is paid in full over the lesser of 10 or the remainder of 20 or 25 years.

You must have a "partial financial hardship".

You must be a "new borrower" with eligible Direct Loans.

Annually. Failure to submit documentation by the deadline may result in the capitalization of interest and will increase the payment amount to the 10-year standard payment amount.

Leaving the Plan

At any time, you may change to any At any time, you may change to other repayment plan for which you are any other repayment plan for eligible. which you are eligible.

Interest /Interest is capitalized when you are Capitalization removed from the plan for failing to

recertify your income by the deadline or when you voluntarily leave the plan.

If you are determined to no longer have a "partial financial hardship" or if you fail to recertify your income by the deadline, interest is capitalized until the outstanding principal balance on your loans is 10% greater than it was when you entered the plan. It is also capitalized if you leave the plan.

You must have a "partial financial hardship".

You must be a Direct Loan or FFEL borrower with eligible loans.

Annually. Failure to submit documentation by the deadline will result in the capitalization of interest and increase in payment amount to the 10-year standard payment amount.

If you want to leave the plan, you will be placed on the standard repayment plan. You may not change plans until you have made one payment under that plan or a reduced-payment forbearance.

If you are determined to no longer have a "partial financial hardship", fail to recertify your income by the deadline, or leave the plan, interest is capitalized.

None.

You must be a Direct Loan borrower with eligible loans.

Annually. Failure to submit documentation by the deadline will result in the recalculation of your payment amount to be the 10-year standard payment amount.

At any time, you may change to any other repayment plan for which you are eligible.

Interest that accrues when your payment amount is less than accruing interest on your loans is capitalized annually until the outstanding principal balance on your loans is 10% greater than it was when your loans entered repayment.

Re-Entering the Plan

Your loan holder will compare the total of what you would have paid under REPAYE to the total amount you were requ ired to pay after you left REPAYE. If the difference between the two shows that you were requ ired to paid less by leaving REPAYE, your new REPAYE payment will be increased. The increase is equal to the difference your loan holder calculated, divided by the number of months remaining in the 20-or 25-year forgiveness period.

You must again show that you !You must again show that you !No restrictions. have a "partial financial hardship". have a "partial financial hardship".

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SECTION 11: SAMPLE PAYMENT AMOUNTS

The tables below provide repayment estimates under the traditional and income-driven repayment plans. These figures are estimates based on an interest rate of 6%, the average Direct Loan interest rate for undergraduate and graduate borrowers. The figures also assume a family size of 1, that you live in the continental U.S., and that your income increases 5% each year. Va rious factors, including your interest rate, your loan debt, your income, if and how quickly your income rises, and when you started borrowing may cause your repayment to differ from the estimates shown in these tables. These figures use the 2016 Poverty Guidelines and Income Percentage Factors.

Table 2. Non-Consolidation, Undergraduate Loan Debt of $30,000 in Direct Unsubsidized Loans and Starting Income of $25,000

Standard $333 $333 10 years $33,967 N/A

Graduated $190 $571 10 years $42,636 N/A

Extended-Ineligible

Fixed - - - -

Extended-Ineligible

Graduated - - - -

PAYE $60 $296 20 years $38,105 $27,823

REPAVE $60 $296 20 years $38, l 05 $24,253

IBR I $90 I $333 I 21 years, 10

months $61,006 $0

ICR I $195 I $253 I 19years,6 months

$52,233 $0

Page 9 of 10

Table 3. Non-Consolidation, Graduate Loan Debt of $60,000 in Direct Unsubsidized Loans and Starting Income of $40,000

Standard $666 $666 10 years I $79,935 I N/A

Graduated $381 $1,143 10 yea rs I $85,272 I N/A

Extended-$437 $437 I $130,974 I N/A 25 years

Fixed

Extended- I Graduated

$300 I $582 I 25 years I s126, 168 I N/A

PAYE $185 $612 20 years I $81,105 I $41,814

REPAVE $185 $816 25 years IS 131,444 I $0

IBR $277 $666 18 years, 3 I $107,905 I months

$0

ICR $469 $588 13 years, 9 I $89,468 I months

$0

SECTION 12: IMPORTANT NOTICES

Privacy Act Notice. The Privacy Act of 1974 (5 U.S.C. 552a) requires that the following notice be provided to you:

The authorities for collecting the requested information from and about you are §421 et seq. and §451 et seq. of the Higher Education Act of 1965, as amended (20 U.S.C. 1071 et seq. and 20 U.S.C. 1087a et seq.), and the authorities for collecting and using your Social Security Number (SSN) are §§428B(f) and 484(a)(4) of the HEA (20 U.S.C. 1078-2(f) and 1091 (a)(4)) and 31 U.S.C. 7701 (b). Participating in the Federal Family Education Loan (FFEL) Program or the William D. Ford Federal Direct Loan (Direct Loan) Program and giving us your SSN are voluntary, but you must provide the requested information, including your SSN, to participate.

The principal purposes for collecting the information on this form, including your SSN, are to verify your identity, to determine your eligibility to receive a loan or a benefit on a loan (such as a deferment, forbearance, discharge, or forgiveness) under the FFEL and/ or Direct Loan Programs, to permit the servicing of your loans, and, if it becomes necessary, to locate you and to collect and report on your loans if your loans become delinquent or default. We also use your SSN as an account identifier and to permit you to access your account information electronically.

The information in your file may be disclosed, on a case-by-case basis or under a computer matching program, to third parties as authorized under routine uses in the appropriate systems of records notices. The routine uses of this information include, but are not limited to, its d isclosure to federal, state, or local agencies, to private parties such as relatives, present and former employers, business and personal associates, to consumer reporting agencies, to financial and educational institutions, and to guaranty agencies in order to verify your identity, to determine your eligibility to receive a loan or a benefit on a loan, to permit the servicing or collection of your loans, to enforce the terms of the loans, to investigate possible fraud and to verify compliance with federal student financial aid program regulations, or to locate you if you become delinquent in your loan payments or if you default. To provide default rate calculations, disclosures may be made to guaranty agencies, to financial and educational institutions, or to state agencies. To provide financial aid history information, disclosures may be made to educational institutions.

To assist program administrators with tracking refunds and cancellations, disclosures may be made to guaranty agencies, to financial and educational institutions or to federal or state agencies. To provide a standardized ' method for educational institutions to efficiently submit student enrollment statuses, disclosures may be made to guaranty agencies or to financial and educational institutions. To counsel you in repayment efforts, disclosures may be made to guaranty agencies, to financial and educational institutions, or to federal, state, or local agencies.

In the event of litigation, we may send records to the Department of Justice, a court, adjudicative body, counsel, party, or witness if the disclosure is relevant and necessary to the litigation. If this information, either alone or with other information, indicates a potential violation of law, we may send it to the appropriate authority for action. We may send information to members of Congress if you ask them to help you with federal student aid questions. In circumstances involving employment complaints, grievances, or disciplinary actions, we may disclose relevant records to adjudicate or investigate the issues. If provided for by a collective bargaining agreement, we may disclose records to a labor organization recognized under 5 U.S.C. Chapter 71 . Disclosures may be made to our contractors for the purpose of performing any programmatic function that requires disclosure of records. Before making any such disclosure, we will require the contractor to maintain Privacy Act safeguards. Disclosures may also be made to qualified resea rchers under Privacy Act safeguards.

Paperwork Reduction Notice. According to the Paperwork Reduction Act of 1995, no persons are required to respond to a collection of information unless it displays a valid 0MB control number. The valid 0MB control number for this information collection is 1845-0102. Public reporting burden for this collection of information is estimated to average 20 minutes (0.33 hours) per response, including time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the information collection. Individuals are obligated to respond to this collection to obta in a benefit in accordance with 34 CFR 682.215, 685.209, or 685.221 .

If you have comments or concerns regarding the status of your individual submission of this form, please contact your loan holder directly (see Section 7).

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