Thursday, October 29, 2009

Bankruptcy Plan Cannot Favor Student Loan Creditors and Discriminate Against Other Unsecured Creditors

Case Law Update:

In re Knecht, 410 B.R. 650 (Bankr. D. Montana 2009). A bankruptcy debtor filed chapter 13 bankruptcy and proposed a repayment plan that would cause the student loan creditor to be the only unsecured creditor to receive any money. Specifically, the debtor sought confirmation of the repayment plan which proposed to pay more than $36,000 to the student loan creditor while paying nothing to the other unsecured creditors. The trustee objected asserting that the proposed plan unreasonably “discriminated” among unsecured creditors.

The bankruptcy court sustained the trustee’s objection and denied confirmation, holding that the student loan debtor had failed to satisfy the burden of proving that the repayment plan’s separate classification of student loan debt did not unfairly discriminate against the other unsecured creditors.

The court believed that a student loan creditor cannot create a chapter 13 plan that allows a student loan debtor to repay student loans “out of the hide” of other unsecured creditors. Instead, the other unsecured creditors must be paid their pro rata share. For example, let’s assume a debtor owes both $36,000 in student loan debt and another $36,000 in credit card debt. Now, if that debtor would file a plan calling for unsecured creditors to receive $36,000, then the student loan creditor would only be receiving $18,000 while the credit card creditors would also be receiving the other $18,000. Clearly this result is not as beneficial to a debtor because the $18,000 paid to the credit card creditor would be wasted since any unpaid credit card debt would be discharged---whether $18,000 is still owed or the full $36,000 is still owed; moreover, this result is not as beneficial because the $18,000 of unpaid student loan debt would survive the bankruptcy and have to be repaid--- absent a separate adversary complaint proving undue hardship.

Your Bankruptcy Advisor Blog
By: Attorney Robert Schaller (Bob's bio) of the Schaller Law Firm

Bob is a member of the National Bankruptcy College Attorney Network, American Bankruptcy Institute and the National Association of Consumer Bankruptcy Attorneys.

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I recommend that you review a few other blogs that may be of interest to you. These blogs are identified in the right column and are set forth below: bankruptcy issues blog; bankruptcy and family law issues blog; bankruptcy and employment issues blog; and bankruptcy and student loan issues blog.

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