I have received calls recently from other attorneys inquiring as to what I think about the treatment of student loans in bankruptcy. This may have something to do with my being the attorney in In re Harding, 423 BR 568(Bankr S.D. FL. 2010). As a result of these conversations, I thought it would be a good time to update my prior post as to student loans.

I had attempted to separately classify a student loan in a chapter 13 to permit the debtor to make these payments separately from other unsecured creditors. Otherwise, the debtor would incur additional interest during the plan and could end up owing more at the end of the chapter 13 case then at the beginning. I attempted to argue based on a technical reading of the statute and some case law(admittedly a minority) that the debtor could separately classify to maintain the long term student loan debt without this being construed as an unfair discrimination to other unsecured creditors.

Keep in mind that student loans are with limited exceptions non-dischargeable.

Judge Olson of the Ft. Lauderdale division of the Southern District of Florida ruled to the contrary that a chapter 13 plan cannot unfairly discriminate against other unsecured creditors. The court did find that the student loan company could not charge late fees, collection costs or penalties during the chapter 13 plan(and penalties can be 25% as cost of collection). Interest would continue to accrue.

But the issue still remains whether a specific plan unfairly discriminates. In a case Judge Olson had previously decided, In re Kalfayan, 415 BR 907(Bankr. S. D. FL 2009), a medical practitioner would lose his license if the medical student loan was not paid. Since he would lose his job, clearly an exception had to be made so this was considered not to be unfair.

Two other circumstances should pass judicial muster in the Southern District of Florida. One, it would seem obvious that there is no unfair discrimination if the debtor is paying 100% of the remaining unsecured debt. But most chapter 13 plans do not pay 100%.

A second example is if the prorations work so that the non-student loan creditors would get the same percentage in the plan whether or not the student loan debt is separately classified. But it may be rare for a case for there to be no or virtually no difference in the percentage paid to unsecured creditors with or without separate classification. A more difficult scenario would be if there is some difference, with an argument to be made that the difference is minimal and therefore not unfair.

Essentially, on a case by case basis, there could be a finding that there is no unfair discrimination if there is separate classification to maintain long term student loan debt. For more recent decisions referring Harding, see In re Boscary, 2010 Bankr. Lexis 3702(BAnkr N. D. Miss 2010), and In re Edmonds, 2010 Bankr Lexis 3944(Bankr. E.D. Wis. 2010).

A third possibility for separate treatment is based on the student loan being a joint debt with a co-debtor.

As a bankruptcy attorney in Broward County including Fort Lauderdale and surrounding areas, I will continue to monitor this important issue to better represent my clients.

In a recent case, as a Fort Lauderdale bankruptcy attorney, I attempted to obtain special treatment for student loans  in a chapter 13 bankruptcy.  The problem is that student loan debt cannot be eliminated in bankruptcy, except for undue hardship.  (The standard is so tough that this would rarely apply)

A chapter 13 bankruptcy can help the student loan borrower.  During the chapter13 bankruptcy the debtor would make a monthly payment to the bankruptcy trustee,  usually from three to five years.  During that time the debtor is not subject to collection from the student loan creditor.   The student loan creditor receives a portion of the monthly payment to the trustee.  At the end of the chapter 13 case, credit card and other unsecured debt is discharged, except the remaining balance on the student loan is still owed.

The problem with the student loans is that interest, late charges, collection costs and penalties continue to accrue.  Collection costs can be 25% of the debt.   The debtor could owe more money on the student loan at the end of the bankruptcy than was owed prior to filing.   A way around this is to provide in the chapter 13 plan to separately pay the student loans the regular payment, and the credit cards will divide up the rest of the payments.  The problem is that the separate payment  is viewed as unfair discrimination against the other creditors.  Case law accross the country differs, but most cases do not permit separate classification.

We attempted to separately classify student loan debt in the Ft Lauderdale bankruptcy division of the United States Bankruptcy Court in  In re Harding, 425 BR 568 (Bankr. S.D. FL  Feb. 8, 2010).  In a good news- bad news decision,   Judge Olson ruled that the debtor could not separately classify the student loans under the facts of the case and that interest would continue to accrue,  but that collection costs, late charges, and penalties cannot be assessed as a result of the chapter 13. (Note the court previously has permitted separate classification of a medical loan, because a Florida statute would have endangered the medical license which would have prevented the practioner from working if there was a default on the student loan.)

But this is not the end of the story.  Separate classification might still work in the appropriate case.  If the bankruptcy means test requires the debtor to pay at least $400.00 per month, for example, and if the student loan payment is $175.00 per month, a plan might be approved  with separate classification if a total of $575.00 per month is paid. (For an explanation of the means test, see my website.)  However, this might not be possible based in part on the Supreme Court decision from last week, Hamilton v Lanning. (This is not a student loan case, but affects how the means test is applied in a chapter 13).