Chapter 13 and Student Loans

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.



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