In re Birts; 11-15918-BFK; February 27, 2012
In this case, the debtor proposed a plan that proposed to pay approximately 7% of the allowed unsecured claims, but the plan provided that the debtor would keep the payment on her student loan current. Section 1322(b)(1) of the Code allows for the designation of one or more classes of unsecured claims, but provides that the Chapter 13 Plan “may not discriminate unfairly against any class so designated.” 11U.S.C. 1322(b)(1).
Courts around the country have applied a number of different tests to determine if any classification discriminates unfairly. The Eighth Circuit articulated a four-part test, in In re Leser, 939 F.2d 669, 672 (8th Cir. 1991), which is as follows:
1. whether the discrimination has a reasonable basis;
2. whether the debtor can carry out a plan without 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.
Still other courts have added a fifth factor “the difference between what the creditors discriminated against will receive as the plan is proposed, and the amount they would receive if there were no separate classification.” In re Husted, 142 B.R. 72, 74 (Bankr. W.D.N.Y. 1992).
Judge Kenney decided that his test would substitute the fifth Husted factor for the fourth Leser factor making the test for his court the following:
Judge Kenney Test for unfair discrimination:
1. whether the discrimination has a reasonable basis;
2. whether the debtor can carry out a plan without discrimination;
3. whether the discrimination is proposed in good faith; and
4. the difference between what the creditors discriminated against will receive as the plan is proposed, and the amount they would receive if there were no separate classification
Applying this test to student loan classification, Judge Kenney, citing the Fourth Circuit, found that there is “a strong public policy” that exists “in favor of the federal student loan program,” Educ. Credit Mgmt. Corp. v. Frushour (In re Frushour), 433 F.3d 393, 399 (4th Cir. 2005), and that there is a reasonable basis for their separate classification.
As to the second factor, Judge Kenney thought that, while the debtor could carry out the plan without the separate classification, that she would be saddled with all of her student loan debt at the end of the plan and actually encourage her NOT to complete her plan and convert to a Chapter 7.
Third factor: no allegation of bad faith.
Fourth factor: difference to other unsecured creditors: total of $92.17 per month. Not so great a difference as to compel a denial of confirmation though the court points out that this is a case-by-case determination and that a greater disparity could compel a denial of confirmation.
