If an individual’s debts are principally student loans, there should be no debt limit in chapter 13, according to Bankruptcy Judge Janet S. Baer of Chicago.
In her Dec. 27 opinion, Judge Baer created a bankruptcy remedy where none otherwise would exist for an individual who is swamped by student loans but would be ineligible for chapter 7.
The chapter 13 debtor owed about $570,000 on student loans and another $22,500 on credit cards. He was living paycheck to paycheck, Judge Baer said. His monthly take-home pay of some $2,700 left him with about $475 in disposable income.
Under an income-based repayment plan, the debtor had been repaying his student loans at the rate of $268 a month. If he continued the payments for 25 years, any unpaid balance would be forgiven. The amount of his monthly payment would increase or decrease depending on a rise or fall in his income.
The trustee moved to dismiss, because the debtor’s unsecured liabilities exceeded the maximum of $394,725 in “noncontingent, liquidated, unsecured” debt permitted in chapter 13 by Section 109(e).
Claiming that the student loans were contingent, the debtor argued that he was within the chapter 13 debt limit. He contended that the student loans were contingent because a portion could be forgiven in the future.
Judge Baer didn’t buy the contingent argument. In the Seventh Circuit, a debt is noncontingent “if the event giving rise to liability has already occurred.” The debt, she said, came into existence when the debtor signed the loan agreement. “It is the possibility of forgiveness that is contingent,” the judge said, “not the debt itself.”
Nonetheless, Judge Baer said, Section 109(e) by itself does not require dismissal. That section only contains chapter 13 eligibility standards.
Dismissal is governed by Section 1307(c), which says that the court “may” convert to chapter 7 or dismiss for “cause.” It then lists 11 nonexclusive grounds representing dismissal for cause. Failure to meet the debt limit in Section 109(e) is not one of the listed factors.
Analyzing whether there was cause to dismiss, Judge Baer surveyed the evolution of chapter 13. Citing legislative history, she said that the debt limits were added “to keep debtors with large businesses from filing chapter 13 cases.” The debt limits shunt owners of large businesses into chapter 11, where there are more creditor protections.
Concern for creditor protection does not exist when an individual debtor has large educational debt, Judge Baer said. Indeed, unsecured creditors of student loan debtors would prefer chapter 13 because they might realize some recovery compared to chapter 7. Student loan lenders would not be harmed because student loans ordinarily are not discharged in chapter 13. In addition, caselaw allows a debtor to put student loans in a separate class with potentially higher payments than those to unsecured creditors.
Judge Baer noted how the unsecured debt limit in chapter 13 has risen only 7.6% a year since 1978, while the cost of post-secondary education has risen 20.7% annually. The result has been an explosion in student loan debt, a fact that did not exist in 1978 with adoption of the Bankruptcy Code.
Judge Baer found no “cause” for dismissal, in part because the “express language of Section 1307(c) does not require the court to dismiss.” Furthermore, not dismissing would be in the best interest of creditors, the estate and the debtor.
The debtor, she said, can remain current on his student loans in chapter 13 while he pays some of his future earnings to general unsecured creditors.
If the debtor were ineligible for chapter 7, the debtor would have no viable bankruptcy alternative absent chapter 13, since conversion to chapter 11 would impose “substantial fees” on the debtor. In addition, Judge Baer said, chapter 11 entails “‘too cumbersome a procedure’ that is simply not suited for a reality such as his.”