In re Osorio
522 B.R. 70
Bankr. D.N.J.2014Background
- Two below‑median‑income chapter 13 debtors (Osorio and Beck) proposed plans that would pay municipal court fines in full while paying 0% to all other general unsecured creditors. Trustee objected as unfair discrimination.
- Debtors conceded the municipal fines fit 11 U.S.C. § 523(a)(7) but are dischargeable in chapter 13 under § 1328(a); fines therefore rank with other general unsecured claims in chapter 13.
- Debtors argued separate classification was justified by threat of incarceration and by need to have municipalities accept full payment (e.g., to reinstate driver’s licenses).
- The applicable commitment period was 36 months (debtors below median income); plans used only projected disposable income to fund payments during that period.
- The court held the proposed plans unfairly discriminated during the applicable commitment period and violated § 1325(b)(1)(B), but indicated discrimination after the commitment period (if plan paid unsecured creditors pro rata during the commitment period) could be permissible.
Issues
| Issue | Plaintiff's Argument (Trustee) | Defendant's Argument (Debtors) | Held |
|---|---|---|---|
| Whether debtors may separately classify municipal fines and pay them in full while paying 0% to other general unsecured creditors | Separate classification is unfair discrimination; fines are dischargeable in chapter 13 and have no greater status than other general unsecured claims | Threat of incarceration and license reinstatement justify separate treatment to make plan feasible | Held: Not permitted during applicable commitment period — plan unfairly discriminates and confirmation denied |
| Whether threat of incarceration alone justifies separate classification | Threat of incarceration does not change unsecured status; unfair to shift punishment cost to other creditors | Incarceration risk makes full payment necessary to avoid plan failure and collateral consequences (license revocation) | Held: Threat of incarceration, being remote and subject to alternatives, is insufficient by itself to justify discrimination |
| Whether § 1325(b)(1)(B) permits diverting projected disposable income to one class of unsecured creditors during the commitment period | §1325(b)(1)(B) requires application of all projected disposable income during the applicable commitment period to unsecured creditors; cannot be funneled to one class to the exclusion of others | Debtors argue §1322(b)(1) allows classification and full payment to certain unsecureds | Held: §1325(b)(1)(B) bars paying one unsecured class in full while others receive nothing during the applicable commitment period |
| Whether discrimination is permissible after the applicable commitment period | Trustee: discrimination that leaves other unsecureds with nothing is unfair generally | Debtors: could pay pro rata during commitment period then pay fines in full afterward | Held: Permissible if plan pays pro rata to all unsecureds during commitment period; after expiration, reasonable discrimination (with a rational basis) is allowed |
Key Cases Cited
- Bearden v. Georgia, 461 U.S. 660 (1983) (court must consider inability to pay before incarcerating for nonpayment)
- Conn. Nat'l Bank v. Germain, 503 U.S. 249 (1992) (statutory text governs when unambiguous)
- Lamie v. U.S. Trustee, 540 U.S. 526 (2004) (courts enforce plain statutory terms)
- United States v. Ron Pair Enters., Inc., 489 U.S. 235 (1989) (plain‑meaning rule in statutory interpretation)
- In re Ryan, 389 B.R. 710 (9th Cir. B.A.P. 2008) (penal fines may be dischargeable in chapter 13)
- In re Alicea, 199 B.R. 862 (Bankr. D.N.J. 1996) (test for reasonable basis to classify unsecured claims)
- In re Limbaugh, 194 B.R. 488 (Bankr. D. Or. 1996) (rejecting classification based solely on threat of incarceration)
- In re Bentley, 266 B.R. 229 (1st Cir. B.A.P. 2001) (discrimination must confer correlative benefit to other unsecured creditors)
- In re Crawford, 324 F.3d 539 (7th Cir. 2003) (disapproving plans that shift criminal sanction costs to innocent unsecured creditors)