In Re Hanson
In re George J. & Patricia A. HANSON, Debtors.
United States Bankruptcy Court, W.D. Wisconsin.
*132 Daniel R. Freund, Eau Claire, WI, for Debtors.
MEMORANDUM DECISION
ROBERT D. MARTIN, Bankruptcy Judge.
When they filed their Chapter 13 case, debtors George and Patricia Hanson ("the Hansons") were under contract to pay $776.94 per month to the U.S. Department of Education ("D.O.E.") to retire student loans. Because they owed the D.O.E. more than $77,000, a last payment would have been due some 99 months later. The Hansons proposed a Chapter 13 plan which would: 1.) pay $175 per month for 36 months to the Chapter 13 trustee to be distributed to creditors including the D.O.E. for any claimed arrearage due on the student loan contract; and 2.) provide that the Hansons would pay directly to the D.O.E. $437.27 per month on their student *133 loans. The D.O.E. consented to this reduced payment "to enhance the feasibility of the plan."
The trustee objected to confirmation of the plan for two reasons. First, the plan unfairly discriminates against a class of unsecured creditors by paying the D.O.E. more than others. Second, the plan proposes direct payments to the D.O.E. in an amount less than called for by the prebankruptcy contract.
1.) Non-dischargeable student loans do not enjoy priority status under 11 U.S.C. § 507. They are generally classified with other unsecured claims. However, 11 U.S.C. § 1322(b)(1) authorizes a Chapter 13 debtor, in formulating a plan, to designate classes of unsecured creditors, as provided in 11 U.S.C. § 1122, which states that "[e]xcept as provided in [11 U.S.C. § 1122(b) ], a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class." 11 U.S.C. § 1322(b)(1) further provides that a plan "may ... not discriminate unfairly against any class so designated." Courts have tried with little success to articulate a test for unfair discrimination against a class of claims. In re Leser,
Under 11 U.S.C. § 1322(b)(5), a plan may "provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due." 11 U.S.C. § 1322(b)(5) is typically used by debtors to maintain mortgage payments and other long-term secured debt, while curing any arrearage through the plan. In re Bradley,
11 U.S.C. § 1322(b)(5) specifically applies to a debtor maintaining payments on unsecured long-term debt. Unsecured long-term debts may include some student loans. "Long-term student loan obligations with payment terms that extend beyond completion of the plan fall squarely within the ambit of section 1322(b)(5)." In re Benner,
The treatment of long-term unsecured claims under 11 U.S.C. § 1322(b)(1) and 11 U.S.C. § 1322(b)(5) appears to be in conflict with the uniformity of treatment generally required by 11 U.S.C. § 1322(b)(5) and is different from that prescribed in 11 U.S.C. § 1322(b)(1). If there is indeed a conflict (which we have yet to *134 determine because that discrimination may not be unfair), "[t]he existence of a conflict is [a] prerequisite to deciding that a more specific statute prevails over one which is more general." Squillacote v. U.S.,
11 U.S.C. § 1322(b)(5) is specific and clear in its language. 11 U.S.C. § 1322(b)(1) is more general in that it refers to all classes of unsecured claims, not to claims having specific characteristics. "[W]hen we are forced to choose between specific statutory provisions and a general...[one], [a court will] err on the side of specific provisions in the belief that they reflect congressional intent more clearly." Matter of Lifschultz Fast Freight Corp.,
To come within the specific coverage of 11 U.S.C. § 1322(b)(5), the claim must be subject to a schedule of payments which extends beyond the last payment under the plan. This is true for the claim of the D.O.E. Therefore, the Hansons' plan may treat the D.O.E. claim differently from shorter term claims if that different treatment conforms with what is permitted by 11 U.S.C. § 1322(b)(5). What is permitted is curing any default within a reasonable time and "maintenance of payments" while the case is pending. "Maintenance of payments" under 11 U.S.C. § 1322(b)(5) means that the debtor must respect the interest rate and the monthly payment in the original contract during the plan. In re Tavella,
Prior to bankruptcy, the Hansons owed a monthly payment of $776.94 to the D.O.E. That payment was based on the original principal amount of the student loan and the contract interest rate. The Hansons' Chapter 13 plan, however, proposes a monthly payment in the amount of $437.27 to the D.O.E. "outside of the plan." "Under 11 U.S.C. § 1322(b)(5), all of the payments of a note or contract remain in full force and effect ... A change in the monthly payments does not constitute the 'maintenance of payments' for these purposes." In re Tavella,
2.) Periodic payments to the trustee and disbursement by the trustee is the normal practice in Chapter 13 cases and a departure from this norm is only appropriate when the debtor demonstrates a significant reason for doing so. In re Gregory,
Most reported decisions refuse to confirm plans that propose to pay certain creditors or classes of creditors directly by the debtor, particularly when the proposed direct payment is to an unsecured claimant. In re Reid,
In conclusion, the debtors' plan cannot be confirmed. It fails to comply with 11 U.S.C. § 1322(b)(5) and fails to demonstrate that its treatment of the D.O.E. claim is not unfair discrimination between classes of unsecured claims. Furthermore, it proposes an impermissible direct payment to D.O.E. For those reasons, the plan cannot be confirmed. It may be so ordered.
ORDER
The court having this day entered its memorandum decision in the above-entitled matter,
IT IS HEREBY ORDERED that the debtors' Chapter 13 plan not be confirmed.