In Re Husted
MEMORANDUM AND OPINION
This case is before the court for confirmation of the Debtor’s modified Chapter 13 plan which: (1) pursuant to 11 U.S.C. § 1322(b)(1) separately classifies a delinquent child support claim and the Debtor’s other unsecurеd claims; (2) proposes to pay the child support claim in full
BACKGROUND
On February 18, 1992 the debtor, Eric Jon Husted (the “Debtor”), filed a voluntary petition initiating a Chapter 13 case. In his schedule of liabilities, the Debtor lists a $1,100 liability to his former spouse for delinquent child suppоrt payments. The schedules also indicate that the Debtor has secured debt of $1,400, priority unsecured debt of $2,106 and general unsecured debt of $3,139, not including the child support arrears. The plan sepаrately classifies the delinquent child support claim from the other general unsecured claims and proposes 60 monthly payments of $140 which would provide for the child support claim to be paid in full and all other unsecured creditors to receive 25% of their claims. If the plan had provided for the use of all of the Debtor’s disposable income over a three year term, all unsecured creditors, including the child support claim, would have received 17%.
DISCUSSION
The whole purpose behind Chapter 13 is to enable the individual “to develop and perform a plan for the repayment of his debts.” H.R.Rep. 95-595 at 118, U.S.Code Cong. & Admin.News 1978 pp. 5787, 6079;
Matter of Brown,
The Bankruptcy Code allows a debt- or to separately classify claims in a Chapter 13 plan and to treat the separate classes differently to enable а debtor to successfully perform under a plan the provisions of which are believed to be necessary to the debtor’s overall rehabilitation.
In re Lawson,
By allowing separate classification' of debts, Congress acknowledged that it understood that some debtors, to insure their interest in completing the plan, obtaining a fresh start or maintaining a decent quality of life, would have a need to pay certain debts in full while other creditors received a pro rata share. Payment of only a part of these debts would prevent the accomplishment of these stated goals and thus hinder the Debtor’s overall rehаbilitation.
The inability to retain the services of the doctor currently providing critical health care could lead to ineffective treatment, devastating the debtor’s family and possibly rendering performance under the plan impossible; criminal prosecution for negotiating a non-sufficient funds check could have the same impact; failure to pay child support arrearages, since the debt is not dischargeable in Chapter 13 (pursuant to Section 1328(a)(2)) could leave the debtor at the completion of his plan still substantially in debt.
In assessing whether a classification is unfairly discriminatory under Section 1322(b)(1), and thus whether separate classification should be disallowed, courts have genеrally considered four factors:
(1) Whether there is a rational basis for the classification;
(2) Whether the classification is necessary to the debtor’s rehabilitation under Chapter 13;
(3) Whether the discriminatory classification is proposed in good faith;
(4) Whether there is a meaningful payment to the class discriminated against.
In re Kovich,
In addition, this Court believes that a fifth factor should be considered as stated by the Bankruptcy Court in the case of
In re Moore,
(5) The difference between what the creditors discriminated against will receive as the plan is proposed, and the amount they would receive if there was no separate classification.
Unfortunately, the court decisions applying the above four-part test have not been consistent due to the difficulty in applying these factors when assessing thе fairness of the discriminatory classification.
In re Lawson,
Because of the uncertainty in application of this four-part test this Court is prepared, in the absence of a showing of bad faith or specific valid objections by creditors or the Trustee 2 , to confirm Chapter 13 plans which propose to separately classify unsecured claims and provide different treatment for the separаte classes when it is clearly demonstrated that:
(1) there is a good faith rational basis for the separate classification necessary for the Debtor’s overall rehabilitation, espeсially if the debts being separately classified would otherwise be non-dis-chargeable under Sections 523 or 1328; and
(2) the class being discriminated against is receiving a meaningful distribution which is greater than would be received in a Chapter 7 liquidation and than wоuld be received under a three-year single unsecured class plan where all of the Debtor’s disposable income was devoted to the plan.
The separate classification of non-dis-chargeable debts, when they are the ones in the separate class, will enable the debtor to meet Congress’ clear policy of having these claims paid in full, and will allow the debtor to оbtain a true “fresh start,” since the Debtor will be completely free of his prior obligations after the plan is completed.
The fact that separately classified creditors receive more than other unsecured creditors, certainly is a form of discrimination, but it is not necessarily unfair. Such classifications may not be unfair in some cases because if they are not allowed, the Debtor might be forced to file under Chapter 7 and the unsecured creditors may receive nothing.
In re Kovich,
This simplified “test” meets all of the factors which have been used by other courts to analyze “unfair discrimination.” In this case, the Debtor’s proposed modified plan satisfies the simрlified “test” in that: (1) The separate classification of a non-dischargeable debt has a rational basis; (2) is necessary to the Debtor’s overall rehabilitation, since he desires to pay the сhild support arrears during his plan, and it will allow him to be free from all debts once he completes the plan; (3) the classification is proposed in good faith; there is no evidence nor any оbjections before the Court that would lead the Court to believe the plan is not; (4) there is a meaningful 25% distribution to unsecured creditors in the class being discriminated against which is more than they would receivе in a Chapter 7 liquidation case (25% versus 0%); and (5) more than they would receive under a three-year plan where all of the Debtor’s disposable income was devoted to the plan and the unsecured creditors were treated in one class (25% versus 17%).
CONCLUSION
The Court finds that all of the requirements of 11 U.S.C. § 1325 for confirmation of the Debtor’s modified plan have been met, and that in accordance with 11 U.S.C. § 1323(c) therе is cause for and the Court approves the term of the plan to be for five years. The Debtor’s modified plan is confirmed.
IT IS SO ORDERED.
Notes
. Under the 1984 amendments, Section 1322(b)(1) was amended to permit any co-debt- or debt to be treated differently.
. For example, as to any given plan creditors may contend that because of the term of the plan or the actual distribution of payments, on a present value basis part (2) of the test has not been met.
The absence of objections to confirmation of a plan is a relevant consideration, since it may lend equity to the debtor's position or indicate that a creditor accepts a plan as honestly filed.
Matter of Chaffin,