In re Osorio
Chapter: 13
MEMORANDUM DECISION
I. INTRODUCTION
These matters are comprised of two separate chapter 13 bankruptcy cases in which the debtors Roberto and Julia Oso-rio and Emily Beck (collectively, the “Debtors”
Section 1322(b)(1) of the Bankruptcy Code permits a chapter 13 debtor to designate a separate class of unsecured claims so long as that class does not unfairly discriminate against any other class of unsecured claims. The question presented in these cases is whether a below median income debtor in a chapter 13 case unfairly discriminates in proposing to separately classify and make full payment from the debtor’s projected monthly disposable income on unsecured dischargea-ble municipal court fines, while at the same time, offering no payments to the remaining general unsecured claims. The court concludes that such treatment is unfair discrimination during the applicable commitment period — here 36 months — and violates Section 1325(b)(1)(B). By contrast, the court concludes that after the applicable commitment period, payments in full to one class of creditors with no payments to other general unsecured claims would not unfairly discriminate.
II. JURISDICTION AND VENUE
The court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 10, 1984, as amended October 17, 2013, referring all bankruptcy cases to the bankruptcy court. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(L). Venue is proper in this Court pursuant to 28 U.S.C. § 1408. The statutory predicates for the relief sought herein are 11 U.S.C. §§ 1322(b)(1) and 1325(b)(1)(B). Pursuant to Fed. R.Bankr.P. 7052, the court issues the following findings of fact and conclusions of law.
Roberto and Julia Osorio filed a chapter 13 bankruptcy case on December 6, 2013. They disclosed no secured or priority unsecured debts and $129,993.84 in unsecured debts, all jointly owed. The Osorios propose in their chapter 13 plan to pay $221 per month for 60 months, for a total of $13,260. The plan will pay their attorney fees of $2,781 (plus any future fees), the Trustee’s commission, and a total of $8,109 to eight municipal courts for court fines (the “Osorio Fines”). The Osorios offer no distribution to the remaining unsecured creditors under the plan.
Upon request of the court, the Osorios’ attorney supplemented the record concerning the Osorio Fines:
Town Amount Infraction
Northfield $248.59 driving on a suspended license
Mt. Laurel $692.94 driving on a suspended license
Winslow $420.00 loading vehicle wrong way
Winslow $ 65.00 driving on a suspended license
Waterford $1,209.00 exterior property condition
Pennsauken unknown unknown
Camden unknown unknown
There is also a criminal complaint for restitution with the Township of Berlin.
Only one of the municipalities the plan proposes to pay, Winslow Township, filed a proof of claim alleging a secured claim of $420. Other general unsecured creditors filed a total of $36,304.98 in claims.
Emily Beck filed chapter 13 bankruptcy case on August 8, 2014. She disclosed a secured debt on a 2006 Volkswagon valued at $1,500, no priority unsecured debts, and $50,338.02 in unsecured claims. In her plan, she proposés to pay $164 per month for 40 months, for a total of $6,560. She will pay her attorney fees of $3,070, the Trustee’s commission, $1,595 to the secured lender on her vehicle, and a total of $1,345 to two municipal courts for court fines (the “Beck Fines” collectively with the Osorio Fines, the “Municipal Court Fines”). Beck offers no distribution to the remaining unsecured creditors under the plan.
Upon request of the court, Ms. Beck’s attorney supplemented the record concerning the Beck Fines:
Town Amount Infraction
Washington $260 failure to exhibit documents and failure to provide child safety seat
Gloucester $1,000 speeding ticket Failure to possess insurance (hearing pending) Failure to possess insurance (2d ticket) (hearing pending)
Proofs of claim filed by these municipalities in the Beck bankruptcy allege $260 owed to Washington Township but only $222 owed to Gloucester Township. Other creditors filing claims total $3,754 in general unsecured claims.
The Trustee objected to the plans in both cases, arguing that the Municipal Court Fines are dischargeable and that by paying the Municipal Court Fines in full while providing nothing to the remaining unsecured creditors, the Debtors are unfairly discriminating against the remaining unsecured creditors under 11 U.S.C. § 1322(b)(1). The Debtors argue that because there is a possibility of incarceration for not paying the Municipal Court Fines, there is a basis for the separate treatment and that they are thus not unfairly discriminating under the plans.
On the return date of the hearing on the Trustee’s objection to their plans, the Debtors conceded that the Municipal Court Fines were debts “for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit,” and “not compensation for actual pecuniary loss” which fall under 11 U.S.C. § 523(a)(7), and that the Municipal Court Fines were potentially dischargeable in a chapter 13 case. The Debtors also acknowledged, and the Trustee agreed, that the Debtors are below median income debtors as calculated pursuant to Part I of Form B22C. Finally, only the Debtors’ projected monthly disposable income, as determined by 11 U.S.C. § 1325(b)(2) and (3), is being 'used to fund their plans. The - applicable commitment period is three years.
Also at the hearing, the Debtors’ counsel stated to the court that when he has a chapter 13 client with a license suspension, counsel sends notice of the bankruptcy filing to the municipal court clerk which then might restore the license. Once counsel has a confirmed plan that pays a municipality in full, many municipalities, although not all, will reinstate the license. Counsel stated that for those municipalities which will reinstate a license, the municipality usually requires counsel to present it with a confirmed plan demonstrating that the claim will be paid in full.
IV. DISCUSSION
A. Discharge in Chapter 13
Before addressing a debtor’s ability to separately classify the Municipal Court Fines under Section 1322(b)(1), a review of Sections 523 and 1328 of the Bankruptcy Code is helpful. Section 523 provides for certain exceptions to* discharge in bankruptcy cases. Relevant to this discussion is Section 523(a)(7) which provides:
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debt- or from any debt — ...
(7) to the extent such debt is for a fine, penalty, or forfeiture payable to and for the benefit of a governmental unit, and is not compensation for actual pecuniary loss, other than a tax penalty—
(A) relating to a tax of a kind not specified in paragraph (1) of this subsection; or
(B) imposed with respect to a transaction or event that occurred before three years before the date of the filing of the petition; ...
11 U.S.C.A. § 523(a)(7) (2010).
Section 1328 of the Bankruptcy Code provides discusses the dischargeability of certain debts in chapter 13 cases. That section provides, in relevant part:
(a) Subject to subsection (d), as soon as practicable after completion by the debtor of all payments under the plan ... the court shall grant the debtor a discharge of all debts provided for by the plan or disallowed under section 502 of this title, except any debt—
(2) of the kind specified in section 507(a)(8)(C) or in paragraph (1)(B), (1)(C), (2), (3), (4), (5), (8), or (9) of section 523(a)[.]
11 U.S.C. § 1328(a)(2). Specifically excluded from this section is reference to section 523(a)(7).
B. Ability to Discriminate Under A Chapter 13 Plan
Despite the fact that the Municipal Court Fines are afforded no more standing than the remaining general unsecured claims, Section 1322(b)(1) of the Bankruptcy Code permits the Debtors to discriminate between their classes of unsecured creditors. Specifically, Section 1322(b)(1) provides, in relevant part:
Subject to subsections (a) and (c) of this section, the plan may — (1) designate a class or classes of unsecured claims, as provided in section 1122 of this title, but may not discriminate unfairly against any class so designated[.]
11 U.S.C. § 1322(b)(1) (emphasis added). Hence, the Bankruptcy Code permits the Debtors to designate the Municipal Court Fines as a separate class of unsecured claims from the remaining unsecured claims so long as the classification does not unfairly discriminate. “ ‘As the statute makes clear, discriminatory treatment of unsecured creditors through classification is not prohibited — unfair discrimination
Unfortunately, the Bankruptcy Code does not define what it means to “discriminate unfairly.” When deciding the issue, the court should always balance the interests of the debtor and the creditors. “[D]ifferent treatment is permissible if and only if the debtor is able to prove a reasonable basis for the degree of discrimination contemplated by the Plan.” In re Alicea,
(1) whether the discrimination substantially enhances or is necessary to the feasibility of the plan; (2) whether the discrimination reflects chapter 7 liquidation priorities; (3) whether the discrimination is otherwise contemplated by the Code; (4) whether the creditor discriminated against will receive more under the plan than it would in a hypothetical chapter 7 liquidation; (5) if the creditors as a whole will receive more under the plan than in a hypothetical chapter 7 liquidation, will the discrimination encourage the use of chapter 13; (6) will the discrimination reduce the chances that the debtor will be forced to file bankruptcy in the future; (7) does the discrimination enhance an interest of the debtor which is otherwise protected or furthered by the Code; and (8) the extent of the discrimination.
In re Bird,
i. Threat of Incarceration
The Debtors argue that if the Municipal Court Fines are not separately classified, the Debtors will be subject to incarceration and presumably, their plans will fail.
New Jersey also permits a court to order a person who is sentenced to pay a fine and who defaults in payment, to perform community service in lieu of incarceration; the court can order other modifications of the sentence with the defaulting person’s consent. N.J.S.A. 2B:12-23. In addition, on a finding that a defendant does not have the ability to pay, the court may reduce or suspend the penalty or modify the installment plan; order that credit be given for any days of confinement; revoke any unpaid portion of the penalty on a finding that circumstances have changed or it would be unjust to require payment; order community service in lieu of payment; or impose any other alternative permitted by law. N.J.S.A. § 2B:12-23.1(a).
Likewise:
Any defendant convicted of a traffic offense pursuant to Title 39 of the Revised Statutes or a parking offense, shall, upon a satisfactory showing of a condition of indigency or participation in a government-based income maintenance program, be permitted by the court to pay the fine in installments. The court ... may waive an unpaid .portion, up to $200, of any court-imposed time-payment order ... for a defendant who is indigent or is participating in a government-based income maintenance program and who has demonstrated an inability to comply with the time-payment order, and in lieu of the remaining unpaid amount, require the defendant to perform community service for a period of time to be determined by the court.... [Ijndigency is an income up to 250 percent of the poverty level, asdefined in section 4 of P.L. 2005, c. 156 (C.80:4J-11).
N.J.S.A. § 39:4-203.1.
It is clear that before incarceration, due process affords an offender the opportunity to be heard. This court is convinced that after a default in payment the state courts have several statutory alternatives available before they look to incarceration. Even more so, the Supreme Court’s holding in Bearden v. Georgia,
In addition, several other courts have concluded that the threat of incarceration alone is not sufficient for a separate classification in a chapter 13 plan. In coming to this conclusion:
[S]everal ... courts. have analyzed § 1322(b)(1) classifications where the debtor faced possible incarceration. An off cited [sic] case is In re Limbaugh, ... in which the Oregon bankruptcy court articulated a policy argument against discrimination in these cases:
By allowing debtors to separately classify the restitution debt this court would reduce the impact of the criminal sanctions imposed by the state court by requiring debtors’ innocent unsecured creditors to subsidize Ms. Limbaugh’s criminal sanctions. Two purposes of criminal sanctions are to deter and punish the wrongdoer. Both of these purposes are undermined when innocent creditors are required to help pay for a debtor’s criminal sanctions.
In re Stella, 05-05422-TLM,
All in all, the possibility of incarceration for failing to pay Municipal Court Fines appears remote.
Other factors this court considers include that the discrimination proposed by the Debtors does not reflect the chapter 7 liquidation priorities. As set forth above, the Municipal Court Fines have no greater standing than any other general unsecured claim. They are not priority claims which should recover any more than the remaining general unsecured claims. Although they would be nondisehargeable in a chapter 7 case, the Bankruptcy Code does not contemplate that nondisehargeable general unsecured claims be afforded any different treatment than dischargeable general unsecured claims. See In re Bentley,
ii. Extent of Discrimination
Even if the Debtors could convince the court that there may be a reasonable basis for discrimination, the extent of the discrimination proposed by the Debtors is entirely unacceptable and unfair. They propose to pay the Municipal Court Fines in full and absolutely nothing to the remaining general unsecured creditors. Such a disparity, on its face, constitutes unfair discrimination. See, e.g., Boscaccy,
What is more, because of the nature of the Municipal Court Fines, the proposed plans would in effect force the other general unsecured creditors to pay the price for the Debtors’ alleged wrongdoing. See In re Cooper,
C. Interplay Between Section 1322(b)(1) and Section 1325(b)(1)(B)
Another reason to reject the Debtors’ proposed plans is the interplay between Section 1322(b)(1) and Section 1325(b)(1)(B). In light of the Trustee’s objection to the Debtors’ plans, the court cannot confirm the plans unless, inter alia.
the plan provides that all of the debtor’s projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.
11 U.S.C § 1325(b)(1)(B) (emphasis added). This language is clear. If Congress intended Section 1322(b)(1) to allow discrimination in the application of Section 1325(b)(1)(B), it would have made an exception. See In re Mortimore, No. 11-955(RMB),
Because these Debtors are below median income debtors, the applicable commitment period is 36 months. 11 U.S.C. § 1322(d)(2). The Debtors propose to pay nothing to the remaining general unsecured claims while attempting to pay the Municipal Court Fines. Here, the Debtors’ plans propose to start to pay the Municipal Court Fines during the applicable commitment period without paying anything to the remaining general unsecured claims during that same period.
D. Ability to Discriminate
For all that, all is not lost for the Debtors. Section 1325(b)(1)(B) only requires payment of the Debtors’ projected disposable income during the applicable commitment period. If the Debtors were to propose plans which provided for pro rata payments of the Municipal Court Fines and the remaining general unsecured claims during the applicable commitment and then, after expiration of the applicable commitment period, they were to propose to pay the Municipal Court Fines in full,
Assuming a debtor’s plan complies with Section 1325(b)(1)(B) and seeks a longer time period under Section 1322(d)(2) to allow the debtor to discriminate, the debtor’s burden of proving that the discrimination is fair is reduced. Because the debtor would no longer be required to pay his or her other creditors after the expiration of the applicable commitment period, such discrimination by its very nature could not be unfair. All that would be required of such discrimination is that it be reasonable. In re Alicea,
V. CONCLUSION
Based on the foregoing, confirmation of the Debtors’ plans is denied without preju
Notes
. All Debtors are represented by the same attorney Eric J. dayman, Esquire.
. Similarly, Section 523(a) specifically ex-eludes Section 1328(a) from its language.
. Bird itself notes that “none of the above factors should be considered definitive. Nor should the number of factors indicating fairness or unfairness be determinative of the issue. Rather, the factors should be used on qualitative case-by-case basis,” In re Bird, No. 9401012,
. At the hearing on the Trustee’s objection, counsel to the Debtors stated that the Debtors could also lose their drivers licenses. This argument is unpersuasive because a munici
. This statute applies to criminal and noncriminal i.e.,4 disorderly, petty disorderly and traffic offenses.
. All the same, the court notes in the unfortunate event that a state court would take the extraordinary step to substitute incarceration or community service or other alternative in lieu of payment of its claim, this court could not prevent it from doing so. This court cannot compel a state court to accept payment in lieu of incarceration. See In re Cue-vas,
. In doing so, a debtor must comply with 11 U.S.C. § 1322(a)(2) and § 1328(b), which require payment in order of priority.
. For "cause" under 11 U.S.C. § 1322(d)(2).
. .The court is cognizant that there may be times when a debtor’s projected disposable income to be received in the applicable commitment period will be exhausted by those claims entitled to priority under 11 U.S.C. § 1322(a)(2) and § 1328(b) and, as a consequence, general unsecured claims may not get paid at all. But this is of no moment because Section 1325(b)(1)(B) only concerns payment of a debtor’s projected disposable income during the applicable commitment period for payment to creditors. Section 1325(b)(1)(B) does not establish a priority scheme of those payments.
.At the hearing, the Debtors' counsel expressed concern over reinstatement of licenses. Since a debtor is entitled to discriminate under this scenario, counsel will still be able to produce a confirmed plan to a municipality in order to have a license reinstated.