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Debtors May Not Unfairly Favor Student Loan Creditors During Bankruptcy

Posted By admin || 10-May-2010

Court Decision on Bankruptcy PlanIn the Chapter 13 bankruptcy case of Parrott, Gregory S. and Karen S.; In re, the bankruptcy court refused to confirm the debtors' repayment plan saying that the debtors unfairly treated the student loans as long-term debt to the detriment of unsecured creditors.

The details of the bankruptcy case:

The Chapter 13 debtors' plan proposed to bring payments on two student loans current while maintaining regular monthly payments on the two loans plus a third stu­dent loan. Holders of other unsecured claims were to be paid pro rata from the money left over after paying the debtors' attorney's fee, the trustee's fees, and three secured claims.

The debtors' proposed bankruptcy repayment plan would pay the smallest of the student loans 96 percent of its claim while the two larger student loans would receive 78 percent of their claims. The other unsecured creditors would only receive 53 percent of their claims. The bankruptcy trustee objected to the confirmation of the Chapter 13 bankruptcy plan because the plan unfairly discriminated against unsecured creditors.  The Chapter 13 bankruptcy debtors argued that they were treating the student loans as long-term debt; but the bankruptcy court said that they could not treat the loans like long-term debt.

The bankruptcy court said:

"the authority to treat an unsecured debt as a long-term debt is neither expressly nor logically an exception from the statutory rule that classifying unsecured claims cannot unfairly discriminate against any of the classes."

Furthermore, the bankruptcy court said that the classification of the student loans as long-term debt did not benefit the creditors and only served to benefit the debtors and because of this, the Chapter 13 bankruptcy plan should not be confirmed.

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