Debtor Cannot Take Means Test Deduction For Student Loan Payments In...

In In re Brown, Ch. 13 Case No. 12-12316, 2013 Bankr. LEXIS 3696 (Bankr. S.D. Ga. Sept. 6, 2013), the Chapter 13 debtor deducted, on Line 57 of the Means Test, monthly student loan payments of $500 as a “deduction for special circumstances.”  In her Chapter 13 plan, she proposed to make direct payments of $500 on her student loans and make a 1% distribution to unsecured creditors.  The Chapter 13 Trustee objected to the plan on the grounds that the debtor was not contributing all of her disposable income to the plan.  The Court sustained the objection.

Section 707(b)(2) states:

(B)(i) In any proceeding brought under this subsection, the presumption of abuse may only be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.

Section 1325(b)(3) incorporates §707(b)(2) in Chapter 13 cases.   The Court reviewed the split of authority in cases that addressed the issue of whether student loans could be deducted as special circumstances and held that such payments did not qualify for deduction on the Means Test.

While it is commendable to try and advance one’s education for career and personal advancement, the issue is whether these educational costs constitute “special circumstances” under the parameters established by Congress in §707(b)(2). There may be instances where a student loan constitutes a “special circumstance.” See In re Pageau, 383 B.R. 221 (Bankr. D.N.H. 2008) (“special circumstances” may be found where the student loan was necessitated by permanent injury, disability, or an employer closing or layoffs); see also In re Cribbs, 387 B.R. 324, 329 (Bankr. S.D. Ga. 2008) (finding that “special circumstances” must be similar to the examples set out in the statute, and finding special circumstances in the repayment of a 401(k) loan). However, under the facts of this case, the student loans do not qualify as a “special circumstance” warranting a deduction on her means test. There is nothing unique or special about Debtor’s student loans. She obtained her loans to better herself and to obtain promotions, but that does not make the loans special or unique. She was never layed off from work or forced to get an education in order to maintain her job. The fact that a bachelor’s degree may have later become a requirement does not make her loan a special circumstance. For these reasons, while Debtor’s pursuit of higher education is admirable, it is not a special circumstance under §707(b)(2)

The Court then addressed whether the debtor could make student loan payments outside the plan pursuant to §1322(b)(5), which allows a debtor to cure defaults and maintain payments on long term debts, or whether such a plan unfairly discriminates against other creditors under §1322(b)(1).

 In determining whether the treatment of this debt as a separate classification is unfair discrimination, most courts have applied the test set forth in In re Leser, 939 F.2d 669, 672 (8th Cir. 1991) and In re Wolff, 22 B.R. 510 (9th Cir. B.A.P 1982). Under the Leser/Wolff test, a court considers the fairness of proposed discrimination by looking at whether:

 1. the discrimination has a reasonable basis;

 2. the debtor can carry out a plan without the discrimination;

 3. the discrimination is proposed in good faith; and

 4. the degree of discrimination is directly related to the basis or rationale for the discrimination.

The Court founds that these factors were met by the debtor.  The discrimination had a reasonable basis under §1322(b)(5), the debtor can carry out the plan, and her fresh start would otherwise be hampered.  The debtor also propsoed the plan in good faith and is not merely trying to avoid Trustee fees.

 Even if the loans continue in forbearance, interest continues to accrue. Her efforts to avoid the additional outstanding balance does not indicate a lack of good faith. With her limited financial means, she is seeking to preserve her fresh start and has proposed a plan that she in good faith argues is allowable under the Bankruptcy Code. .. There is no evidence Debtor has not acted in good faith. As to the last factor, according to the claims register, Debtor has approximately $128,669.56 in general unsecured claims. Student loans make up the large majority of that amount in the amount of approximately $100,000.00. According to the Trustee, if the Trustee’s objections are sustained, Debtor would pay an approximate $20,380.80 dividend to general unsecured creditors which is an approximate 16% dividend as opposed to the 1% dividend proposed in her plan. The student loan debt is approximately 78% of her unsecured debt. The spread of 1%-17% is significant, but it is directly related to the rationale for the discrimination of preserving the Debtor’s fresh start and is not unfair. … For these reasons, I find the separate classification and direct payment do not constitute unfair discrimination.

Finally, the Court held that the debtor’s plan could proposed to pay interest on her student loans during the Chapter 13 case pursuant to §1322(b)(10).