A court is not required to dismiss a chapter 13 case where the debtor’s student loan debt causes his total unsecured debts to exceed the statutory debt cap. In re Pratola, 578 B.R. 414 (Bankr. N.D. Ill. Dec. 27, 2017), appeal filed, Stearns v. Pratola, Case No. 1:18-cv-213 (N.D. Ill. filed Jan. 11, 2018).
The trustee moved to dismiss Christopher Pratola’s chapter 13 case under section 1307(c) because his debts exceeded the debt limit of $394,725 set forth in section 109(e). The court began its analysis by rejecting Mr. Pratola’s argument that, because he was paying under an Income Based Repayment plan and might have a portion of the debt forgiven, his student loan debt was not noncontingent as required by section 109(e). The court found that only the possibility of forgiveness was contingent. The debt itself, which was fixed at the time the loan was made, was not contingent and, therefore, went into the debt limit calculation.
The court turned to the trustee’s motion to dismiss. Section 1307(c), gives a court discretion to dismiss for cause where dismissal would be in the best interests of creditors and the estate. Such cause includes, but is not limited to, unreasonable delay, failure to file a plan, or failure to make plan payments. Though not mandated by either section 1307(c) or section 109(e) there is general agreement among the courts that a chapter 13 case in which the debt limit is exceeded should be dismissed.
But student loans have routinely been treated differently than other debts and the court found that the statutes and precedents did not determine the issue before it. Turning to legislative history for guidance, the court noted that, in 1978, Congress, finding that chapter 11 bankruptcy was often too cumbersome for certain debtors, expanded availability of chapter 13. Congress added the debt limit provision to prevent large business owners from bypassing chapter 11 to take advantage of chapter 13’s less stringent protections for creditors. A student loan debtor, however, is comparable to the small business owner or other debtor Congress intended to protect with the expansion of chapter 13.
In fact, the court found, there are substantial reasons to treat student loan debt differently from other unsecured debt when applying section 109(e)’s debt limit. At the time the debt limit provision was enacted, student loan debt was not the financial behemoth it has since become. Student loan debt, generally, has increased at a far greater rate (20.7% per year) than the scheduled increases in the debt limit (7.6% per year) creating the “anomalous” situation in which debtors suited to chapter 13 relief exceed the debt limit. And yet, with the onerous “undue hardship” standard, student loans are very difficult to discharge. In fact, chapter 13 may provide more protection for the student loan creditor as the discharge of the debtor’s other debts may result in the debtor’s having a greater ability to repay the student loan.
The court concluded that it would not be in the best interests of either Mr. Pratola or his unsecured creditors to dismiss his case or convert it to the more costly chapter 11.
Pratola Bankr ND Ill opinion Dec 2017
Tags: 109(e) debt limits, Student loans
