A bankruptcy court in Illinois denied the chapter 13 trustee's request to dismiss a case for exceeding the §109(e) debt limit, finding that when student loan debt caused the excess, then the case should proceed in chapter 13. IN RE: CHRISTOPHER V. PRATOLA, Debtor., No. 17 B 11668, 2017 WL 6605264 (Bankr. N.D. Ill. Dec. 27, 2017). The debtor had incurred $568,671 in student loan debt in obtaining his undergraduate degree and graduate degree in cinema and television production. He had been paying $268/month the federal student loans on an income based repayment plan (IBR) requiring payments of 10% of his discretionary income since 2014, and the balance of the debt would be forgiven after 25 years of payments with no defaults. His payment under a standard 10 year repayment plan would be $3,655.75. Debtor is employed as a 'genius' at Apple making approximately $44,000/year. He has modest assets and lives on a tight budget. His schedules show $22,552 of credit card debt.
The trustee sought to dismiss solely based on the debtor being over the debt limit of §109(e), which sets an debt limit of $394,725 of non-contingent, liquidated unsecured debts. The request was filed under §1307(c). § 1307(c) provides, in pertinent part, that “on request of a party in interest ... after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause ....”
The Court initially found that the IBR student loan was non-contingent. The fact that a portion of the debt may be forgiven in the future does not make the debt contingent. If the event giving rise to liability has already occurred, then the debt is noncontingent. In re McGovern, 122 B.R. 712, 716 (Bankr. N.D. Ind. 1989).
The Court then examined whether 'cause' existed for dismissal under §1307(c). Cause is required for a dismissal or conversion under this section. In re Nelson, 343 B.R. 671, 675 (B.A.P. 9th Cir. 2006). While exceeding the debt limit is not included in the list of grounds to dismiss or convert, such list is not exclusive, and a number of court's have found this to be cause for such relief. However, it is not an absolute ground for dismissal or conversion. See United States v. Edmonston, 99 B.R. 995, 996 (E.D. Cal. 1989) (refusing to dismiss or convert case for ineligibility when the creditor moved to dismiss the case post-confirmation).
The debt limits were initially included in enactment of chapter 13 in 1978, and adjusted in 1994 and 1998, with 3 year automatic adjustments thereafter. Congress created the debt limits to avoid having large business owners avoid the additional protections to creditors provided for in chapter 11. The Report of the Committee on the Judiciary (the “Report”) relating to the bill that eventually became the Bankruptcy Reform Act of 1978 explains that the debt limits are aimed specifically at large businesses:
H.R. Doc. No. 93-137, at 118-119 (1977).
Individuals with large amounts of student loan debts are not the types of debtors intended to be excluded by the debt limits in chapter 13. Nor is there an advantage to student loan creditors of a debtor filing under chapter 11. Many courts allow cure and maintain treatment of student loans in chapter 13. Also, student loan debts are nondischargeable regardless of plan treatment. Finally, upon emerging from chapter 13 debtors are more able to maintain payments on the student loans.
Further, the debt limits fail to account for the increasing portion of student loan debt held by individuals. As educational debt has become increasingly difficult to discharge and chapter 13 debtors have been permitted to classify it separately in their plans, educational costs and debts have skyrocketed.Since 1978, the unsecured debt limit has increased at a rate of 7.6% per year on average. From 1978 to 2015, the cost of obtaining a post-secondary education increased at a rate of 20.7% per year on average. Digest of Educ. Statistics, Nat'l Ctr. for Educ. Statistics, https://nces.ed.gov/programs/digest. And in just the last ten years, the total amount of public educational debt has increased at a rate of 16.5% per year on average. Portfolio Summary, Fed. Student Aid, https://studentaid.ed.gov.
Based on the statutory language, case law, and legislative history, as well as the practical realities of the case, the Court held that there is no cause for dismissal of the case. Dismissal would not advance the Congressional intent in creating the debt limits, and would hinder the intent of allowing a fresh start to honest but unfortunate debtors. Nor would dismissal advance the best interest of the creditors or the estate. If the case were converted to chapter 7 unsecured creditors would likely receive no dividend, and if converted to chapter 11 the fees and costs would be too cumbersome for a case such as his. Continuing in chapter 13 would be in the best interest of the creditors and the estate.
Michael Barnett www.hillsboroughbankruptcy.com