Attorneys have Thoughts Too
For as long as I've been practicing bankruptcy law, the argument against allowing a debtor to pay student loans through a chapter 13 plan has always been that doing so would unfairly discriminate against other unsecured creditors in violation of section 1322(b)(1) of the Bankruptcy Code. This was even true when a debtor began their case on an income based repayment plan. While I did not agree with that analysis, that was the lay of the land and the cost usually outweighed the benefit of fighting.
Fast forward to August 1, 2019 (the effective date of the Bankruptcy Court's program), and it appears as though that landscape has changed. Beginning on August 1st, the Bankruptcy Court is implementing a procedure for a Student Loan Modification program (SLM Program) (Administrative Order FLMB-2019-1). For those who are unaware the United States Bankruptcy Court for the Middle District of Florida (the "Bankruptcy Court") has a successful history of implementing programs of this type. The Bankruptcy Court's Mortgage Modification Mediation program ("MMM Program") was one of the first in the country. The MMM Program has been adopted by numerous bankruptcy courts across the country.
The SLM Program appears to use the best feature of the MMM Program, i.e. the parties are required to communicate through a portal system in good faith. The portal system used by the Bankruptcy Court eliminates the "we never received the documents" excuse that creditors normally use in these situations. While I do not anticipate that debtor's will suddenly have a lot of options regarding repayment that they did not have prior to filing bankruptcy, the SLM Program is significant.
First Debtor's are able to pay their student loan payments through their chapter 13 plan. Before the SLM Program, debtors normally could not make payments on their student loans causing them to owe more after bankruptcy then they did going in; robbing them of the fresh start they needed. Now with the SLM Program, debtors are able to work-out an agreement to pay down, potentially an appreciable portion, of that debt. This is significant because in a chapter 13 bankruptcy debtors must pay what their creditors would have received in a chapter 7 (liquidation) or their disposable income, whatever is greater. For debtors who are paying disposable income, theoretically, if they work out a payment plan under the SLM Program, more money would go to pay the non-dischargeable student loan debt instead of the dischargeable unsecured debt leaving them in a much better position. I say "theoretically" because only time will tell if the SLM Program survives challenges by creditors or trustees.
The second reason the SLM Program is significant is that it appears to allow debtors to maintain their IBR plans. Prior to the SLM Program, debtors who had an IBR plan went into deferment and were no longer eligible to continue with the program. Since most of the IBR plans have a feature that forgives the remaining debt after a set period of time, the filing of a chapter 13 bankruptcy would extend the time to forgiveness for 3-5 years. With the implementation of the SLM Program, debtors are no longer penalized for the time they spend in bankruptcy.
The final reason the SLM Program is significant is that it is a concrete step is solving the student loan crisis. While structural changes need to be made in Congress (here's to hoping Congress makes student loans generally dischargeable again), programs like the SLM Program show that courts are will to take the steps necessary to address this crisis within the confines of the law as currently situated. Whether the SLM Program works or not, I thank the Bankruptcy Court for taking the initiative to help fight the problem.
Jeffrey Lampley, Esq.
I am attorney in Southwest Florida who practices in the areas of Business Law and Bankruptcy. This Blog is a combination of useful information and my thoughts on life. Enjoy.