By Ryan C. Wood
When you file a Chapter 13 bankruptcy case it is expected that all your general unsecured creditors will be treated equally. You have to treat your secured creditors and priority unsecured creditors differently but your general unsecured creditors will all be paid the same percentage in your Chapter 13 plan, right? The answer is: it depends.
Pursuant to 11 U.S.C. §1322(b)(1), the Chapter 13 plan may designate different classes of unsecured claims so long as the plan does not unfairly discriminate against the different classes. 11 U.S. C. §1122(a) provides: Except as provided in subsection (b) of this section, a plany may place a claim or an interest in a particular class only if such claim or interest is substantially similar to t he other claims or interests of such class. However, the Chapter 13 plan may treat a claim for a consumer debt differently than other unsecured creditors if there is another person who is also liable for the debt along with the person filing for bankruptcy. The interpretation of this statute varies amongst the different jurisdictions so it is best to consult with a bankruptcy attorney about how your jurisdiction treats this statute.
In the case of In re: Renteria, 470 B.R. 838 (9th Cir. BAP 2012), Ms. Renteria filed for Chapter 13 bankruptcy. In her Chapter 13 plan she proposed to pay her former attorney (whom she owed about $20,000) 100% of the this claim or debt plus 10% interest because her mother personally guaranteed the debt for Ms. Renteria. Her former attorney filed suit against both Ms. Renteria and her mother in state court to recover the funds owed to him and there was currently a default judgment entered against her mother prior to the filing of Ms. Renteria’s bankruptcy case. The Trustee objected to the Chapter 13 plan because he contended the plan unfairly discriminated against the other unsecured creditors since the unsecured creditors will receive 0% repayment in the Chapter 13 plan while the former attorney will receive 100% plus 10% interest despite Section 1322(b)(1) providing the different treatment of co-signed debts. Ms. Renteria filed a declaration to provide more information about the circumstances of the treatment of her former attorney’s debt. She retained her former attorney to help her with a domestic violence and paternity lawsuit. She would not have been able to retain the services of her former attorney without her mother personally guaranteeing the attorney fees and expenses. Ms. Renteria also indicated that since she had no non-exempt assets her other unsecured creditors would not have been in a worse position if she filed a Chapter 7 bankruptcy case. The bankruptcy court overruled the Trustee’s objections and confirmed the case and the Trustee appealed. The Ninth Circuit Bankruptcy Appellate Panel affirmed the lower court’s overrule of the objection to confirmation and confirmed/approved the chapter 13 plan.
Courts are split on the interpretation of the “however” clause in §1322(b)(1). A majority of the courts hold that debts that are co-signed (or co-obligated) by another person still need to clear the unfair discrimination hurdle. A minority of the courts believe that the “however” clause is plain and unambiguous and indicates that co-signor or (co-obligors) claims are exempted from the unfair discrimination rule. The Renteria court examined the construction and placement of the “however” clause. The one thing the courts have concluded is that different courts will disagree on the meaning of the “however” clause. Basic statutory interpretation though requires the word however not be ignored and arguably holding that co-signed debts or claims cannot be treated differently would make the however clause meaningless. The wrong approach to statutory interpretation. The Renteria court then looked at legislative history. The Renteria court examined the cases listed in the legislative history (In re Utter, 3 B.R. 369 (Bk.W.D.N.Y. 1980) and In re Montano, 4 B.R. 535 (Bk.D.D.C. 1980)), and found that Congress was trying to address these two cases in the §1322 statute. In the Utter case, Utter separated out one claim to pay 100% and all other unsecured claims received little to nothing. The 100% claim was due to the fact that Utter’s sister was obligated to the same debt. The court in Utter denied confirmation because the preferential treatment discriminates unfairly against the other unsecured creditors that do not have co-signed debts. In the Montano case, the claims guaranteed by co-signors received 100% payment and all other unsecured creditors received 1% payment. The court listed the same reasoning as the Utter court: that the other general unsecured claims were being unfairly discriminated against.
The Renteria court concluded that Congress wants to permit a person filing a Chapter 13 case to separately classify the debts where a third party is co-obligated to the debt and to prefer the co-obligated debt when facts are similar to In re Utter and In re Montano. This case and many others leave open the rest of Section 1322(b)(1) and when other types of general unsecured debts can be separately classified and treated differently. There is no clear rule or analysis to draw from about what is unfair discrimination. Discrimination is clearly allowed but when does it become unfair is the question to be answered. So far it seems like the unfair part of the discrimination analysis has been rendered meaningless. Most courts deny confirmation of plans any time there is any type of different treatment and have a blanket rule that all discrimination is unfair. This cannot be of course. There has to be some form of discrimination between general unsecured claims that is allowed and held to not unfair discrimination.
If you are thinking of filing a Chapter 13 bankruptcy case that has co-signed debt it is best to consult with Chapter 13 bankruptcy attorneys to help you through the process.