Case info: In re Pratola, 2017 WL 6605264, (Bankr. N.D. Ill. Dec. 27, 2017)
Case opinion: Download
TL;DR: You can stay in a chapter 13 even if your unsecured debt exceeds the debt limits if your student loans cause you to exceed § 109(e)’s debt limit.
Trustee’s motion to dismiss: denied.
- ICYMI: Student loans in bankruptcy December 2017 [Baez]
- ICYMI: Student loans in bankruptcy December 2017 [Wiley]
- Everything you need to know about student loans in bankruptcy November 2017
Student loans help debtors avoid chapter 13 debt limits 2017
When he filed his chapter 13 case, Christopher Pratola owed about $447 thousand in federal student loans and another ~$100 thousand in private student loans.
By themselves, Chris’s student loan debt exceeded the 2017 chapter 13 debt limit, which was $394,725 for unsecured debts.1 Because of that, the chapter 13 trustee moved under 11 §§ USC 109(e) and 1307(c) to dismiss his case.
What the court said
In the end, the court allowed Chris to stay in the chapter 13. How it got there is pretty interesting.
The court answered two questions:
- Whether student loan debt that’s subject to an income driven repayment plan is a noncontingent debt under § 109(e); and
- Whether § 1307(c) requires a case be dismissed when a debtor’s student loan debt causes him to exceed the debt limit
Let’s talk about each real quick.
Student loans being repaid under an IDR plan are noncontingent debt
The court answers this question quickly. Chris’s student loans were noncontingent debt. The basic test (at least in the jurisdiction this court is in) to distinguish noncontingent debt from contingent debt is to ask whether the debt existed when the debtor filed bankruptcy (noncontingent) or whether it may exist sometime in the future (contingent).
Chris owed the student loans when he filed his case. It doesn’t matter that they may be forgiven at the end of his IDR plan. What matters is that no future event needs to occur for the student loan debt to exist.
A chapter 13 doesn’t have to dismissed just because debts exceed the debt limit
The court took a little more time to arrive at this point.
Section 1307(c) says that a court may convert a chapter 13 to a chapter 7 or dismiss it for cause. So what exactly is cause?
Under § 1307(c), cause includes things like:
- unreasonable delay;
- failure to file a chapter 13 repayment plan; and
- failure to make a plan payment
Cause also may exist, according to some courts, when a debtor’s unsecured debts exceed the debt limit in violation of § 109(e).
Now, to be clear, dismissal isn’t automatic. The court has some leeway to decide if it should dismiss a case simply because the debtor’s educational debt exceeds the debt limits. That’s what the court did next. It analyzed whether cause existed in Chris’s case.
Student loan debt in excess of the chapter 13 debt limit is not cause to dismiss or convert
The court looked at Congress had to say about debt limits. It looked at the drastic increase in education costs compared to the incremental increase in the § 109(e) debt limits. And it looked at whether allowing Chris to stay in the 13 would be in the best interest of his creditor’s. (It was.)
The court looked at all those things to conclude that there was no cause to dismiss his chapter 13 simply because his student loan debt caused him to exceed the debt limits.
Far reaching, I imagine.
In the years to come, more and more people will file a chapter 13 bankruptcy owing several hundred thousand in student loan debt. That’s a fact. College costs continue to increase at a faster pace than grant aid.
The debt limit means that if your unsecured debt is more than that limit, you cannot stay in a chapter 13 case.↩