Ivana Machado

In re
IVANA MACHADO,
Debtor
U NITED STATES BANKRUPTCY COURT
D ISTRICT OF MASSACHUSETTS
Chapter 13
Case No. 06-13013-RS
MEMORANDUM AND ORDER
The Debtor has proposed a plan that (a) discriminates in favor of nondischargeable
student loan debt and against other nonpriority unsecured debt and (b) excludes certain cure-and-
maintain payments on long-term unsecured debt from the Chapter 13 trustee’s statutory
compensation (“Plan”). The trustee objects to both provisions of the Plan (“Objection”). For the
reasons and to the extent set forth below, the Court finds no unfair discrimination and no fault in
the Debtor’s payment of maintenance payments directly to the creditors, instead of through the
trustee, but the Court sustains the Objection because the plan fails to channel cure payments
through the Chapter 13 trustee and to provide for payment of the trustee’s fee on such cure
payments.
Plan
The Debtor’s non-priority unsecured debt amounts to $48,034 comprised of $21,084 in
non-dischargeable student loan claims and $26,950 in other unsecured claims. The Debtor also
has $12,000 in tax priority debt and $1,800 in administrative expense priority debt.
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1 Though a below-median income debtor with an applicable commitment period of
thirty-six months, the Debtor proposes a longer term for the Plan, primarily to permit full
payment of the tax priority claim. See 11 U.S.C. §1325(b)(4)(A)(i).
2 The record does not reflect the cure amount or the allocation of the $250 between cure
payments and maintenance payments. Any dispute regarding the amount or allocation would be
subject to further process herein.
2
The Plan has a sixty-month term. 1 The Plan provides so-called “cure and maintain”
treatment of the Debtor’s student loan debt, directly paying $250 per month for sixty months to
the student loan lenders. 2 Under this treatment, the student loan debt would not be fully paid
through or during the term of the Plan. By contrast, the Plan provides for a pro rata distribution
on account of the Debtor’s other unsecured debt, paying through the Chapter 13 trustee $276.20
per month for sixty months, resulting in a 4.14% dividend during the Plan term with the balance
discharged upon Plan completion. Lastly, the Plan excludes the payments made by the Debtor
directly to the student loan lenders from the percentage fee component of the trustee’s statutory
compensation.
The Positions of the Parties
The trustee contends that there is no basis for the separate classification and different
treatment of the student loan debt and the other unsecured debt; that the differential between the
payment of the former and the 4.14% dividend for the latter constitutes unfair discrimination;
and that the student loan debt should be paid through her (and not “outside the plan”), thus
subjecting those payments to her statutory percentage fee.
The Debtor responds that long-term debt may be treated differently than short-term debt
in a plan; that maximizing debt reduction is a legitimate bankruptcy goal, reinforcing her fresh
start; that, absent the different treatment of unsecured debt, she would face many years of
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3 “[T]he plan may . . . designate a class or classes of unsecured claims...but may not
discriminate unfairly against any class so designated[.]” 11 U.S.C. §1322(b)(1) (emphasis
added).
4 “[T]he plan may . . . provide for the curing of any default within a reasonable time and
maintenance of payments while the case is pending on any unsecured claim or secured claim on
which the last payment is due after the date on which the final payment under the plan is due[.]”
11 U.S.C. §1322(b)(5) (emphasis added).
3
interest accruals and default on her student loan debt, undermining that fresh start; that she is
dedicating to the Plan five years’ disposable income not three years’ as she might otherwise do,
reflecting her good faith in proposing the Plan; that the Plan increases the prospect of full
payment of her non-dischargeable student loan debt, thereby furthering an identified legislative
goal; and that direct payments to creditors are permitted under a plan and, if permitted, are
properly excluded from trustee’s percentage fee compensation.
Unfair Discrimination
The resolution of the discrimination dispute implicates two provisions of the Bankruptcy
Code: first, the provision that permits separate classification and treatment of unsecured claims
so long as there is no unfair discrimination against any class3; and second, the provision that
permits cure and maintain treatment of secured and unsecured long-term debt.4 It is clear that
the Debtor may employ cure and maintain treatment under Section 1322(b)(5) for the her student
loan debt given the occurrence of prepetition defaults and original loan maturity dates after the
final Plan payment date. See 8 Collier on Bankruptcy ¶1322.09[2] (15th ed. rev.). See also In re
Saulter, 133 B.R. 148 (Bankr. W.D. Mo. 1991). Nonetheless, the treatment of student loan debt
under Section 1322(b)(5) must not discriminate unfairly as against the Debtor’s other unsecured
debt. See In re Chandler, 210 B.R. 898, 901 (Bankr. D. N.H. 1997); In re Coonce, 213 B.R.
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344, 347 (Bankr. S.D. Ill. 1997). In determining whether any such discrimination is fair or not,
courts consider various factors, applied to the circumstances of each particular case. These
factors are variously formulated but bear upon the equitable allocation of plan resources and the
furtherance of underlying policy objectives. See In re Thibodeau, 248 B.R. 699 (Bankr. D.
Mass. 2000); In re Bentley, 266 B.R. 229 (1st Cir. BAP 2001).
Four considerations inform my decision in this matter. First, Congress, by its exception
of student loan obligations from discharge, has long made clear the legislative objective of
student loan repayment. The Plan treatment of the Debtor’s student loan debt furthers the goal
by routing Plan resources toward such repayment in accordance with the stated Code provisions.
Second, for debts whose terms extend beyond the period of a chapter 13 plan—often
including, precisely because of their nondischargeability, student loan obligations—Congress
has further expressly permitted a debtor to elect to cure and maintain that debt. Here, the Debtor
has elected this option, which channels only so much money to the student loan creditors as is
necessary to cure the prepetition arrearage and ensure that she will not emerge from bankruptcy
in arrears on these obligations. If she were to forego this option and pay an equal percentage to
both student loan creditors and other nonpriority unsecured creditors, she would emerge from
bankruptcy more deeply in arrears than she went into bankruptcy, a result that cannot be fair to
her or consistent with the evident intent behind sections 523(a)(8) and 1322 (b)(5).
Third, the financial differential resulting from the proposed discrimination is modest.
The Debtor’s applicable commitment period (and thus plan term) is thirty-six months. If she
dedicated the combined $276.20 and $250 to the entire $43,084 pool of unsecured debt (as
advocated by the trustee) for that period, the dividend on all unsecured claims would be 6.76%,
or approximately $700 more than the 4.14% provided in the Plan for the non-student loan claims.
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5 “[T]he plan shall . . . provide for the submission of all or such portion of future
earnings or other future income of the debtor to the supervision and control of the trustee as is
necessary for the execution of the plan[.]” 11 U.S.C. §1322(a)(1) (emphasis added).
6 “Unless the court orders otherwise, the debtor shall commence making payments not
later than 30 days after the date of the filing of the plan or the order for relief, whichever is
earlier, in the amount . . . proposed by the plan to the trustee[.].” 11 U.S.C. §1326(a)(1)
(emphasis added).
7 “If a plan is confirmed, the trustee shall distribute [plan payments] in accordance with
the plan as soon as practicable.” 11 U.S.C. §1326(a)(2).
“Except as otherwise provided in the plan or in the order confirming the plan, the trustee
shall make payments to creditors under the plan.” 11 U.S.C. §1326(c) (emphasis added).
8 “Before or at the time of each payment to creditors under the plan, there shall be paid
. . . if a standing trustee is serving . . . the percentage fee fixed for such standing trustee under
5
I find no unfairness in this differential warranting denial of Plan confirmation.
Fourth, perhaps reflective of that modest differential, no holder of a non-student loan
unsecured claim has objected to the treatment of such claims under the Plan.
Taking into account the identified policy considerations, the available resources, the
foregoing allocation among the plan constituencies, and the absence of objection by any affected
creditor, I find that, in the circumstances of this case, the proposed discrimination as against non-
student loan claims is fair.
Trustee’s Percentage Fee
The resolution of the percentage fee dispute implicates several provisions of Title 11
(Bankruptcy Code) and related provisions of Title 28 (Judicial Code): first, the provision that
requires the Debtor to remit her future earnings and income to the trustee for execution of the
plan5 ; second, the provisions that fix the timing of plan payments from a debtor to the trustee 6
and from the trustee to creditors 7 ; and third, the provisions that fix the timing of payment 8 and
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section 586(e)(1)(B) of title 28[.]” 11 U.S.C. §1326(b)(2).
9 “The Attorney General...shall fix [for the standing trustee] a percentage fee not to
exceed...ten percent...” 28 U.S.C. §586(e)(1)(B).
“[The standing trustee] shall collect such percentage fee from all payments received by
such [standing trustee] under plans in cases under chapter 12 or 13 of title 11 for which such
[standing trustee] serves[.]” 28 U.S.C. §586(e)(2).
10 I am mindful that Judge Kenner determined, in In re Harris, 200 B.R. 745 (Bankr. D.
Mass. 1996), that, where payments under a plan on a bifurcated secured claim were to be made
from future earnings or income of the debtor, such payments (both unsecured and secured) must
be made through the trustee. Here, the student loan claims are neither bifurcated nor secured.
Moreover, as Judge Kenner observed, considering Section 1126(c): “the Code clearly
contemplates that, in some circumstances, the debtor may make his or her plan payments directly
to creditors.” Harris, 200 at 748. I find such circumstances in this case and do not consider that
decision as contrary to Harris.
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the calculation9 of the trustee’s percentage fee compensation.
These provisions make clear that plan payments through the trustee are the norm; that
such plan payments through the trustee are subject to the trustee’s percentage fee; that,
notwithstanding the norm, plan payments directly to a creditor are permissible; and that, if such
direct-to-creditor plan payments are permitted, they are not subject to the trustee’s percentage
fee.10
The question then becomes whether plan payments directly to creditors should be
permitted in the circumstances of this case. On the answer to that question will turn the question
whether the trustee’s percentage fee applies.
Here, the plan proposes cure and maintain treatment for the class of non-dischargeable
student loan debt, effectuating that treatment by curing prepetition defaults, thus reinstating
original loan terms, and by resuming contract payments during the case, with such cure and
maintenance payments made directly to creditors. The former payments are modified by the Plan
in that the Debtor is permitted to cure such payment defaults within a reasonable time,
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reinstating the debt to its pre-default status. The latter payments are not modified by the Plan in
that the Debtor will simply resume, and continue to make, payments in accordance with the
reinstated contract terms. I find that distinction—between payment defaults modified by the
Plan and maintenance payments not modified but rather resumed—a basis for determining
whether payment should be made directly to creditors by the Debtor or by the Debtor through the
trustee. See 8 Collier on Bankruptcy ¶ 1322.09[4] (15th ed. rev.). More particularly, I further find
that, in the circumstances of this case, the cure component of the cure and maintain treatment is
properly made through the trustee (and such cure payments are subject to the trustee’s
percentage fee), and that the maintenance component of the cure and maintain treatment is
permissibly made directly to creditors (and such maintenance payments are not subject to the
calculation of the trustee’s percentage fee). See In re Lopez, 373 B.R. 40 (9 th Cir. BAP 2007)
(debtor may act as disbursing agent for maintenance payments on long-term debt).
Conclusion
The Court finds that the discrimination in the Plan against the class of non-student loan
claims does not constitute an unfair discrimination warranting denial of confirmation; that the
cure payments on student loan claims under the Plan must be made through the trustee and are
thus subject to the trustee’s percentage fee; and that the maintenance payments on student loan
claims under the Plan may be made directly to the student loan lenders and, if so made, are thus
not subject to the trustee’s percentage fee. Since the Plan does not fully meet those criteria, it
cannot be confirmed.
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Order
For the foregoing reasons, the Objection is hereby sustained. The Debtor shall file any
amended plan by November 30, 2007.
Date: November 6, 2007 	_______________________________
Robert Somma
United States Bankruptcy Judge
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