Student Loan Payments Special Circumstance in Means Testing

While paying a student loan outside a Chapter 13 plan may be an option in bankruptcy, student loan debt may help an above median debtor pass the means test and file a Chapter 7.   A monthly student loan payment is a valid additional circumstance allowing a debtor with above-median income to file for Chapter 7 bankruptcy, according to the United States Bankruptcy Court for the Southern District of Indiana, in a decision filed April 16, 2007.  The Trustee’s calculations showed that Brenda Delbecq, a schoolteacher, had $306 per month of disposable income if $327 payments on a 21,000 student loan were excluded, creating a presumption of abuse.

The court disagreed and concluded that Delbecq had no reasonable alternative to making the loan payments.  According to the court, ”the only parties who would benefit from conversion [to Chapter 13] are the Debtor’s Attorney and the Chapter 13 Trustee.”  The court noted that in their jurisdiction the Court has historically allowed separate classification of student loan debt in Chapter 13 plans, so that the other unsecured creditors would receive nothing in any case.   Furthermore, the costs of administering the plan would siphon money away from payments, allowing interest to accrue and increasing the time needed to pay off the student loan.

The Delbecq decision to proceed with a Chapter 7 liquidation provides a clean solution to the alternative - administering a student loan through a Chapter 13 plan, with issues of unfair discrimination versus a repayment plan that adds to total student loan indebtedness.   If “special” is interpreted to mean “unusual”, trustees and unsecured creditors have grounds for a challenge.  The number of people with incomes only slightly above median who have significant student loan debt is huge, and the overlap with those in trouble with credit cards, medical debt, and unsecured second mortgages substantial.

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