Unfair Discrimination in Chapter 13-Part 1

28 Dec Unfair Discrimination in Chapter 13-Part 1

First of all, the type of discrimination referred to in the title of this post pertains to creditor claims. In general, creditor claims of the same class must be treated the same in a Chapter 13 bankruptcy. Broad classes of claims include priority, general unsecured, and secured claims. Trouble can start when a debtor proposes to treat creditors of the same class differently. This is because the Bankruptcy Code prohibits unfair discrimination among similarly classed creditors. This is sometimes implicated when it comes to student loans. Student loans are almost always nondischargeable in bankruptcy, however they are still classified as general, unsecured claims–just like credit card debts. Consequently, when a debtor proposes to continue direct payments to a student loan lender and pay credit card creditors only a small percentage of what they are owed, the bankruptcy trustee will sometimes object to this treatment on unfair discrimination grounds. It is very difficult to prevail in the face of such an objection, but one sometimes can. I represented a debtor in 2007 who was allowed, over the trustee’s objection, to continue direct student loan payments. See In re Machado, 378 B.R. 14, (Bkrtcy.D.Mass. 2007). However, the Court’s ruling allowing this was unusual and fact-specific. The Court’s ruling can be accessed here (requires pdf reader).

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