CAN CHAPTER 13 PLAN FAVOR CODEBTOR CLAIMS?

A co-debtor is someone who has shared legal liability with the debtor. Example : you borrow $50,000 from bank X. Your father signs a document that he guarantees your $50,000 loan such that if you fail to pay the loan, he will pay it. You use the money to buy a restaurant which fails. When you file for chapter 13  bankruptcy, your plan proposes to pay the $50,000 in full over 60 months to get your father off the hook, but proposes to pay your credit cards of $100,000 only 25% or $25,000 over 60 months. The Chapter 13 trustee objects to the confirmation of your plan because it discriminates in favor of your father’s personal guaranty. Is the trustee correct?

 In Re Renteria, the debtor owed about $100,000 in unsecured debt, which included about $20,000 owed to her former attorney James Preston. Her plan proposed to fully repay Preston’s claim with annual interest of 10% because the debtor’s mother had guaranteed payment of the attorney’s fees. The debtor’s other unsecured creditors were going to be paid about $7,000, or only 7% while Preston was going to get paid 100%.

 Before 1984, Section 1322(b)(a) of the old bankruptcy code stated that Chapter 13 plan may “designate a class or classes of unsecured claims, as provided in section 1122 of this title, but may not discriminate unfairly against any class so designated…”. But in 1984, the “however clause” was added to Section 1322(b)(1). Congress in 1984 added, “However, such plan may treat claims for a consumer debt of the debtor if an individual is liable on such consumer debt with the debtor differently than other unsecured claims…” It’s clear that if another person is liable on the consumer debt, like a guarantor, together with the debtor, the plan may treat the guaranteed debt differently from other unsecured debt of the chapter 13 debtor.

 A minority of courts, including the bankruptcy court in this case (Bankr.9th Cir.5/14/12), have ruled that the “however clause” carves out co-debtor claims from the requirements of the unfair discrimination rule. The bankruptcy court confirmed this plan over the trustee’s objection, finding that Section 1322(b)(a) did not apply to co-debtor claims. The majority of courts note that the “however clause” allows co-debtor claims to be treated differently than other unsecured claims, but does not say that the plan may discriminate in their favor. Because different words were used, these courts find that different meanings were intended and conclude that Congress did not intend the “however clause” to completely exempt co-debtor claims from the unfair discrimination rule.

“…we conclude that the trustee’s appeal here must fail. The record reflects that the trustee only objected to Renteria’s plan because she proposed to pay a 100% dividend to Preston and little or no money to her other unsecured creditors. There were no disputed facts, and Renteria’s explanation for why she needed to prefer Preston – to prevent Preston from collecting from her mother as the guarantor of Renteria’s debts – was uncontested. Renteria also represented that she had no additional net income to pay any greater dividend to her general unsecured creditors, and the trustee did not challenge that representation. Furthermore, the trustee waived or conceded all other confirmation issues. Whatever else the “however clause” may or may not do, a court may not deny confirmation of a plan under Section 1322(b)(1) solely because the plan prefers a co-debtor consumer claim over all other unsecured claims.”

Writing for the majority, Judge Markell acknowledged that the panel’s ruling did not resolve where to draw the line between the “however clause” and the unfair discrimination rule.”We intentionally have left unanswered the question of when (if ever) does the preferential treatment of a co-debtor consumer claim violate the unfair discrimination rule. We decline to answer that question until we receive an appeal with a record and issues squarely presenting that question for decision,” he said. So, chapter 13 plans may not be denied confirmation solely because the plan discriminates in favor of co-debtor obligations.

 Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than five thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.