My Bankruptcy Law Network colleague Michael Doan reports that the 9th Circuit Court of Appeals has ruled that the Bankruptcy Code permits debtors to discharge student loan debt in Chapter 13. A San Diego based federal judge relied on the 9th Circuit case to hold that the student loan was dischargeable if the student loan creditor did not object after receiving notice that the plan provided for less than 100% payment to the student loan creditor. The holding of this case – Needelman vs. PHEAA – is available as a download from Michael’s post.
The gist of the judge’s ruling in Needelman is that the Order of Confirmation of the Chapter 13 plan controls treatment of creditors. The judge recognized that the Bankruptcy Code specifically provides that (federally backed) student loans are not subject to discharge absent an adversary proceeding filed by the debtor, but he concluded that the confirmation order that fixed the percentage of payment to unsecured creditor controls the rights of that creditor.
What does this mean to a debtor filing bankruptcy in the Northern District of Georgia?
At this point, I don’t think that this ruling from the 11th Circuit and a California Federal District means that much. At best, a debtor here in Georgia will make the same argument and the case will wind its way through the appeals process to the 11th Circuit Court of Appeals (Georgia is in the 11th Circuit). 9th Circuit law is not binding on federal or bankruptcy courts in the 11th Circuit so the 11th Circuit judges will have to make their own decision.
It is also likely that the United States Supreme Court will decide this issue, which means that the 9th Circuit jurisprudence could be totally overruled.
Now, let’s assume that the 11th Circuit or even the Supreme Court follows the interpretation of the 9th Circuit. We will see Chapter 13 plans that propose less than 100% payment to student loans, and we will see student loan creditors begin to object to these plans on the grounds that student loans are non-dischargeable.
At the end of the day, therefore, we may be looking at a bankruptcy landscape in which lazy student loan creditors lose out but most, I suspect, will adopt procedures to protect their rights.
However, this court decision may reflect a trend in bankruptcy law in general. When BAPCPA was enacted in 2005 the pendulum in the bankruptcy world was swinging far to the benefit of creditors. What we may be witnessing is evidence that this pendulum is swinging back in favor of debtors.