Educational Debt in Excess of §109(e) Debt Limit is Not Cause for Dismissal or Conversion of Chapter 13 Case

Educational Debt in Excess of §109(e) Debt Limit is Not Cause for Dismissal or Conversion of Chapter 13 Case

This matter is before the Court for ruling on the chapter 13 trustee’s motion to dismiss the case of Debtor pursuant to 11 U.S.C. § 1307(c).1 The trustee asserts that there is cause for dismissal because Debtor owes unsecured debt in excess of the $394,725 limit set forth in § 109(e).

From August 2003 to December 2007, Debtor earned an undergraduate degree in interdisciplinary studies at Arizona State University. Subsequently, from January 2008 to June 2012, he earned a graduate degree in cinema and television production at the University of Southern California.  In order to pay for his education, he incurred $374,108 in student loan debt from Federal Student Aid (an office of the U.S. Department of Education); that debt is now serviced by Federal Loan Servicing. In addition, he incurred $194,563 in other student loan debt that is owed to “Aes/Chase Bank” and “Aes/Nct.”

Since March 2014, Debtor has been paying back the educational debt owed to the U.S. Department of Education through an income-based repayment plan (“IBR plan”).  Under the IBR plan, he is making monthly payments that are equal to 10% of his discretionary income for a term of twenty-five years.  Upon completion of the payments, any remaining balance will be forgiven.  However, if Debtor defaults, then the entire remaining balance will become due.  As of May 2017, Debtor’s monthly IBR plan payment was $268.  If his discretionary income increases, then the payment will increase, but it cannot exceed what the payment would be under a standard ten-year plan.  Under such a plan, Debtor’s monthly payment would be $3,655.75.

Since 2013, Debtor has been employed as a “Genius” by Apple, Inc.  In 2015, he earned $41,883; in 2016, he earned $39,504; and in 2017, he is on pace to earn $44,207. His average monthly take-home pay is $2,733, and his average monthly expenses are $2,259, leaving $474 of average monthly disposable income. Debtor’s monthly expenses include, among other things, $825 for rent, $300 for food and housekeeping supplies, $300 for transportation, and $268 for student loan payments. He owns a twelve-year-old car with over 159,000 miles, a few shares of Apple stock, scripts that he has written, and various other items of personal property.

By most standards, Debtor’s income and expenses are modest, and he owns little property. He has a relatively tight budget and seems to have been living from paycheck to paycheck for the last five years. Assuming that Debtor does not experience a dramatic and unforeseen increase in income, he must continue living modestly for the indefinite future.

On April 13, 2017, a little less than five years after completing graduate school, Debtor filed a voluntary petition for relief under chapter 13 of the Bankruptcy Code. In his schedules, he lists $591,223 of unsecured debt.  That amount consists of student loan debt in the amount of $568,671 and credit card debt in the amount of $22,552. Proofs of claim filed in the case total $469,844.42, including a claim for $447,103.99 filed by the U.S. Department of Education.

On April 20, 2017, the trustee filed a motion to dismiss Debtor’s case because he owes unsecured debts in excess of the $394,725 debt limit.

Section 109(e) provides, in relevant part, as follows: “Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $394,725 and noncontingent, liquidated, secured debts of less than $1,184,200 . . . may be a debtor under chapter 13 of this title.” 11 U.S.C. § 109(e). In turn, § 1307(c) provides, in pertinent part, that “on request of a party in interest . . . after notice and a hearing, the court may convert a case under this chapter to a case under chapter 7 of this title, or may dismiss a case under this chapter, whichever is in the best interests of creditors and the estate, for cause . . ..” 11 U.S.C. § 1307(c). Section 109(e) does not provide authority for the Court to dismiss a case; rather, the provision only defines who may be a debtor under chapter 13, 11 U.S.C. § 109(e). Section 1307(c) provides express authority for the Court to dismiss a case for cause on request of a party in interest and after notice and a hearing. 11. U.S.C. § 1307(c).

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