Opinion
Case No. 00-33272-S
October 6, 2000
MEMORANDUM OPINION
This matter is before the court on the court's own motion for a hearing on confirmation of plan and to show cause why this case should not be converted or dismissed for lack of good faith if the plan is denied.
FACTS
This Chapter 13 case was filed on June 6, 2000. Debtor's plan, filed June 27, 2000, included a provision in which Henrico Federal Credit Union, an unsecured creditor, was to be paid 100% while other unsecured creditors would be paid 17%. The reason stated for this favorable discrimination was "co-signer." On August 30, 2000, this court entered an Order directing debtor to come forward with evidence that this discrimination was fair and to satisfy the four factor test previously adopted by this court in In re Martin, 189 B.R. 619 (Bankr.E.D.Va. 1995). On September 20, 2000, hearings were held on confirmation of plan and to show cause why the case should not be converted or dismissed in the event that debtor failed to meet her burden under 11 U.S.C. § 1322(b)(1) and Martin.
The four factors are: (1) whether the discrimination has a reasonable basis; (2) whether the debtor can carry out a plan without such discrimination; (3) whether such discrimination is proposed in good faith; and (4) the treatment of the class discriminated against.
DISCUSSION
It is undisputed that § 1322(b)(1) provides that a plan to designate a class of unsecured claims so long as the classification does not discriminate unfairly against any other class. Some confusion, however, has arisen over the second clause in § 1322(b)(1) that states "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." Some courts have interpreted the second clause in § 1322(b)(1) as creating an exception to the otherwise applicable unfair discrimination test if the discrimination involves a co-signed consumer debt. This court, however, agrees with the line of cases that interprets the second clause in § 1322(b)(1) as requiring the debtor to meet the unfair discrimination test. See In re Martin, 189 B.R. 619, 627 (Bankr.E.D.Va. 1995); see also In re Cheak, 171 B.R. 55, 57-58 (Bankr.S.D.Ill. 1994), In re Battista, 180 B.R. 355, 358 (Bankr.D.N.H. 1995). This court has previously adopted a four-factor test with which to analyze unfair discrimination pursuant to § 1322(b)(1). See In re Martin, 189 B.R. at 627.
At the September 20 hearing debtor did not present testimony sufficient to meet the four-factor unfair discrimination test. The evidence before the court was that debtor's mother co-signed on this consumer debt so that debtor could buy a car. Debtor testified that she wished to pay this loan in full to protect her mother's credit. However, debtor further testified that her mother was employed at Hartford Insurance Company, but "had no clue" as to her salary. When asked by the court why her mother could not pay the debt, debtor stated that she felt as though it was her responsibility to repay the loan because her mother had not derived any benefit from the loan.
Testimony that debtor's mother co-signed on a consumer debt, in and of itself, is not a sufficient basis for the court to determine the plan fairly and reasonably discriminated against other general unsecured creditors of the estate, particularly in light of the fact that no evidence exists that the mother is unable to pay any portion of the co-signed debt. Therefore, because debtor failed to meet her burden under § 1322(b)(1) and Martin, the plan filed June 27, 2000, is DENIED.
Following receipt of the court's objection to the June 27 plan debtor filed an amended plan on September 19, 2000. The amended plan also contained a provision in which Henrico Federal Credit Union would be paid 100%. The reason stated for this discrimination was "co-signer, consumer debt (mother)." Again, this not a sufficient basis for the court to determine whether or not this discrimination is fair and reasonable. Although debtor's modified plan is not before the court, it is prospectively DENIED for failing to meet the burden under § 1322(b)(1) and Martin.
Finally, debtor was before the court on a hearing to show cause why the case should not be converted or dismissed for lack of good faith in the event that the June 27 plan was denied. This matter is to be CONTINUED GENERALLY in order to allow debtor to file a modified plan that satisfies the requirements of § 1322(b)(1) and Martin.
An appropriate order will enter.