§ 707(b)(3) - Deduction of Student Loan Expense from Disposable Income

In re Reimer, Case No. 07-32787 (Bankr. N.D. Ohio February 21, 2008) (J. Speer). The United States Trustee’s Office filed a Motion to Dismiss pursuant to 11 U.S.C. § 707(b)(1) and (3) asserting that the debtors had sufficient disposable income from which to pay their creditors in a hypothetical Chapter 13 repayment plan.

Of particular note was the UST’s contention that the debtors’ deduction of a $400.00 per month student loan payment expense was impermissible. The debtors argued that due to the nondischargeability nature of student loans, they may be treated differently under the Bankruptcy Code when calculating disposable income.

The Court rejected the debtors’ argument, reasoning that although an obligation to pay a debt may survive bankruptcy, that basis, alone, does not entitle a debtor to treat that claim differently. Otherwise, all nondischargeable debts could be entitled to favorable treatment, including those debts that arise from a debtor’s wrongful conduct like fraud, embezzlement, and larceny under 11 U.S.C. § 523(a)(2) or (4). Although there are debts that are nondischargeable that are also entitled to receive favorable treatment, these two classifications are not co-dependent. Thus, just because a claim is nondischargeable, it does not mean the claim is entitled to favorable treatment under the Bankruptcy Code. This was one factor in the Court’s holding that, under the totality of the circumstances, the debtors’ bankruptcy filing constituted an abuse for purposes of § 707(b)(3), and accordingly, unless the debtors voluntarily converted their case, the Court would enter an order of dismissal pursuant to § 707(b)(1).

COMMENT: This opinion highlights an important consideration in cases where disposable income may be an issue. If a debtor is close to the line where a § 707(b) action might be possible when including payments on a student loan in his or her budget, debtor’s counsel might be well advised to take a closer look at the debtor’s budget. As this opinion demonstrates, a court might not be inclined to include payment on a nondischargeable debt as a permissible expense when determining how much money remains available to pay creditors in a Chapter 13 case.