Judge Karlin

13-40602 Knowles (Doc. # 47) - Document Text

SIGNED this 4th day of November, 2013.



In re:
Daniel Lee Knowles Case No. 13-40602
Tiffany Ann Knowles, Chapter 13


Memorandum Opinion and Order Overruling in Part and Sustaining in
Part the Trustee’s Objection to Plan Confirmation

Debtors seek confirmation of a Chapter 13 plan1 that treats debts owed to two
unsecured creditors—a student loan creditor and the Kansas Department of Labor
(KDOL)—dramatically more favorably than the debts they owe to their many other
general unsecured creditors. Debtors’ plan also calls for them to retain and fully pay
for a third, non-exempt vehicle for their two-person household, while also paying for
the two vehicles they elected to exempt. The chapter 13 trustee (the Trustee) objects
to all of these proposals.

1 Doc. 2.

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The Court overrules in part and sustains in part the Trustee’s objection to plan
confirmation. The Code, since being amended in 2005, only prohibits above-median
income debtors from voluntarily paying nondischargeable student loan debt using
discretionary income outside of a plan when all projected disposable income, as defined
by the Code, is paid into a plan when unfair discrimination results from such
treatment. The treatment of the student loan creditor in this case does not create
unfair discrimination under 11 U.S.C. § 1322(b)(1) if Debtors are not accelerating the
repayment of the student loan. Debtors’ treatment of the KDOL claim, however, does
unfairly discriminate against similarly situated creditors, and the Trustee’s objection
to this part of the plan is therefore sustained. The Trustee’s objection to Debtors’
planned retention of a third vehicle is also sustained, as Debtors did not carry their
burden to show that this plan provision was filed in good faith under 11 U.S.C. §

Because of these rulings, Debtors’ plan cannot be confirmed. Debtors must file
an amended plan consistent with this decision within 21 days of the entry of this
Memorandum Opinion if they wish to remain in a Chapter 13 proceeding.

I. Factual and Procedural History
The parties stipulate to the following facts,2 which are supplemented by record

2 Doc. 28 (Stipulations of Fact). On July 24, 2013, I set a deadline for the parties tostipulate to all facts they could stipulate to by August 14 (rejecting Debtors’ counsel’spreferred procedure that required the Trustee to file a summary judgment motion). OnAugust 14, the Trustee filed a Motion to Extend the deadline to file stipulations (Doc. 27),
noting that while the Trustee had tried, in good faith, to meet the August 14 deadline bysending proposed stipulations to Debtors’ counsel 6 days earlier, and soliciting similarstipulations from him, Debtors’ counsel had refused to stipulate to the Trustee’s facts or to


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evidence. Debtors filed this Chapter 13 bankruptcy in May 2013 and scheduled a total

of $65,075 in unsecured claims, $40,598 in secured clams, and $268 in priority

unsecured claims. While Debtors’ plan will pay no dividend to general unsecured

creditors, it will pay for three vehicles, with the Trustee’s discount rate of interest, as


Creditor Capital One – collateral 2010 Nissan, with debt of $11,100 andvalue of $11,000, proposing to pay the full debt at $208.20 a month;

Creditor Chase Auto – collateral 2006 Ford F-150, with debt of $15,698
and value of $10,866, proposing to pay the full debt at $294.45 a monthbecause Chase Auto is a “910” creditor; and

Creditor HD Credit – collateral 2011 motorcycle, with debt of $13,800 andvalue of $11,375, proposing to pay full debt at $258.85 a month becauseHD Credit is a “910” creditor.
The plan also provides full payment of the anticipated $4,793 KDOL claim as a special

class.3 Debtors’ schedules list student loan debt owed to Direct Loan Servicing System

offer any of his own. Counsel’s main basis for refusing to stipulate, originally, was thatmost of the facts the Trustee sought to stipulate could be found if I simply combed throughthe pleadings on file for the information. I conducted a status conference on August 15,2013, and confirmed that while Debtors’ counsel still disagreed with my order to stipulateto the relevant facts (and if the parties disputed any material facts, we’d have anevidentiary hearing solely on the limited disputed facts), he did not actually dispute any ofthe Trustee’s offered facts, and did not need any additional facts of his own. As a result,
Debtors’ counsel ultimately agreed to sign the Stipulation of Facts that the Trustee hadoriginally presented to him. This is fairly summarized in an Order I signed on August 16,2013 (Doc. 29, noting “The parties have indicated agreement to the facts circulated.”). At notime since (other than to present additional evidence about retention of the third, nonexempt
vehicle, as the parties agreed) have Debtors indicated a desire to present additionalevidence.

3 Although KDOL has not yet filed a claim (the government bar date doesn’t expireuntil November 13, 2013), this opinion will refer to its “claim” as opposed to its “debt” forconsistency.


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for $33,975 and to U.S. Department of Education for $1028.4 The plan provides to pay
those student loans pro rata with other general unsecured creditors, but Debtors do not
expect that any portion of the payments they promise to make to the Trustee will ever
reach any unsecured creditor except for KDOL.

Debtors’ plan payment is $980 per month. Debtors are above-median income and
thus their applicable commitment period is 60 months.5 Debtors’ budget reflects
$1051.25 in monthly net income, although Mr. Knowles admitted at trial that his
Schedule J overstates his true motorcycle insurance costs by close to $100 each month.6
Debtors’ monthly expenses include, but are not limited to: $300 for transportation (not
including car payments); $250 for auto insurance; $56.56 for motorcycle insurance; $75
for auto tags and taxes; and $500 for “student loan repayments to Fed Loan, UNL.”
Over the life of Debtors’ plan, they will thus spend $18,000 for transportation (not
including the note payments, which total approximately $42,000), $15,000 for auto
insurance, $3393.60 for motorcycle insurance, $4500 for auto tags and taxes, and
$30,000 for student loan debt repayment.

The Trustee generally objects to confirmation of Debtors’ plan on the basis that

4 Of these two student loan creditors, only the U.S. Department of Education hasfiled a claim, for $35,058.61 (Claim number 13).

5 See 11 U.S.C. § 1325(b)(4) (requiring payments of projected disposable income fornot less than five years if the current monthly income of the debtors is above the medianfamily income for that state).

6 At the time of filing, Debtors were paying $150/mo for motorcycle insurance. Theyhave since switched insurers and now pay $56.56/month, but have not amended theirSchedule J to reflect this savings.


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it does not comply with 11 U.S.C. § 1322(b)(1) because the plan unfairly discriminates

against classes within the plan. The Trustee then stated three bases for his objection

to confirmation: (1) Debtors’ direct payment of $500 per month for student loan debt

results in unfair discrimination against other unsecured creditors; (2) there is no legal

basis for separate classification of the KDOL claim as a special class; and (3) Debtors

are unnecessarily retaining the 2011 motorcycle when they are already paying to

retain two other vehicles.7 Debtors’ response, filed by their retained counsel, contains

only one sentence: “COME NOW debtors and object to the motion to dismiss and show

that the Trustee is dead wrong in the position he has taken and debtors will soon show


I have fully considered the parties’ briefs, the Stipulation of Facts, and the

evidence received at trial on the issue of the motorcycle retention.9 As a preliminary

7 Doc. 18.

8 Doc. 21. This response is wholly unacceptable. It does not provide the Trustee orme with a single factual or legal basis for Debtors’ position, and, in fact, does all parties adisservice by delaying the proceedings. The response shows a lack of preparation andindicates that there was no inquiry into, or true analysis of, the factual and legal elementsof the issues by Debtors’ counsel. Furthermore, Debtors’ counsel’s refusal to enter into goodfaith stipulations of fact by the August 14 deadline, until I had to intervene and conduct ahearing, is similarly unprofessional and cannot be tolerated. Counsel for Debtors is warnedto not file any similar pleadings in this Court, or to again refuse to cooperate when orderedto provide a Court with reasonable stipulated facts, without risk of a referral to the KansasBoard for Discipline of Attorneys for violations of the Kansas Rules of Professional Conduct.
Counsel can (and must) be both professional and courteous while also protecting his clients’rights. See In the Matter of the Kansas Bar Association’s Pillars of Professionalism
Memorandum and Order, adopted by both the District and Bankruptcy Courts in thisDistrict on October 19, 2012.

9 Doc. 31 (Brief in Support of the Chapter 13 Trustee’s Objection to Confirmation);
Doc. 32 (Debtors’ Response); Doc. 33 (Chapter 13 Trustee’s Reply Brief).


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matter, I find this Court has jurisdiction to decide this matter,10 as it is a core


Debtors, as the proponents of the plan, bear the burden of proof to show that

their plan is confirmable.12

Unfair Discrimination — Payment of Student Loans and the
Kansas Department of Labor as Special Classes
Section 1322(b)(1) of Title 11 permits a chapter 13 plan to “designate a class or

classes of unsecured claims;” the plan, however, “may not discriminate unfairly against

any class so designated.” Generally stated, § 1322(b)(1) permits the designation of

separate classes of unsecured claims and different treatment of the separate classes,

as long as the classification does not cause “unfair” discrimination.13 The Court has

10 This Court has jurisdiction pursuant to 28 U.S.C. § 157(a) and 11 U.S.C. § 1334(a)
and (b) and by operation of a Standing Order dated August 1, 1984, effective July 10, 1984,
referenced in D. Kan. Rule 83.8.5, wherein the District Court for the District of Kansas
referred all cases and proceedings in, under, or related to Title 11 to the Districts’bankruptcy judges.

11 See 28 U.S.C. § 157(b)(2)(A) and (L) (stating that “matters concerning theadministration of the estate” and the “confirmation of plans” are core proceedings that abankruptcy judge has jurisdiction to hear and determine).

12 See Alexander v. Hardeman (In re Alexander), 363 B.R. 917, 921–22 (10th Cir.
BAP 2007) (generally assigning burden of proof for confirmation to plan proponent).

13 Although not clear, Debtors may be arguing that § 1322(b)(1) does not apply totheir preferred treatment of the student loan creditors via direct payment, because the planitself does not directly classify the student loan creditor separately. I find that the directpayment to the student loan creditor outside of Debtors’ plan is the equivalent of a separateclassification for purposes of § 1322(b)(1). See, e.g., In re Sharp, 415 B.R. 803, 807 (Bankr.

D. Colo. 2009) (stating that “classifications are not always explicit” and that “[c]ourts haverecognized that a payment to a creditor ‘outside the plan’ can amount to an implicitclassification, even though not specifically referenced in the plan”); In re Renteria, Case No.

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wide discretion in determining whether proposed discrimination is unfair

The Bankruptcy Code does not define when a plan classification causes unfair
discrimination, and courts have struggled to define the limits of unfair discrimination
under § 1322(b)(1). The D.C. Circuit, the first Circuit to address unfair discrimination
under § 1322(b)(1), simply stated:

[A]n inquiry into fairness plainly involves more than the rationality of thedebtor’s classifications or some minimum amount creditors must receive.
What constitutes fair discrimination will vary from case to case, and wecannot offer a generally applicable definition. The court must examine theamounts proposed for each class in light of the debtor’s reasons forclassification, and exercise sound discretion.15

Other appellate courts, however, have attempted to offer a “generally applicable
definition” through the use of multi-factor tests.

For example, the First Circuit BAP, in Bentley v. Boyajian (In re Bentley), 16
directed courts to look to “the principles and structure of Chapter 13 itself” for “the
baseline against which to evaluate discriminatory provisions for fairness.”17

11-25510 MER, 2012 WL 1439104, at *1 (Bankr. D. Colo. Apr. 26, 2012) (stating that“payment to . . . a student loan creditor, ‘outside the plan,’ i.e., as a recurring expense notcovered by the plan provisions or paid through the Chapter 13 trustee, can constitute animplicit classification”).

14 Labib-Kiyarash v. McDonald (In re Labib-Kiyarash), 271 B.R. 189, 196 (9th Cir.
BAP 2001).

15 Barnes v. Whelan (In re Barnes), 689 F.2d 193, 201–02 (D.C. Cir. 1982).

16 266 B.R. 229 (1st Cir. BAP 2001).

17 Id. at 240.


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Specifically, the Bentley court looked at (1) equality of distribution; (2) nonpriority of

student loans; (3) mandatory versus optional contributions (a comparison of what the

dischargeable unsecured creditors would receive in a pro rata distribution of the

mandatory contribution under chapter 13); and (4) the debtor’s fresh start.18 Under this


When a plan prescribes different treatment for two classes but, despitethe differences, offers to each class benefits and burdens that are
equivalent to those it would receive at the [statutory] baseline, then thediscrimination is fair. On the other hand, when the discrimination alters
the allocation of benefits and burdens to the detriment of one class, the
discrimination is unfair and prohibited.19

The Seventh Circuit also appears to favor the Bentley approach. In In re Crawford, 20

the Seventh Circuit cited the Bentley opinion and then stated:
[T]his is one of those areas of the law in which it is not possible to dobetter than to instruct the first-line decision maker, the bankruptcyjudge, to seek a result that is reasonable in light of the purposes of therelevant law, which in this case is Chapter 13 of the Bankruptcy Code;
and to uphold his determination unless it is unreasonable (an abuse ofdiscretion).21
The Eighth Circuit and Ninth Circuit BAP use a different four-part test, referred

to as the Leser/Wolff test,22 to determine whether separate classification results in

18 Id. at 240–42.
19 Id. at 240.
20 324 F.3d 539 (7th Cir. 2003).
21 Id. at 542.
22 Mickelson v. Leser (In re Leser), 939 F.2d 669 (8th Cir. 1991); AMFAC Distribution

Corp. v. Wolff (In re Wolff), 22 B.R. 510 (9th Cir. BAP 1982).


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unfair discrimination. Under this test, the court is directed to ask: “(1) whether the

discrimination has a reasonable basis; (2) whether the debtor can carry out a plan

without the discrimination; (3) whether the discrimination is proposed in good faith;

and (4) whether the degree of discrimination is directly related to the basis or rationale

for the discrimination.”23

The Tenth Circuit has not considered this issue,24 and bankruptcy courts in this

Circuit have used both the Bentley test25 and the Leser/Wolff test.26 Although it seems

that the Leser/Wolff test may be followed by a majority of courts,27 this Court believes

that the Bentley test more accurately reflects the statutory scheme established by

23 In re Leser, 939 F.2d at 672; In re Wolff, 22 B.R. at 512. More recent cases from
the Eighth and Ninth Circuit BAP applying the Leser/Wolff tests are Groves v. LaBarge (In
re Groves), 39 F.3d 212 (8th Cir. 1994); Copeland v. Fink (In re Copeland), 483 B.R. 534 (8thCir. BAP 2012); In re Labib-Kiyarash, 271 B.R. at 194–96.

24 Even if the Tenth Circuit had specified the use of a particular test, the existingmulti-factor tests are not without criticism. Some courts have noted that the multi-factor
tests that have been developed to define unfair discrimination are not entirely satisfactorybecause they are essentially totality of circumstances tests, “running the risk of beingdepicted as an ad hoc, potentially purely subjective determination.” See, e.g., In re Sharp,
415 B.R. 803, 807–08 (Bankr. D. Colo. 2009) (discussing criticism of tests for determiningunfair discrimination). And as noted by one commentator, “numerous authorities havesuggested that the multi-factor tests boil down to nothing more than a test ofreasonableness.” Stephen L. Sepinuck, Rethinking Unfair Discrimination in Chapter 13, 74
Am. Bankr. L.J. 341, 360 n.113 (2000).

25 See, e.g., In re Stull, 489 B.R. 217, 220 (Bankr. D. Kan. 2013) (applying Bentleytest); In re Mason, 300 B.R. 379, 387 (Bankr. D. Kan. 2003) (concluding that the Bentleytest “is most loyal to the objective goals and motivations of Chapter 13 and the BankruptcyCode”).

26 See, e.g., In re Anderson, 173 B.R. 226, 229 (Bankr. D. Colo. 1993) (applying four-
part Leser test); In re Perkins, 55 B.R. 422, 425–26 (Bankr. D. Okla. 1985) (same).

27 See In re Towler, 493 B.R. 239, 244 (Bankr. D. Colo. 2013) (calling the Leser/Wolff
test the “most prominent” of the multi-factor tests for unfair discrimination under §


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chapter 13 and the spirit of the Code. As a result, I will use it to help determine
whether Debtors’ plan results in unfair discrimination.

Here, Debtors have discriminated in favor of two unsecured creditors—a student
loan creditor and the KDOL. With regard to the student loan creditor, Debtors propose
pro rata distribution along with other unsecured creditors (which admittedly is
predicted to result in the Trustee paying zero dollars to any unsecured creditor), plus
an additional $500 per month Debtors will pay directly to the student loan creditor out
of the income not devoted to the plan payment. With regard to Creditor KDOL, Debtors
propose a special class to fully pay the anticipated $4,793 claim, which arose from
overpayment of unemployment compensation to one of the Debtors.

The Trustee argues that Debtors’ treatment of these creditors unfairly
discriminates against other unsecured creditors, because the student loan creditor
would be paid almost in full and the KDOL claim would be paid in full, while the
remaining unsecured creditors would receive nothing. And while the Trustee
acknowledges that Debtors’ student loan debt is nondischargeable, he argues that this
fact, alone, is insufficient to justify separate treatment. He argues that if payments
were instead shared pro rata among all unsecured creditors, the dividend to all
unsecured creditors would be 51% (rather than zero, as currently proposed). Finally,
the Trustee argues that pro rata payment to the student loan creditor in addition to
direct payment is doubly unfair because if pro rata distribution to unsecured creditors
would occur, perhaps due to non-filing of claims, earlier payment of secured claims, an
inheritance, or the like, the student loan creditor would receive dual favorable


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With regard to the treatment of the student loan creditor, Debtors respond that
the superior treatment of the student loan creditor is not unfair because that debt is
nondischargeable. They argue that paying nearly all of the debt during the plan would
enhance their ability to obtain a fresh start after they exit bankruptcy,28 because if
they are prevented from paying this debt for 60 months, they will face not only the
$35,000 presently owed, but five years of additional nondischargeable interest when
they finally exit bankruptcy with their discharge.

With regard to the treatment of the KDOL claim, Debtors argue that Kansas law
allows the Department of Labor to reduce future unemployment payments by the
amount of a past overpayment under K.S.A. § 44-719(d)(1), and that, if Debtors are laid
off and if they apply for unemployment in the future, future benefits might be denied
based on the outstanding overpayment. They further argue that if this happened
during the life of this plan, there might be insufficient income to make plan payments.

Using the Bentley court’s test, I consider the following factors to aid in the

28 The plan will result in approximately 85% of the student loan being paid in fiveyears when many student loans are paid out over a much longer period of time. If the actualpromissory note(s) for these loans called for payment, for example, of only $300 per month,
it might not be in good faith (or fair) to in essence pre-pay the student loan at the expenseof other unsecured creditors. See In re Freeman, Case No. 06-10651-WHD, 2006 WL
6589023, at *2, n.1 (Bankr. N.D. Ga. Dec. 22, 2006) (curing and maintaining student loandebt does not unfairly discriminate; however, payment on an accelerated basis mayconstitute unfair discrimination); see also In re Brown, __ B.R. __, 2013 WL 4806392, at *11
(Bankr. S.D. Ga. 2013) (noting that the bankruptcy court would continue to approve plansthat provide for regular monthly payments to a creditor equal to that required pre-petitionunder the loan documents, with the balance at the end of the five-year period to be exceptedfrom discharge under § 1328(a)(1)). This precise objection is not before me with this plan,
and no evidence was presented as to the amount of the contractually agreed payment.


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determination whether Debtors’ proposed treatment of these “preferred” creditors
creates unfair discrimination: (1) equality of distribution; (2) nonpriority of student
loans or the KDOL debt; (3) mandatory versus optional contributions (a comparison of
what the unsecured creditors holding dischargeable claims would receive in a pro rata
distribution of the mandatory contribution under chapter 13); and (4) the Debtors’

fresh start.29

Regarding the equality of distribution, the Bentley court noted that the Code’s
focus is to treat all equally situated creditors equally, unless specifically stated
otherwise in the Bankruptcy Code. Debtors do not claim that the Code has accorded
either “preferred” unsecured creditor priority status under 11 U.S.C. § 507(a).30 As a
result, these “preferred” unsecured creditors would normally share in pro rata
distributions with the other approximately $25,000 in unsecured claims, receiving 51%
of their claims instead of 85-100%.31 Debtors must thus justify this widely differing
treatment using some alternate argument.32

Admittedly, student loan debts are nondischargeable, but, as stated in Bentley,

29 In re Bentley, 266 B.R. at 240–42.

30 I note that while the plan expressly states they have no priority creditors, Debtorshave since stipulated that their schedules showed $268 in priority claims. I can also takejudicial notice that the IRS has filed a priority claim for $1,383, and that Debtors have notobjected to that claim.

31 Doc. 28, Stipulation No. 11.

32 See Bentley, 266 B.R. at 240 (“As a general rule, then, fairness in Chapter 13requires equality of distribution among nonpriority unsecured creditors, and the burden onjustification is on those who propose plans to the contrary.”).


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“nondischargeability is not, and does not entail, priority as to any distribution in or
through bankruptcy; it merely permits the holder to continue to enforce the debt after
bankruptcy. . . . Accordingly, as far as the Code is concerned, nothing in the nature of
the claims at issue here warrants or justifies treating the student loans more favorably
than the others.”33 Chapter 13 expressly excepts many debts from discharge, and thus
the Code does not necessarily contemplate that a debtor will emerge from Chapter 13
entirely free of all prepetition debt. The “choice here is not between a fresh start and
no fresh start, but between fresh starts of different extent.”34

That said, however, I agree with one commentator who has opined that the real
reason educational loans are nondischargeable has little to do with the debtor at all;
they are more likely nondischargeable because Congress wishes to protect the
government’s fiscal health as a guarantor (or lender) of these loans, and because “if
these debts were dischargeable, the availability of educational loans might drastically
decline.”35 So we cannot forget that Congress, while not according student loans
priority status, most certainly gave them favored status.36 This is important when

33 Id. at 241; see also Towler, 493 B.R. at 246 n.5 (collecting cases stating thatnondischargeability of debt is not a sufficient basis, by itself, to justify more favorabletreatment of the debt).

34 Bentley, 266 B.R. at 242 n.25.

35 Sepinuck, supra note 24, at 382.

36 Id. at 383. The Sepinuck article also makes the interesting point that Congressmay have elected to not grant priority status to student loans since the Code requirespriority claims to be paid in full during a three to five year plan, which many debtors couldnot afford to do. Priority treatment would actually foreclose many debtors from seekingChapter 13 relief. Id. at 385–86.


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trying to construe how Congress wished its “fair discrimination” language to be

I also acknowledge that the nondischargeability rule effectively forbids student
loan claimants from pursuing collection from a debtor’s post discharge earnings for
upwards of 5 years. As a result, if the nondiscrimination rule does not allow favorable
treatment of student loan claims during the life of the plan, those claimants may, in
fact, be worse off than if the debtor had liquidated under Chapter 7, since they may not
pursue collection for a long time. And the result for debtors is even worse—owing more
on their student loans after completion of their plan than before filing for Chapter 13
relief because of accumulation of equally nondischargeable interest that will accrue.37
Further, since it is clear that Congress intended for the means test to result in more
debtors filing chapter 13 petitions rather than chapter 7 petitions, a decision that
encourages a Chapter 7 filing (an outcome that could occur by denying Debtors the
opportunity to maintain their student loan payment during the life of their mandatory
5-year plan) does not further the purposes or spirit of the Code.

Regarding distributions, Debtors show a negative projected disposable income
on their B22C means test, so there is no projected disposable income to devote to

37 Id. at 387-88; In re Delbecq, 368 B.R. 754, 759 (Bankr. S.D. Ind. 2007) (concludingthat paying credit card debt instead of making student loan payments was not a reasonablealternative for a debtor as she would end up owing substantially more in nondischargeablestudent loans than she did upon the date of filing).


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payment of unsecured creditors.38 It is only Debtors’ excess discretionary income that

is devoted to the extra $500 per month payment of student loans. As a result, this

prong of the Bentley test—the comparison of what the unsecured creditors would

receive in a pro rata distribution of the mandatory contribution—is satisfied: Bentley

notes that, “after student loan claims have shared on a pro rata basis with other

general unsecured claims in the distribution funded by the Chapter 13 plan,” the

student loans may be “paid by debtors out of assets that they need not contribute to the

plan.”39 This is exactly what Debtors have proposed here—it is Debtors’ discretionary

income, above their Code-computed projected disposable income, that they are

voluntarily contributing to payment of student loans.40 As Judge Nugent noted in In

38 Obviously, because below I herein deny confirmation of a plan that retains a thirdvehicle (as discussed below), the means test would now show at least an additional $229.52(the amount deducted for the motorcycle), thus showing a positive $198 as monthlydisposable income potentially payable to unsecured creditors. As Debtors admit in theirbrief, the Supreme Court’s recent decision in Ransom v. FIA Card Servs., N.A., __ U.S. __,
131 S. Ct. 716, 722 (2011) would not allow them to deduct the costs of the associated loanfor a vehicle they cannot keep. Because this would be known with certainty at the time ofplan confirmation, this decision is without prejudice to any objection the Trustee or otherparties in interest might make if Debtors opt to amend their plan in lieu of dismissal.

39 Bentley, 266 B.R. at 243.

40 For the plan at issue here, the Trustee did not dispute Debtors’ calculation ofprojected disposable income. For this reason, the Trustee’s argument based on Hamilton v.
Lanning (In re Lanning), 560 U.S. 505, 130 S. Ct. 2464 (2010), is misplaced. The SupremeCourt in Lanning held that “when a bankruptcy court calculates a debtor’s projecteddisposable income, the court may account for changes in the debtor’s income or expensesthat are known or virtually certain at the time of confirmation.” Id. at 2478. The Trustee
cites this case and then argues that the Supreme Court requires chapter 13 debtors tosatisfy a forward-looking approach to income (rather than a mechanical approach), and thatthis somehow requires debtors to make equal payments to all similarly situated creditors.
But the Lanning opinion does not reach this far—in fact, although the opinion gives lowercourts permission to consider changes in income or expenses when computing projecteddisposable income, it says nothing about the treatment of discretionary income above that


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re Stull, after assessment of the Bentley test in that case: “Because student loans are
not accorded statutory priority, anything they receive over what they would take in a
pro rata distribution without the discrimination, should come from assets not required
to be contributed to the plan and thus not detract from the unsecured creditors’ take.”41

Application of this factor to the KDOL claim, however, is less clear. As a result
of Debtors’ special treatment of this claim, other unsecured creditors essentially bear
the burden of paying this similarly situated dischargeable debt, although the difference
in pro rata distribution would be admittedly small. And while Debtors argue that they
must separately classify this debt because they may need unemployment compensation
in the future, and they presume that if they do not repay this claim in full they may
be denied future benefits, there are no facts in evidence to support this argument.
There is nothing in the Stipulation of Facts that provides evidence about the likelihood
either Debtor might be laid off during the life of the plan, or, if they were, whether they
could defer payment of other expenses until re-employment without the need for
unemployment benefits. In addition, Debtors fail to acknowledge that the very statute
upon which they rely for this argument—K.S.A. § 44-719(d)(1)—also allows the
secretary of the agency to totally waive repayment under certain conditions, making
the certainty they would face consequences for nonpayment even more speculative.
Debtors are now currently gainfully employed, qualifying as above-median income

number, and certainly does not define unfair discrimination under § 1322(b)(1).
41 489 B.R. 217, 220 (Bankr. D. Kan. 2013).


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debtors. Accordingly, any potential future impact on Debtors’ fresh start is pure
speculation. For that reason, I have no evidence upon which I can find this
discrimination is “fair.”42

Finally, under the Bentley test, I consider Debtors’ fresh start. Admittedly, as
the Bentley court notes, “affording debtors a fresh start is one of the fundamental
purposes of Chapter 13 and of the Bankruptcy Code in general.”43 But the Code places
many limitations on this fresh start, including its express exclusion of most student
loans from discharge under § 523(a)(8). And fair distribution to creditors is equally an
important goal of the Code as is a fresh start. The Code contemplates that student
loans will remain after debtors receive their discharge. Debtors will presumably be
better situated to repay those student loans, having received a discharge of all their
other unsecured debt. Yet, as Bentley notes, nothing in the Code prevents debtors from
facing this debt earlier, using their discretionary income to pay student loan debt
throughout the life of the plan.

Based on the consideration of the Bentley factors, and a weighing of the burdens
and benefits established by the Code as a baseline, this Court concludes that the direct
payment to the student loan creditor of ongoing contractual payments does not
constitute unfair discrimination under § 1322(b)(1). Although student loans are not

42 Unlike the student loan claim, where the Trustee has admitted its
nondischargeability, there is no similar admission regarding the KDOL debt, and Debtorshave not claimed the KDOL debt is nondischargeable.

43 266 B.R. at 242.


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accorded priority by the Code, Debtors are contributing this excess amount to the
student loan debt only from funds not required by the Code to be committed to the
plan. As stated by Bentley, “[w]hen a plan prescribes different treatment for two
classes but, despite the differences, offers to each class benefits and burdens that are
equivalent to those it would receive at the baseline, then the discrimination is fair.”44
If payment of $500 per month to student loan creditors is what is required by Debtors’
contract, then the treatment of the student loan creditors in this case is no different
than that contemplated by the Code, and Debtors do not unfairly discriminate by
devoting their discretionary income to repayment of those loans.

For these reasons, the facts of this case are distinguishable from the case upon
which the Trustee relies, In re Kubeczko. 45 The bankruptcy court in Kubeczko analyzed
whether a below-median income debtor could pay monthly payments to student loan
creditors as a long-term debt under § 1322(b)(5), thereby causing a significant decrease
in plan payments to other unsecured creditors.46 The Kubeczko court concluded that the
proposed treatment resulted in unfair discrimination under § 1322(b)(1).47 But the
difference from the facts at hand is critical. The debtor in Kubeczko earned below
median income and thus, pursuant to the Bankruptcy Code, had no disposable income.
Here, Debtors are above-median, and propose to commit their discretionary income to

44 Id. at 240.
45 Case No. 12-13766 HRT, 2012 WL 2685115 (Bankr. D. Colo. July 6, 2012).
46 Id. at *1–2.
47 Id. at *5.


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their student loan payments. Utilizing the baseline test, this is permissible, because

the “principles and structure of chapter 13 itself” do not indicate the procedure is


For similar reasons, the Court rejects the Trustee’s argument that payment to

the student loan creditor via both direct payment and pro rata through the plan is

unfair. The Trustee contends that if pro rata distribution to unsecured creditors occurs

under the plan, the student loan creditor will receive dual favorable treatment. But

grouping of unsecured creditors for equal plan payment is exactly what the Code

contemplates, and I cannot determine that equal distribution of any plan payments,

as directly required by the Code, is unfair discrimination.49 In this case,

“Debtors’ student loan and non-student loan creditors are receiving

48 Bentley, 266 B.R. at 240. The Trustee argues that it is absurd for Congress topermit a more wealthy, above-median debtor to pay a student loan through the plan butthen deny the same benefit to a below-median debtor. While I express no opinion on howthis case would be decided if Debtors were below-median, I do note that the entire exercise
of determining unfair discrimination (which is not permitted) versus discrimination (whichis permitted) necessarily requires a weighing of factors. And although from where I sit theresult of permitting wealthier debtors (who will presumably have more income afterbankruptcy) to pay student loans during bankruptcy but to deny that same benefit to poorerdebtors may not seem well-guided, Congress did not ask for my advice when it wrote thecurrent version of the Code, and that current version appears to require this result. Sowhile the result may be misguided, I cannot find the result is necessarily absurd. First, thisinterpretation does still allow some (wealthier) debtors a “fresher” start, a fresh start beinga stated goal of the Code. Second, an interpretation that repays government-backed debtmore quickly also furthers the government’s interest in replenishing the Treasury andpotentially having more funds available to make more student loans.

49 See, e.g., In re Sharp, 415 B.R. 803, 813 (Bankr. D. Colo. 2009) (citing Bentley and
concluding that the debtors’ pro rata payment to student loan creditors in addition to amonthly discretionary payment to student loan creditors was not unfair discriminationbecause equal distribution of plan payments, by definition, did not discriminate). I also notethat no party expects this double recovery to actual occur, because the plan anticipates nopayments to the student loan creditors under the plan.


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exactly what the Code requires Debtors to pay them—a pro rata paymentof PDI [projected disposable income]. The fact that the student loancreditors are also receiving a discretionary payment from Debtors doesnot entitle the remaining unsecured creditors to additional moneys, nor‘dis-entitle’ student loan creditors from receiving a pro rata payment.”50

The Court finds that the treatment of the debt owed KDOL as a special class,
however, is unfairly discriminatory. Debtors do not assert that the KDOL debt
commands either priority status or that it is a nondischargeable debt. As a result, and
in contrast to the analysis of the student loan debt, the proposed treatment of the
KDOL debt does unfairly discriminate against similarly situated creditors. Debtors
presented no evidence whatsoever on this issue, and thus failed to demonstrate it was
more likely than not that failure to pay 100% of that debt would impair their fresh
start. Accordingly, the Court finds that the proposed discrimination merely “alters the
allocation of benefits and burdens to the detriment of one class,”51 and the
discrimination is, therefore, unfair under § 1322(b)(1).

B. Good Faith — Retention of Third Vehicle
The Trustee also challenges Debtors’ plan to retain and pay for three vehicles
through their plan. Debtors propose to retain and pay for a 2010 Nissan Sentra, a 2006
Ford F-150 pickup, and a 2011 Harley Davidson motorcycle. Debtors claimed the
Nissan and Ford as exempt, and do not dispute that the Harley motorcycle is not
exempt. Debtors’ plan will also pay more for both the Ford and the Harley motorcycle

50 Id.

51 Bentley, 266 B.R. at 240.


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than they are worth, because they were both purchased within 910 days of filing


Section 1325(a)(3) requires that a chapter 13 plan be “proposed in good faith and

not by any means forbidden by law.” Whether a plan has been proposed in good faith

is a question of fact based on the totality of the circumstances.53 In Flygare v.

Boulden, 54 the Tenth Circuit expressed the following non-exclusive factors for

determining a debtor’s good faith:

(1) the amount of the proposed payments and the amount of the debtor’ssurplus; (2) the debtor’s employment history, ability to earn andlikelihood of future increases in income; (3) the probable or expectedduration of the plan; (4) the accuracy of the plan’s statements of thedebts, expenses and percentage repayment of unsecured debt andwhether any inaccuracies are an attempt to mislead the court; (5) theextent of preferential treatment between classes of creditors; (6) theextent to which secured claims are modified; (7) the type of debt soughtto be discharged and whether any such debt is non-dischargeable inChapter 7; (8) the existence of special circumstances such as inordinatemedical expenses; (9) the frequency with which the debtor has soughtrelief under the Bankruptcy Reform Act; (10) the motivation and sincerityof the debtor in seeking Chapter 13 relief; and (11) the burden which theplan’s administration would place upon the trustee.55
The continued viability of the Flygare factors for all cases, however, has been

questioned by a subsequent Tenth Circuit case as a result of the 2005 amendments to

52 See Doc. 28, Stipulation No. 2 and 11 U.S.C. § 1325(a) (requiring full payment ofvehicles purchased within 910 days of bankruptcy, with interest, in chapter 13 plans).

53 Robinson v. Tenantry (In re Robinson), 87 F.2d 665, 668 (10th Cir. 1993).

54 709 F.2d 1344 (10th Cir. 1993).

55 Id. at 1347–48 (quoting United States v. Estus (In re Estus), 695 F.2d 311, 316–17
(8th Cir. 1982)).


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the Bankruptcy Code.

In Anderson v. Cranmer (In re Cranmer), 56 the Tenth Circuit noted that the
Bankruptcy Code has been amended since Flygare was decided to include § 1325(b),
and that “[s]ection 1325(b)’s ‘ability to pay’ criteria subsumes most” of the Flygare
factors such that the “good faith inquiry now has a more narrow focus.”57 Regardless,
the Tenth Circuit stated in Cranmer that bankruptcy courts still need to consider
“factors such as whether the debtor has stated his debts and expenses accurately;
whether he has made any fraudulent misrepresentation to mislead the bankruptcy
court; or whether he has unfairly manipulated the Bankruptcy Code.”58

The Trustee argues that Debtors’ retention of a third vehicle is unreasonable
and unnecessary. He notes that by claiming two other functioning vehicles as exempt,
Debtors have essentially admitted that it is the Nissan and Ford that they regularly
use for transportation to and from work.59 The Trustee contends, then, that retaining
and paying for a third vehicle (the motorcycle) for a two-adult household must
necessarily be a luxury expense, and that diverting income from unsecured creditors
so they can retain a spare vehicle would create an absurd result. The Trustee argues
that retention of the motorcycle, along with associated increased insurance, tax, and

56 697 F.3d 1314 (10th Cir. 2012).

57 Id. at 1319 n.5 (internal quotations omitted).

58 Id. (internal quotations omitted).

59 See K.S.A. §60-2304(c) (granting exemption for “one means of conveyanceregularly used for the transportation of the person or for transportation to and from theperson’s regular place of work”).


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maintenance costs, when Debtors propose no dividend to unsecured creditors, would
hinder the spirit and purpose of the Code.

Debtors respond that retaining the motorcycle is not only necessary—because
Mr. Knowles rides the motorcycle to work in warm weather—but financially wise,
because if required to surrender the motorcycle, Debtors’ transportation expenses
would actually increase due to higher costs associated with the Ford’s poor gas mileage.
Debtors presented evidence that Mr. Knowles rides the Harley motorcycle to work
about 32 weeks a year, from mid-March to late-September or October. Debtors live
about 18 miles from Mr. Knowles’ job, and Mr. Knowles testified that he could make
two weeks’ worth of trips to work on one tank of gas in the motorcycle, but it cost an
additional $60 a week for gas when he drives the truck to work. Mr. Knowles
ultimately claimed that riding the motorcycle saves him about $1920 a year in gas.60

In reaching that conclusion, however, Mr. Knowles failed to consider the other
costs associated with retaining this spare vehicle. Mr. Knowles testified that the
motorcycle’s tags and taxes cost about $200 a year, insurance (at $56.56 per month)
$678.72 a year, and the annual note payment totaled $3096 (at $258 each month). The
actual comparison is, therefore, a questionable $1920 per year gas savings versus a
certain $3,974.72 per year expense of ownership of the motorcycle. And this does not

60 This claimed savings did not compute. Mr. Knowles testified he rode themotorcycle to work approximately 32 weeks a year, and that round trip mileage was 180per week. So over a year, to reach the claimed savings, he would need to drive the cycle towork 5,760 miles. He testified, however, that he purchased the cycle with 3,000 miles 13months ago, and that it now has 6,000 miles. It is thus clear that he is not driving the cyclenearly as much as his “savings” claim, further buttressing my conclusion that not only isthis a luxury item, but that the claimed gas savings are not as significant as claimed.


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account for any additional maintenance costs (or new tires) that Debtors would likely
encounter over a 60 month plan, so the difference is probably even greater.

Debtors’ brief additionally contends that, regardless of whether retention of the
motorcycle is necessary for their maintenance and support, as long as they comply with
the Code’s provisions for retention of secured debt, they have filed their plan in good
faith, citing Judge Berger’s decision in In re Roberts61 and contrasting it to Judge
Nugent’s decision in In re Sandberg. 62 In Sandberg, the above-median debtors proposed
a chapter 13 plan that paid unsecured creditors only a 2.3 per cent dividend, but
proposed to retain and pay for a 36-foot boat.63 Judge Nugent concluded that the boat
was indisputably a luxury item, and that the debtors’ motivation and sincerity with
respect to rehabilitation through their chapter 13 plan weighed in favor of a finding
that the plan was not proposed in good faith.64 Judge Nugent concluded that it was
fundamentally inappropriate to “discharge so much unsecured debt while still
retaining and enjoying a luxury item” and that “[h]olding otherwise would defy the
letter and spirit of chapter 13.”65

In Roberts, the above-median debtors proposed a chapter 13 plan that retained
their expensive home (valued somewhere between $530,000 and $665,000) while

61 493 B.R. 584 (Bankr. D. Kan. 2013).

62 433 B.R. 837 (Bankr. D. Kan. 2010).

63 Id. at 839–41.

64 Id. at 844–45.

65 Id. at 848.


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paying nothing to general unsecured creditors.66 In analyzing whether the debtors’ plan
was proposed in good faith, and citing the good faith factors cited by the Tenth Circuit
in Cranmer, Judge Berger specifically found that the debtors’ documents and schedules
were accurate, and that there were no attempts to mislead the bankruptcy court.67
More importantly, Judge Berger then noted:

Here, the Debtors have attempted to follow the Bankruptcy Code; they

have pared their expenses and share a single car, they have amended

their schedules to more accurately reflect their financial situation, and

they ask to keep their house in which they have lived for eight years. 68
As a result of these findings of fact, Judge Berger found no unfair manipulation of the
Bankruptcy Code, and concluded that the totality of the circumstances indicated that
the debtors filed their chapter 13 plan in good faith in accordance with § 1325(a)(3).69

In contrast, Mr. Knowles testified that his wife drives the Nissan to work, and
that their work shifts do not allow them to ride together. He also testified, however,
that he makes no attempt to utilize the far more fuel efficient/30 mpg Nissan for his
work transportation on days Ms. Knowles does not work (which, most weeks, is four
days, as she is a registered nurse most often working three 12-hour shifts). The facts
also showed that both the Ford F150 and the Harley motorcycle were purchased within
about 15 months of filing bankruptcy—the Ford F150 was purchased in February 2012,

66 493 B.R at 587.
67 Id. at 594–95.
68 Id. at 596 (emphasis added).

69 Id.


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the Harley motorcycle was purchased in August 2012, and Debtors filed their
bankruptcy petition in May 2013. Further, the debt on the Harley—which Debtors
propose to pay in full through the plan—is $14,272.59, but the motorcycle is worth only

As a result of this evidence, I find the totality of the facts in this case are much
more similar to those in Sandberg than to the facts in Roberts. First, by exempting the
Nissan and the Ford F150, Debtors necessarily claim those were the two vehicles
necessary for their transportation to work. For them to now fudge on which vehicle
they actually use most places Mr. Knowles’ testimony in conflict with their sworn
schedules. Second, state law allows the exemption of one vehicle, not 1.5 each as they
essentially want. Third, the Harley motorcycle is indisputably a luxury item. While
they may save some money on gas when Mr. Knowles elects to ride it to work, they
spend far more than they save when considering the overall costs of insurance, tags
and taxes, maintenance and debt payments. Fourth, Debtors admit that they seek to
retain this motorcycle even though retention will require them to pay $3000 more than
it is worth; this makes no financial sense. Fifth, unlike in Roberts where the debtors
hoped to retain their one exempt homestead allowed under Kansas law, instead of two,
these Debtors think they should be able to retain more than state law exemptions
allow. Finally, the debtors in Roberts had pared expenses, contrary to the evidence
here, where in spite of having incurred upwards of $65,000 in unsecured debt, Debtors
purchased not one, but two, vehicles within 15 months of bankruptcy (and the
motorcycle less than 9 months before filing). There is simply no financially responsible


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reason to retain an expensive Harley motorcycle under these facts other than simply
because Debtors like to have it—and this is not enough, especially where Debtors
propose zero dividend to their non-preferred unsecured creditors.

As stated by Judge Nugent in Sandberg, a “primary purpose of the good faith
inquiry is to determine under the totality of the circumstances of a case whether there
has been an abuse of the provisions, purpose, or spirit of Chapter 13.”70 The Court finds
here that permitting Debtors to retain and pay for their third vehicle, a Harley
Davidson motorcycle, at the expense of any dividend to their unsecured creditors, is not
in good faith, but would instead be an unfair manipulation of the Bankruptcy Code.
Debtors have failed to carry their burden under § 1325(a)(3). Like Judge Nugent did
in Sandberg, I question these Debtors’ motivation and sincerity with respect to
rehabilitation through their chapter 13 plan, and find the plan was not proposed in
good faith.71

III. Conclusion
The Trustee’s objection to confirmation is overruled in part and sustained in
part, as indicated more fully herein. Because of these rulings, Debtors’ plan, as
proposed, cannot be confirmed. Debtors must file an amended plan, tailored to reflect
the rulings contained herein, within 21 days of the entry of this Memorandum Opinion,
if they wish to remain in this Chapter 13 proceeding. Failure to do so will result in the

70 433 B.R. at 845.
71 Id. at 844–45.


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dismissal of their case for undue delay prejudicial to creditors pursuant to 11 U.S.C.

It is so ordered.

# # #


Case 13-40602 Doc# 47 Filed 11/04/13 Page 28 of 28


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