6th Circuit BAP Rules that Student Loan Litigation Can be Ripe Early in Chapter 13 Case

In re Cassim,  395 B.R. 907 (6th Cir. BAP November, 2008)

Issue:   Is the issue of whether a student loan should be discharged for undue hardship “ripe” at the beginning of a chapter 13?                     

Holding:    Yes, at least here where the debtor’s condition will not change during the plan period.   

This chapter 13 debtor filed an adversary proceeding to have her student loans of $22,000 discharged.  She filed the AP shortly before her chapter 13 plan was confirmed.  Her plan was $50 per month which was sufficient to pay only her attorney for the chapter 13 case.  No creditor would receive a distribution.  She was disabled with monthly income of $675 from social security.   The lender filed a “motion to dismiss for lack of subject matter jurisdiction” saying the matter was not ripe.  The bankruptcy court denied the motion. 

The BAP affirmed.  “The constitutional ripeness of a declaratory judgment action depends upon ‘whether the facts alleged, under all the circumstances, show that there is a substantial controversy, between parties having adverse legal interests, of sufficient immediacy and reality to warrant the issuance of a declaratory judgment.’”  “Delay of the dischargeability determination would deprive Cassim of the opportunity to pay any non-dischargeable student loan debt and attorneys fees related to the adversary proceeding through the chapter 13 plan as well as potential loss of the automatic stay.  The Bankruptcy Code’s  purpose is to provide a debtor with a fresh start.  Requiring a debtor to wait until after completion of the plan and entry of the general discharge may well unnecessarily prolong that fresh start.”  “We reject the notion raised by ECMC that because there is a chance that Cassim will not complete her plan and qualify for a general discharge, any determination of dischargeability is too speculative to warrant the issuance of a declaratory judgment.  Confirmation of Cassim's plan was premised on a finding that ‘the debtor will be able to make all payments under the plan[.]’  Indeed, ECMC has never asserted any facts suggesting that Cassim will not be able to complete her plan; its concern is strictly hypothetical.”  “Moreover, it is noteworthy in the present case that there is no suggestion that Cassim's completion of her plan will ‘significantly advance our ability to deal with the legal issues presented[.]’”

The BAP cited an 8th Circuit case, Bender v. Educ. Credit Mgmt. Corp. (In re Bender), 368 F.3d 846 (8th Cir.2004).   “In that case, the Eighth Circuit held that the student loan dischargeability claim was not ripe three and a half years before the general discharge would occur.  The court noted that the exception for a hardship discharge must be measured considering the facts at the time of discharge and rejected the debtor's argument that her situation was ‘so dire, and the possibility of improvement so remote, that a court could determine whether repayment of her student loans three and a half years down the road would constitute undue hardship.’ Id. at 848.  The court held that ‘[d]eferring a decision until the case is ripe will allow a court to make its undue hardship determination on the basis of real rather than speculative circumstances.’”  The 8th Circuit commented that “such proceedings should take place relatively close to that date so that the court can make its determination in light of the debtor's actual circumstances at the relevant time.”  The BAP distinguished the facts of Bender saying that this debtor’s situation will not change during the plan period and therefore the case is different. 

The BAP commented in a footnote, “Because the Appellant did not raise the issue on appeal, the Panel will not address whether a 0% plan, which pays only a debtor's attorney fees for filing the bankruptcy case, meets the good faith requirement for plan confirmation under 11 U.S.C. § 1325(a)(3).”