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Discriminating in Favor of Co-Signed Debts

Co-signed DebtIn a recent blog post I said that a Chapter 13 payment Plan can pay a co-signed debt in full, including interest, while paying little or nothing to the other "general unsecured" creditors. The practical benefits of this can be huge if you are trying to protect a co-signer from having to pay a debt. In effect you are allowed to avoid paying other creditors in order to have the means to protect your co-signer.

There is confusion about this part of bankruptcy law because the Bankruptcy Code is less than clear about it. Because of this lack of clarity many bankruptcy attorneys don't take advantage of this significant benefit of Chapter 13. One way to better understand the law about this is to look at In re Renteria, a 2012 published opinion of the Ninth Circuit Bankruptcy Appellate Panel (BAP).


One of the key principles of bankruptcy law is that creditors which are legally the same must be treated the same. You can't discriminate in favor of one creditor over the others unless there is a legally appropriate reason to do so.

In Chapter 13, a procedure which involves a formal plan for paying creditors usually a portion of what you owe over a period of 3 to 5 years, this antidiscrimination principle plays out in the legal requirements of that plan. The Section of the Bankruptcy Code titled "Contents of plan" specifically states that a Chapter 13 Plan "may not discriminate unfairly against any class [of unsecured creditors]." See Section 1322(b)(2). This was in the original language of the new Bankruptcy Code when it was first enacted in 1978.


That expression against "discrimination" is plenty vague in that it only forbids discriminating "unfairly," begging the question what kind of favoring one creditor over the others would be "fair" and thus allowed.

Within months of the effective date of the Bankruptcy Code, bankruptcy courts were facing the question whether it was "unfair" for a debtor's Chapter 13 plan to pay a co-signed debt in full while paying much less to the other creditors. The majority of courts said no: just because one debt has a co-signer does not make it "fair" to discriminate in favor of that creditor. See the 1980 opinions In re Utter and In re Montano.

In presumed reaction to this, with the Bankruptcy Amendments and Federal Judgeship Act of 1984 Congress added an exception to the anti-discrimination language of Section 1322(b)(1), now saying:

however, such plan may treat claims for a consumer debt of the debtor if an individual [co-signer] is liable on such consumer debt with the debtor differently than other unsecured claims.

A quick reading of this language would lead one to think that Congress intended to allow a Chapter 13 plan to treat consumer co-signed debts ("claims") differently than other unsecured claims, that is, to discriminate in favor of co-signed debts.


But as the majority opinion in Renteria referred to at the beginning of this blog post, the

"however clause" has been the subject of a significant amount of debate. Neither courts nor commentators have agreed on precisely what Congress intended to accomplish by adding the "however clause" to § 1322(b)(1). [Quoting an earlier Ninth Circuit BAP opinion] [T]he "however clause"

has perplexed and divided courts as to whether it obviates, or merely qualifies, the fairness requirement. Most courts hold that separately classified co-obligor debts must still clear the § 1322(b)(1) unfair discrimination hurdle. The consequence is that the "however" clause permitting co-obligor debts to be treated "differently" is more in the nature of a qualification to the application of the unfair discrimination analysis than an exemption from it. A minority of courts... conclude that the "however" clause excuses compliance with the § 1322(b)(1) ban on unfair discrimination.

So the questions are whether the "however" clause allows unfair discrimination in favor of co-signed debts, or instead whether the discrimination must still be "fair," and if so what is "fair" discrimination in the context of co-signed debts?


As arcane as these distinctions sound, they matter in practical ways, maybe most importantly in this distinction between co-signed debts in which the financial benefit of the credit went to the debtor and those co-signed debts in which the financial benefit went to the other co-signer. In other words, did the debtor have the other co-signer agree to become legally obligated on the debt to help the debtor, or did the debtor sign to help the other co-signer? Or for that matter, did they mutually benefit—such as a couple both signing on a vehicle loan where they will share the vehicle?

If the "however" clause "obviated"—got rid of—the non-discrimination requirement altogether, then discrimination in favor of co-signed debt would seem to be allowed in Chapter 13 plans regardless of any "fairness." This makes much more likely that a co-signed debt in which the other co-signer benefitted from the granting of credit could be legally discriminated over other debts, not just co-signed debts in which the debtor benefitted.


The Bankruptcy Appellate Panel, like the Ninth Circuit Court of Appeals itself, deliberates and publishes its opinions in 3-judge panels. In most cases the three judges agree and issue a single opinion. It's also not unusual for there to be two opinions, a majority opinion and either a dissenting opinion when there's a 2-1 split or a concurring opinion by a judge who agrees with the majority opinion but wants to say something more. In Renteria all three judges had something to say, with a majority opinion and two other concurring ones.

As one of the concurring judges candidly observed:

What is unusual here . . . is that the challenge of achieving consensus about the meaning of this statute has proved to be too much for the Panel. While all members of the Panel agree about the result of this appeal, we propose three different approaches for disposing of the issue.

That disagreement makes getting clear and practical guidance from this opinion more complicated, including about whether a Chapter 13 plan may discriminate in favor of a co-signed debt that had benefitted not the debtor but rather the other co-signer.


Judge Markell's opinion is the one that counts, because it's the one that all 3 judges signed on to. After providing what appears to me to be a balanced summary of the controversy and the case law illustrating it, he said "we hold that Congress sought to permit a chapter 13 debtor to separately classify and to prefer a codebtor consumer claim when the facts are similar to those presented inUtter andMontano." (These are the two cases referred to above not allowing discrimination in favor of co-signed debts that Congress seemed to be reacting to when it added the "however" clause--more about them shortly).

The majority opinion concluded:

We acknowledge that our decision leaves open the issue of the precise relationship between the "however clause" and the unfair discrimination rule. We intentionally have left unanswered the question of when (if ever) does the preferential treatment of a codebtor consumer claim violate the unfair discrimination rule. We decline to answer that question until we receive an appeal with a record and issues squarely presenting that question for decision.

In other words, they couldn't agree—beyond deciding that in this case the discrimination in favor of the co-signed debt was permissible—so they agreed to


That's all the more clear in the two concurring opinions.


Judge Dunn said that

the most plausible interpretation of the "however clause" is that Congress wanted to make crystal clear, in light of Utter andMontano, that a chapter 13 debtor has the right to classify separately unsecured claims with co-obligors from other unsecured claims without eliminating the prohibition on unfair discrimination.

The "however clause" "allow[s] for a fact-based determination in each case as to whether such different treatment crosses the "unfair discrimination" line."

In other words, a Chapter 13 plan may discriminate in favor of co-signed claims, but only if that discrimination is not "unfair."

Judge Dunn then did a quick unfair discrimination analysis and concluded there was none:

Renteria's plan provided for different treatment of [the co-signed] claim from other unsecured claims, as expressly allowed by § 1322(b)(1), but did not leave the general unsecured creditors with no potential for a meaningful distribution. The Trustee conceded that Renteria's plan was proposed in good faith. Based on the factual record before us, that does not look like unfair discrimination to me.


Judge Pappas then rather pointedly disses Dunn's opinion, saying that while it "is certainly definitive," he "respectfully disagree[s] with" what Dunn "confidently" concludes. He argues instead that "Congress intended to exempt co-signed consumer debts from the unfair discrimination restrictions in § 1322(b)(1) applicable to other kinds of debt." [T]he unfair discrimination restriction . . . does not apply to plan provisions treating co-signed consumer debts."

In other words, Judge Dunn's unfair discrimination analysis is neither appropriate nor necessary, because the "however" clause created a complete exception for co-signed debts.


Judge Markell's majority opinion left unresolved whether and to what extent consumer co-debtor claims are subject to the anti-discriminatory provision in the first clause of Section 1322(b)(1); Dunn said the anti-discriminatory provision ought to still apply to some degree, "allowing for a fact-based determination in each case as to whether such different treatment crosses the "unfair discrimination" line; and Pappas said the anti-discriminatory provision no longer applies to consumer co-signed debts.

So that takes us back to the facts of the Renteria case itself, since if nothing else the majority opinion allowed the discrimination under the facts of this case.

The co-signed debt that the debtor in Renteria owed was about $20,000 to an attorney "retained . . . to prosecute family law litigation on her behalf for domestic violence and paternity. . . . [S]he enlisted the help of her mother, . . . who guaranteed in writing Renteria's payment of attorneys' fees and expenses in order to induce [the attorney] to represent Renteria."

This was quite clearly a co-signed debt in which the co-signer, Renteria's mother, entered into the obligation for Renteria's benefit. So that's as far as the opinion goes, allowing discrimination only in favor of debtor-benefitted co-signed debts.

But there's one last step. As I said earlier, the majority opinion held "that Congress sought to permit a chapter 13 debtor to separately classify and to prefer a codebtor consumer claim when the facts are similar to those presented inUtter andMontano." So what were the facts in these two cases?

Although not absolutely clear, both cases seem to involve co-signed debts in which the debtor benefitted from the credit, not the co-signer. Utter, a short, 2-page decision simply refers to "a debt owing to Security Trust Company . . . co-signed by the sister of the [debtor] husband," without any information about the purpose of the debt or whether the husband or her sister received the benefits of the debt. Montano is clearer, with a reference to "claims guaranteed by co-signers." Given that neither of these two cases refers to co-signed debts benefitting the other co-signer, Renteria's holding allowing discrimination in favor of co-signed debts is limited to those benefitting debtors.

As the majority opinion concluded: "We intentionally have left unanswered the question of when (if ever) does the preferential treatment of a codebtor consumer claim violate the unfair discrimination rule." So whether discriminating in favor of a debt which was co-signed by debtor for the benefit of the other co-signer is allowed or not has to await the appeal of a case on those facts.


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