In Re Smith
- Reporters:
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- Before:
- Mabey
On October 25, 1979, the debtors filed a Chapter 13 petition under the Bankruptcy Code. On their schedule of creditors, they listed $130.00 owed to the Internal Revenue Service, $250 owed on credit card purchases, $280 owed on a repair bill, and $11,200 owed in student loans. Also listed was a possible deficiency due on a repossessed truck which by affidavit of the finance manager of the creditor, Rick Warner Ford, is claimed in the amount of $5,445.84. Two secured creditors, who apparently hold non-possessory, non-purchase money security interests in household goods, were listed as being owed $1,800 and $600. All property owned by the debtors was claimed as exempt.
The debtors filed an amended plan in which they proposed to pay $58.68 per month for 30 months with $50 per month going to pay unsecured creditors. The secured creditors were not included in the plan, and the debtors expressed their intention to have the security interests set aside under
In the memorandum filed by Utah Technical College which was elucidated by oral argument, the college makes three claims. First, it alleges that student loans are not dischargeable under Chapter 13. Second, it argues that its debt should be treated as a long-term debt under Section 1322(b)(5) and hence not discharged under the plan. Last, the college argues that even if its debt is dischargeable, the plan as proposed does not comply with the requirement of “good faith” and thus, cannot be confirmed.
The first contention of the college is based upon its reading of the legislative history and specific provisions of the Code. It claims that Congress never intended to allow the discharge of student loans, debts incurred by fraud and the like in Chapter 13 and that the present wording of
A review of the legislative history and statutory provisions of Chapter 13 discloses an unmistakable intent by Congress to except student loans and other comparable
The House Report explains
The discharge is of all debts except alimony, maintenance or support, and certain long-term obligations specially provided for under the plan.
*546
H.R.Rep.No.95-595,
supra
at 430, U.S.Code Cong. & Admin.News 1978, p. 6386. This broad discharge was then differentiated from the hardship discharge to be granted under proposed
The explanations given and the differences between the regular and hardship discharges evidence a clear intent to provide an incentive for repayment under Chapter 13 by providing a broader discharge than is allowed under Chapter 7. This incentive includes the discharge of student loans. Only if the debtor fails to complete his plan but qualifies for a hardship discharge will his discharge be pruned to fit the Chapter 7 discharge.
Rather than being intrinsically inconsistent, as contended by the college, the broader discharge of Chapter 13 appears to be based on sound, well-reasoned policy. The fact that the Technical Amendments Bill proposes to eliminate the broader discharge dictates not a conclusion that the broader discharge was never intended in the first place but rather an evidence that the Congress may be reconsidering its original policy decision in light of practices that have developed under the law. Until this is changed, however, the broader discharge stands, fully supported by the legislative history.
The college’s arguments as to the unique nature of educational debts which must have convinced Congress not to discharge them is not defensible in light of the congressional debates on the subject. These debates show that originally Congress was reluctant to include educational loan debts as nondischargeable at all. Rather, it was only after lengthy discussions evidencing much disagreement over the propriety of exempting these debts from any discharge, that an amendment making educational debts nondischargeable passed in any context. The House Judiciary Committee had voted in full to reject an amendment to make student loans non-dischargeable. Therefore, the House Report originally recommended, upon consideration of a GAO study, not to except educational loans from discharge. H.R.Rep.No. 95-595, supra at 132 et seq. The Report indicated that, in its view, the problem in the educational loan program was not in defaults due to bankruptcy filings, but in the general mismanagement of the program and the failure to follow up on loans which were granted. This original recommendation was made with full consideration of the “unique” nature of education loan debts, i. e., that they are made without any other security than the projected future earnings of the recipient. After arguments were made both for and against it, an amendment was offered by Congressman Ertel to again make student loans nondischargeable under the new law. After a lengthy and heated argument, the amendment was finally passed. H.R.Debates, 123 Cong.Rec. H11690-92, H11696-710, at IV-5 (daily ed. Oct. 27, 1977); 124 Cong.Rec. H457-78, at IV-154 et seq. (daily ed. Feb. 1, 1978). Strong comments were made, however, by the amendment’s opposition. Congressman Dodd from Connecticut pointed out several misconceptions about bankruptcies and student loans and warned of the class discrimination he thought this exception would create against students. Id. at IV-156. Congressman Cornell offered a compromise amendment to the Ertel amendment which would only make student loans nondis-chargeable if they constituted 65% or more *547 of the total debt. Id. at IV-160. This amendment was, however, defeated by a vote of 34 to 21. Id. at IV-166. Thus, contrary to the college’s arguments, the discharge of student loans in Chapter 13 was no inadvertence. All of the policy arguments made by the college were carefully considered by the Congress in making its final decision on the treatment of student loans in both the context of Chapter 7 and Chapter 13.
The college next argues that its debt should be treated as a long-term debt under Section 1322(b)(5) and hence, a debt not discharged under the plan. Section 1322(b)(5) specifies that
the plan may . . . (5) . . . provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due.
The college apparently asks the Court to force the debtors to treat their debt as long-term and thus, by terms of
Although, as recognized by the college, there exists little legislative history on the subject, that which is available along with the plain wording of the statute seems to reject the college’s interpretation. Section 1322 is permissive, not mandatory. The legislative history on the subject reinforces the permissive wording of Section 1322(b)(5). The House Report explains:
Paragraph (5) concerns long-term debt, such as mortgage debt. It permits the plan to provide for the curing any default within a reasonable time, and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due. (Emphasis added.)
H.R.Rep.No.95-595, supra at 429, U.S.Code Cong. & Admin.News 1978, p. 6384. The Senate Report states:
Subsection (b) permits a Chapter 13 plan to ... (5) provide for curing any default on any secured or unsecured claim on which the final payment is due after the proposed final payment under the plan. (Emphasis added.)
S.Rep.No.95-989, supra at 141, U.S.Code Cong. & Admin.News 1978, p. 5927.
Section 1322(b)(5) affords a benefit to the debtor and is not intended to bestow a right upon creditors. As explained in 5 Collier on Bankruptcy ¶ 1322.01[E], at 1322-11 (15th ed. 1980), this section was included to permit “the debtor to take advantage of a contract repayment period which is longer than the Chapter 13 extension period which may not exceed five years under any circumstances.” Debts whose lengthy contract repayment periods are not disturbed by the debtor’s plan are excepted from discharge under
The Court now turns to the final issue raised by the college, that of “good faith” under Section 1325(a)(3). The college contends that the debtors are improperly using Chapter 13 to discharge their student loans. As evidence of this fact, they cite the statement of debtor’s attorney at the meeting of creditors that in his opinion the primary practical use of Chapter 13 is to avoid
Several courts have questioned the propriety of considering the presence of debts which could not be dischargeable in Chapter 7 in deciding whether the good faith requirement of Section 1325(a)(3) is met. See In re Cloutier, 3 B.R. 584 (D.Col.1980); In re Seely, 6 B.C.D. 1003, 6 B.R. 309 (Bkrtcy.E.D.Va.1980). As explained in In re Iaco-voni, supra, however, this Court concludes that the existence of such debts is relevant as a factor to be considered in determining whether a plan is proposed in good faith. While a broader discharge is, as noted, clearly intended in Chapter 13, that broad discharge cannot properly be used to scuttle the primary statutory intent of effecting meaningful repayment to creditors. As noted in Iacovoni, it may be that the presence of these debts requires a greater repayment effort by debtors to make certain that no abuse of the Chapter occurs. In fact, the Iacovoni inquiry, which includes consideration of the presence of otherwise nondischargeable debts, is intended precisely to insure that there is no “abuse of the provisions, purpose or spirit” of Chapter 13. In re Village Men’s Shops, Inc., 186 F.Supp. 125, 129 (S.D.Ind.1960); In re Cloutier, supra at 587. The Court agrees that standing alone, “it is not bad faith to utilize the liberal discharge provisions of Chapter 13.” In re Seely, supra at 1005, 6 B.R. 309. But it may be bad faith to utilize these provisions without a corresponding attempt to répay creditors a meaningful amount. Although the Court must also agree that it is not its place to adjudicate at the confirmation hearing the nondischargeability of certain debts, this is not necessary to fulfill the requirements of Iacovoni. On their face, schedules often reveal the presence of probable nondischargeable debts such as the student loans here. Likewise, as the onus lies with the trustee or creditors to object when they feel the “good faith” requirement is not being met, possibly nondischargeable debts may be brought into question by creditors.
In the present case, considering the high percentage of debts comprising student loans, and the relatively small repayment attempted, the Court finds that the “good faith” requirement of Section 1325(a)(3) has not been met. Accordingly, confirmation must be denied. The record shows that an order of confirmation was erroneously entered. It is vacated, and confirmation is denied.
The Court further notes that the file reveals the return of the erroneously executed order of confirmation from Magcober Dresser Industries, the purported employer of the debtor, John Smith. Noted on this returned copy is a statement from the company that John Smith is no longer employed there. This being the case, and no further evidence being submitted that the debtor has gained other employment, it appears that proper confirmation cannot be granted at this time, in any case, as no Chapter 13 plan based on his previous earnings is now feasible. Likewise, if the debtor has not obtained other employment, he would no longer qualify as an individual with regular income under Section 109(e).
ORDER
In accordance with this memorandum decision, the order of confirmation dated May 29, 1980 is vacated and confirmation is denied.