In re Williams, Bankruptcy No. 195-10117-7. Adv. No. 195-1020.
| Decision Date | 22 May 1996 |
| Docket Number | Bankruptcy No. 195-10117-7. Adv. No. 195-1020. |
| Citation | 195 BR 644 |
| Parties | In re Nelda Florentine WILLIAMS, Debtor. Nelda Florentine WILLIAMS, Plaintiff, v. UNITED STATES DEPARTMENT OF EDUCATION, Texas Guaranteed Student Loan Corporation, Wachovia Services, Inc. and Eduserve Technologies, Inc., Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Texas |
Dick Harris, Abilene, TX, for Debtor.
Doug W. Ray, Ray, Wood & Fine, L.L.P., Austin, TX, for Texas Guaranteed Student Loan Corporation.
The debtor requested a determination of the dischargeability of student loans which first became due more than seven years ago. The lender argued that the automatic stay of a prior bankruptcy proceeding tolled the running of the seven years, and therefore the student loans could not be discharged. This court finds that the student loans are not dischargeable in the present bankruptcy, because they have not been due for seven years.1
Nelda Florentine Williams (Debtor) obtained three loans for college in the amount of $5,000 each in 1984, 1985, and 1986 respectively. The loans were educational loans, guaranteed or insured by a governmental unit as defined in § 523(a)(8)2. They first became due December 1, 1987. Texas Guaranteed Student Loan Corporation is the current holder of the notes.3 As of May 18, 1995 the amount due on the loans was $29,682.35. No extensions or deferments in the repayment of the loans were granted to the Debtor.
On October 26, 1987, the Debtor filed a voluntary petition under Chapter 13 in the United States Bankruptcy Court for the Eastern District of Texas (the first bankruptcy). The Debtor filed no plan in that proceeding; nor did she attend a § 341 meeting. Early in 1988 the Debtor moved to the Dallas area and directed her attorney to dismiss the first bankruptcy. However, that case was never dismissed. Instead it was converted to a Chapter 7. The Debtor never attended a Chapter 7 § 341 meeting, never filed Chapter 7 schedules, and never received a discharge. The court dismissed the Chapter 7 bankruptcy on February 20, 1992.
On May 18, 1995 the Debtor filed the present Chapter 7 bankruptcy proceeding, unaware that the original bankruptcy had been converted and not dismissed in 1988.
Did the automatic stay that was in effect during the first bankruptcy toll the running of the seven year requirement in § 523(a)(8)(A), thereby precluding discharge of the debtor's student loans in the present bankruptcy?
Generally, student loans are non-dischargeable in bankruptcy. § 523(a)(8)4. There are two exceptions to this rule. First, discharges are allowed if the debtor can prove undue hardship. § 523(a)(8)(B). Secondly, discharges are allowed if it has been more than seven years since the debt first became due. § 523(a)(8)(A). The seven year period does not include any "applicable suspension of the repayment period." § 523(a)(8)(A). Thus, to determine dischargeability, one must subtract any applicable suspensions from the time between when the loans first come due and the filing of the bankruptcy in order to see if the debt falls outside the seven year period. The debate centers on the meaning of the phrase "applicable suspension of the repayment period." This is an issue of first impression in the Fifth Circuit.
The Debtor offers a Fifth Circuit tax case to illustrate the guiding principles of construction in this matter. A bankruptcy case involving tax debt is similar to a bankruptcy case involving student loan debt in that both types of debt are generally non-dischargeable, and both have exceptions to the general rule that rely on statutorily defined time limits. The Debtor offers Quenzer v. United States (In re Quenzer), 19 F.3d 163 (5th Cir.1993) which addressed the dischargeability of taxes. The dispute in Quenzer involved the dischargeability of the Quenzers' 1984 and 1985 tax liability. The Quenzers had filed a Chapter 13 petition in September 1986, converted it to Chapter 7, and voluntarily dismissed it in March 1988. In March 1990 they filed a new Chapter 7 petition, wanting to discharge the 1984 and 1985 taxes that were due more than three years prior to the filing of the second Chapter 7. The question before the court was the suspension of a priority period during an automatic stay. However, in Quenzer the government relied on § 108(c), which deals with suspensions that apply only to nonbankruptcy law and nonbankruptcy proceedings, and the court denied its application. Since Quenzer did not directly discuss the issue before this court, it is not proper precedent in the instant case5.
Where meaning is unclear, legislative intent cannot be ignored. Indeed, the Fifth Circuit refused to rigidly adhere to the provisions of the Bankruptcy Reform Act of 1978, if such action meant that the true intent of the Congress would be subverted:
That judicial rectification was mandated, suggesting that a slavish application of § 317 of the Bankruptcy Reform Act of 1978 (repealing § 1087-3) "without regard to the obvious intention of Congress would create an absurd result in accord with neither established principles of statutory construction nor common sense."
Wisconsin Higher Educ. Aids Bd. v. Hogan (In re Hogan), 707 F.2d 209, 211 (5th Cir. 1983) (quoting New York State of Higher Educ. Serv. Corp. v. Adamo (In re Adamo), 619 F.2d 216, 219 (2d Cir.1980)). In Hogan the court held that a voluntary bankruptcy during the 11 month gap between the repeal of section 1087-3 of the Higher Education Act and the enactment of the Bankruptcy Code did not result in an automatic discharge of student loans, despite the Congressional oversight.
Since this is a matter of first impression, prudence dictates an initial look at the legislative history of § 523. The Congressional record from 1976 provides:
The Committee bill seeks to eliminate the defense of bankruptcy for a five-year period, to avoid the situation where a student, upon graduation, files for a discharge of his loan obligation in bankruptcy, then enters upon his working career free of the debt he rightfully owes. After a five-year period, an individual who has been faithfully repaying his loan may really become bankrupt. He should not be denied this right, and is not under the Committee bill.
S.REP.No. 882, 94th Cong., 2d Sess. 32 (1976), reprinted in 1976 U.S.C.C.A.N. 4713, 4744.
So from the inception of congressional action, there was a concern that student loans should not be dischargeable without some effort on the debtor's part to repay the loan. Additionally, the record shows that there was no intent to make student loans nondischargeable without exception.
In 1979, the Senate Committee addressed the issue of the suspension of repayment obligations: "Section 3(2) of the bill would also amend 11 U.S.C. 523(a)(8) to exclude periods of deferment from the calculation of the first five years of the repayment period." S.REP. No. 230, 96th Cong., 1st Sess. 2 (1979), reprinted in 1979 U.S.C.C.A.N. 936, 937 (emphasis added). Here Congress shows its concern that a debtor should not be able to manipulate deferments in order to defeat the five year period required before a student loan could be discharged. Noting that student loans are subject to deferment, the committee acted to remove time under a deferment from the calculation of the five year period before a student loan could be discharged.
In 1990 Congress amended § 523(a)(8)(A) of the Code to extend the required period from five to seven years before a discharge in bankruptcy of student loans could be granted. Pub.L. 101-647, § 3621(2), 104 Stat. 4965.
Now that the Debtor's principle case has been distinguished, and the legislative history has been examined, an inquiry into the judicial construction given the phrase "applicable suspension of the repayment period" by courts in other circuits is warranted. The majority of cases which have dealt with this issue indicated that as long as the suspension of payments was valid and predicated on some act of the debtor, such as a request for deferral, or bankruptcy, then the suspension was applicable to toll the seven year limit6. Unilateral action by the lender is not effective to toll the statute7.
To assist in interpreting the case law on point, an understanding of the automatic stay is necessary. When a bankruptcy petition is filed, creditors are automatically prevented from taking any action to collect the debt. § 362(a). This protection by the automatic stay has been reinforced by the courts:
It is equally well established that under § 362(a) of the Bankruptcy Code, the filing of a petition for voluntary, joint or involuntary bankruptcy under 11 U.S.C. §§ 301, 302 or 303 automatically stays all proceedings to collect the underlying debt in order that the bankrupt debtor may be given a breathing spell from creditors and the financial pressures that drove him into bankruptcy and to allow him to attempt a repayment or reorganization plan.
Constitution Bank v. DiMarco, 155 B.R. 913, 917 (E.D.Penn.1993) (citations omitted).
Unless lifted by court order, this stay against the creditors remains in effect until the case is closed, the case is dismissed, or until the discharge is granted or denied8. § 362(c).
To illustrate that the automatic stay is not an "applicable suspension" as contemplated by § 523, the Debtor cites Gibson v. Virginia State Educ. Assistance Auth. (In re Gibson), 177 B.R. 837 (Bankr.E.D.Va.1995). In Gibson the court ruled that the term "applicable" modified the term "suspension" in a way that prevented the use of a prior bankruptcy to toll the seven year limit. The court in Gibson limited "applicable suspension" to suspensions of repayment that the lender granted in the ordinary course of business. However, the district court reversed Gibso...
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