Discharge, Exceptions to Discharge, and Objections to Discharge (2024)

DISCHARGE, EXCEPTIONS TO DISCHARGE, AND OBJECTIONS TO DISCHARGE

Consumer bankruptcy principally is designed to permit debtor rehabilitation through the discharge of debts. The Bankruptcy Code authorizes a broad discharge, which provides a fresh start to "honest but unfortunate debtors," to fulfill one of its most fundamental purposes. (401)

Notwithstanding the general availability of the discharge, section 523 of theBankruptcy Code specifically enumerates certain debts that are not discharged. A debtor may discharge all other debts in bankruptcy, but those exceptions remain postbankruptcy charges against the debtor. The exceptions are to be construed narrowly, (402) and a creditor bears the burden to prove each element of an exception to discharge by a preponderance of the evidence. (403)

Debts excepted from the bankruptcy discharge obtain distinctive treatment forpublic policy reasons. Many nondischargeable debts involve "moral turpitude" orintentional wrongdoing. (404) Other debts are excepted from discharge because of the inherent nature of the obligation, without regard to any culpability of the debtor. Regardless of the debtor's good faith, for example, support obligations and many taxclaims remain nondischargeable. Society's interest in excepting those debts fromdischarge outweighs the debtor's need for a fresh economic start.

When the Bankruptcy Code initially was enacted, section 523 contained ashort list of exceptions for certain types of wrongdoing, such as fraud, defalcation,and intentional torts. The list of exceptions has grown to nearly twenty, in additionto those exceptions contained in other portions of the United States Code. (405) Some of these exceptions provide overlapping grounds for dischargeability and are theresult of special interest amendments. While the Commission did not whittle downthe list to its original form, as some commentators have advocated, the Commissionrecommends certain specific clarifications and amendments to enhance fairness toall parties and to alleviate litigation, confusion, and nonuniformity.

While section 523 deals with individual debts, section 727 governs a debtor's eligibility for an overall Chapter 7 discharge. As was discussed in the first portionof this chapter, only the honest debtor is entitled to the extraordinary relief that abankruptcy discharge provides. Section 727 forecloses the availability of the Chapter7 discharge to debtors who engage in fraudulent behavior. The Commission makesseveral moderate recommendations to section 727 to help ensure the proper use ofthis important provision.

1.4.1 Credit Card Debt

Except for credit card debts that are excepted from discharge undersection 523(a)(2)(B) (for materially false written statements respectingthe debtor's financial condition) and section 523(a)(14), (debts incurredto pay nondischargeable taxes to the United States), debts incurred ona credit card issued to the debtor that did not exceed the debtor's creditlimit should be dischargeable unless they were incurred within 30 daysbefore the order for relief under title 11.

A debtor who has engaged in fraudulent activity should not be rewarded witha discharge of a debt that was obtained through that fraud. For this reason, section523(a)(2)(A) of the Bankruptcy Code excepts from discharge a debt for money,property, or an extension of credit to the extent it was obtained by false pretenses, afalse representation, or actual fraud. This provision bears great similarity to itspredecessor, section 17 of the Bankruptcy Act of 1898. In addition, if debtors makefalse statements in credit card applications that mislead a lender to extend credit, theresulting debts may be nondischargeable under section 523(a)(2)(B). (406)

However, with increasing frequency, section 523(a)(2)(A) is used to challengethe dischargeability of debt arising from the routine use of credit cards even in theabsence of actual fraud. (407)

The Commission received numerous comments indicating that the currentversion of section 523(a)(2)(A) is ill-suited to sort dischargeable credit card debtfrom nondischargeable credit card debt. The courts seem to concur that applicationof this exception to credit card debt "has been fraught with doctrinal difficulty."(408) Even direction from the circuit courts has not been a panacea for the confusion; within ayear's time, the Court of Appeals for the Ninth Circuit issued four opinions analyzingsection 523(a)(2)(A), three of which involve credit card debt and employ somewhatdifferent methods of interpretation. (409) The lack of clear guidance is especially problematic considering the continuing growth in the availability and use of creditcards, the number of consumer bankruptcy filings, and the number of adversaryproceedings threatened or brought regarding credit card debt on questionablegrounds.

A troubling consequence of this confusion is that ordinary credit card debtthat was incurred honestly is declared nondischargeable -- while all other debts aredischarged -- in the absence of any fraudulent action or intention. A creditor'sallegation of nondischargeability can lead to quick settlement. Because the debtorcannot afford to contest the charge, the debtor agrees to repay the debt postpetitionwithout any judicial evaluation of whether the debtor committed fraud. When thisoccurs, both fundamental principles of bankruptcy are violated: the financialrehabilitation of the debtor is undermined by continuing obligations on ordinaryprepetition credit card debt that continues to accrue interest at high rates. At thesame time, the credit card issuer has received preferential treatment over all otherunsecured creditors of the same debtor. With the recommended change toreaffirmation procedures, it is necessary to address this side of the issue as well.

For these reasons, the Commission recommends that credit card debtsincurred within 30 days of bankruptcy be automatically nondischargeable and creditcard debts not exceeding the debtor's credit limit incurred outside of 30 days beautomatically dischargeable. To the extent that debts exceeded the debtor's creditlimit, they would continue to be governed by the current law, and thus the creditorwould have to prove fraud, false pretenses, or false representation.

Background on the Dischargeability of Credit Card Debt. A creditor thatchallenges the dischargeability of a debt under section 523(a)(2)(A) currently has theburden to show:

• the debtor knowingly made misrepresentations;
• the debtor intended to deceive the creditor when making thesemisrepresentations; and
• the creditor justifiably relied on the representation, which proximatelycaused the creditor's damages. (410)

This test has been applied to actions under this provision regardless of whether thecreditor alleges actual fraud, false pretenses, or false representation as the specificgrounds for nondischargeability. (411) The interpretation and application of these standards has been highly variable. Courts have taken disparate approaches to assessimplicit "representations" made by the use of a credit card, to determine when aperson had an "intent to deceive," and to identify "justifiable reliance" by the creditcard issuer when the debtor made purchases on a valid credit card within theestablished credit limits for the card.

The following discussion illustrates the disparity in application of the variouselements of section 523(a)(2)(A) that lead to conflicting results.

Use of a Credit Card as a Representation. When a customer has used a creditcard and subsequently seeks to discharge that debt in bankruptcy, some courts havedetermined that the customer misrepresented that she was able to repay the resultingdebt when she made the charge. (412) Simply using a credit card, under this theory, represents both an intentand present ability to pay;(413) if repayment later becomes impossible, the original charge retroactively is deemed fraudulent. This may be thecase even if the lender had no expectation when the debts were incurred that thedebtor had the present ability to repay the charges. (414)

Other courts are critical of that approach, noting that "[t]he availability ofcredit during financially difficult times is a very good reason to maintain credit. 'Thetest for nondischargeability is not whether the credit was used in difficult times.'"(415) Rather than making every consumer a guarantor of her future solvency, they find thata customer's use of a credit card constituted an express or implied representation ofanintentto repay. (416)

A few courts have declined to equate a credit card charge with a representation of intent or ability to pay. (417) The court in In re Cox concluded that Congress did not intend section 523(a)(2)(A) to cover "implied representations," nordo policy and jurisprudential justifications support the provision's use in this regard. The court said instead that most credit card fraud cases belong in the purview ofsection 523(a)(2)(C), under which debts incurred on the eve of bankruptcy for luxurygoods are nondischargeable. (418) Cox "has its origins in nineteenth-century cases holding that a borrower's predictions regarding his future ability to pay his debts arenot actionable as false pretenses."(419) Another court has suggested that the use of a credit card is not a "representation" because it is not a statement that is capable ofbeing true or false. This conclusion was extrapolated from a Supreme Court decisionthat held that signing and submitting a check is not a factual assertion and is notcapable of being true or false. (420) A far cry from the implied misrepresentation approach, these theories can make it difficult, if not impossible, for credit cardlenders to bring nondischargeability actions under section 523(a)(2)(A) unless thecirc*mstances of the use of the credit card were unique, e.g., there was someadditional affirmative misrepresentation accompanying the use of the card. (421)

Intent to Deceive Using a Credit Card. Ill intent traditionally has been acrucial factor of fraud or false representation. (422) Although not central to the holdingof the Supreme Court's Field v. Mans decision, the Court noted that Congress couldhave barred discharge on the basis of unintentional misrepresentations if it hadwished, "but it would, however, take a very clear provision to convince anyone ofanything so odd."(423)

While actual intent should be critical to the inquiry, intent is a particularlydifficult element to prove, especially in connection with regular credit card use. Quite a few courts use objective factors to "infer" an intent to deceive the credit cardissuer. (424) The most widely-utilized set of factors includes the following:

• the length of time between making the charges and the bankruptcyfiling;
• whether the debtor consulted an attorney about bankruptcy beforemaking the charges;
• the number and amount of charges;
• whether the charges exceeded the debtor's credit limit;
• whether the debtor made multiple charges on the same day;
• whether the debtor was employed when making the charges;
• whether the debtor had prospects for employment;
• whether the debtor suddenly changed her buying habits;
• whether the debtor was financially sophisticated;
• whether the debtor purchased luxury items or necessary items; and
• the debtor's financial condition at the time the charges were made. (425)

Yet, courts again diverge on the extent to which objective factors such asthese should be used to impute intent. Some courts carefully examine most or all ofthe aforementioned elements to determine whether or not the debtor demonstratedintent to repay. (426) Thus, if the collective evidence shows that the debtor was "loadingup" on goods shortly before filing, the court may conclude that the debtor did notintend to repay and was acting deceitfully. (427)

Other courts believe that the consideration of one or two objective factorsmay suffice to produce an inference that the debtor intended to deceive the creditorwhen making a credit card purchase. (428) Using this approach, fraud might be inferred if a reasonable person would have questioned her ability to repay the debt: "Ifevidence indicated that the cardholder should have known that the charges cannot bepaid, the creditor has established a claim of nondischargeability."(429) This approach enables a credit card lender plaintiff to "prove" fraud merely by indicating the patternof credit card charges, the proximity of the charges to the bankruptcy filing, and thedebtor's inability to repay the debts. (430) There is an inherent tautology in this approach; because families find themselves in bankruptcy on account of financialproblems, unsecured credit card debts can become dischargeable almostautomatically.

Some courts reject the notion that a debtor's inability to repay evidencesfraudulent intent, and instead try to determine the debtor's subjective intent. (431) The"hopeless state" of the debtor's financial affairs is no substitute for an actual findingof bad faith, according to this approach. "[A]lthough the reasonableness of thedebtors' belief as to the truth of their representations may be circ*mstantial evidenceof their intent, ultimately the issue is their actual intent and not the objectivereasonableness of it."(432) The Ninth Circuit stated in the Anastas case that "the focus should not be on whether the debtor was hopelessly insolvent at the time he made thecredit card charges . . . if ability to repay were the focus of the fraud inquiry, too oftenwould there be an unfounded judgment of nondischargeability of credit card debt."(433) Thus, under this approach, objective factors are relevant only to assist the court indetermining whether the debtor actually and subjectively intended to deceive thecreditor. (434) In courts taking this approach, creditors may have to prove that the debtor incurred credit card debt in bad faith with the intention of filing for bankruptcy andavoiding the debt. (435)

Credit Card Lender's Reliance on Borrower's Representation by Use of aCredit Card. Even more difficult is the question of reliance, another essentialcomponent to the common law definition of fraud on which courts have beendivided. In a section 523(a)(2)(A) case involving a land sale, the Supreme Court inField v. Mans held that a creditor must prove that his reliance wasjustifiable; if thefalsity of the representation should have been readily apparent to that particularcreditor, the creditor will not prevail. (436) This resolved a split in the circuits over whether reliance had to be "reasonable," but did not minimize the difficulties in creditcard debt nondischargeability cases. It is unclear whether a credit card lender relieson each charge made by a consumer as an expression of solvency or intent. (437)

Some courts do not require a credit card issuer to prove reliance at all. Theysimply presume that a credit card issuer is entitled to rely on each use of a credit cardas a manifestation of an intent to repay. (438) "The credit card issuer justifiably relies on a representation of intent to repay as long as the account is not in default and anyinitial investigations into a credit report do not raise red flags that would makereliance unjustifiable."(439) The fact that many courts presume justifiable reliance may explain why it is not uncommon for credit card plaintiffs to refrain from offering anyspecific evidence of reliance, which may hurt their cases in other courts. (440)

Other courts treat reliance in the traditional sense as a discrete andindependent element of fraud that must be proven by a preponderance of theevidence. (441) At a minimum, these courts may require a creditor to show that it did not continuously extend credit passively or blindly. (442) If a creditor conducts a financial analysis that raises a "red flag" and extends credit nonetheless, this also maydefeat a finding of justifiable reliance. (443)

Some of these courts are especially troubled by the fact that creditors send anincreasing number of unsolicited credit card applications and make minimal inquiriesinto the status of the consumer's income and existing debt obligations whenoriginally extending credit to the debtor. (444) If a creditor never conducted a meaningful initial credit check, some courts will find that the creditor could not haverelied justifiably on any representation made by the subsequent use of a credit card. (445) Following an Eleventh Circuit case decided under the Bankruptcy Act of 1898, othercourts hold that a credit card company "assumes the risk" of nonpayment once adebtor exceeds her credit limit until the lender attempts to revoke the borrower'scredit privileges. (446) Some courts in the Eleventh Circuit have considered themselves bound by this approach, (447) which will preclude a finding of reliance in many instances absent evidence of actual fraud when the debtor did not exceed the creditlimit.

The element of reliance becomes even more elusive to some courts whenapplied to another modern credit device, the "live check." With this credit product,a creditor sends an unsolicited check to a consumer; by endorsing the check, theconsumer becomes subject to the fine print in the credit agreement. At least onecourt questioned how reliance could be proven in this context: "Absent proof of[lender]'s clairvoyant abilities, this Court is hard pressed to find that [lender] reliedupon a representation which occurred subsequent in time to Beneficial's action ofissuing the check."(448) Reliance on the use of the check as a representation of solvency or intent would not suffice.

Benefits to All Parties of a Bright-Line Rule for Credit Card Debt. As hasbeen illustrated, courts are searching for a way to apply a traditional test to a noveltransaction but are reaching vastly different results. (449) One court described the problem in the following manner:

Each of the . . . approaches [presently used by courts] has beencriticized by courts that adhere to one of the other approaches or toone of the many other divergent views that do not fit neatly into theabove categories. It seems likely that until Congress takes action toestablish clear cut guidelines in credit card nondischargeability casesunder Code section 523(a)(2)(A), divergent views among the courtswill continue to proliferate. Unabated, the current situation will resultin increased inconsistency of outcomes among cases resting onsimilar facts. That such lack of consistency is harmful to the system,should be obvious to all concerned. (450)

A bright-line test would minimize unnecessary costs and burdens for creditcard lenders who currently have to keep track of the vastly disparateapproaches being employed by various courts, many within the same district. Although nondischargeability actions are brought by some lenders with greatregularity, pursuing nondischargeability complaints under the current system simplyis not cost effective for many other lenders, whether or not they have colorableclaims. A bright-line rule would permit all credit card lenders to look to the samecomprehensible test to determine whether a debt is nondischargeable and to proceedaccordingly.

Clarifying the law also would have a significant effect in the cases involvingthe poorest debtors who cannot afford to defend these actions. The currentuncertainty leaves ample room for some creditors to threaten to bringnondischargeability actions even when they have no evidence of borrowermisbehavior. This forces some innocent debtors to settle and agree to repayotherwise dischargeable unsecured debts. (451) Courts around the country report that they are receiving increasing numbers of motions for extensions for time to filenondischargeability complaints, shortly followed by settlements and/orreaffirmations. "[T]oo often in a case where a creditor alleges fraudulent use of acredit card, debtor's counsel advises them to agree to judgments which saddle themwith obligations they are unable to pay."(452) This situation creates a predicament for both debtors and their counsel. On the one hand, some debtors are represented byattorneys "who work for a flat fee and thus may be inclined to agree to an easysettlement."(453) On the other hand, if the debtor's lawyer charges an hourly fee, the rising legal costs of defending an action might lead the debtor to settle. (454)

Creditors have identified changes in their practices in bringingnondischargeability charges and seeking settlements that amount to reaffirmations. (455) A credit industry trade publication reported that about 30% of Visa's memberschallenged the discharge of credit card debt in the early 1990s, while 99% of itsmembers now challenge the dischargeability of those debts. (456) According to a senior vice president and counsel for one lender, about 98% of the company's alleged fraudcases are settled out of court, with 80-90% in the credit card company's favor. (457)

An increasing number of courts are expressing concern and outrage aboutthese practices, particularly when the creditor has made no efforts to investigate theunderlying facts. (458) However, courts cannot monitor all activities in all cases that take place beyond the courthouse doors. While some districts have local rules thatrequire hearings for settlements for pro se debtors and impose standards parallel tothe reaffirmation requirements, (459) many courts do not review settlements of nondischargeability actions at all.

Although the Bankruptcy Code contains a fee-shifting provision to encouragedebtors to defend actions that are not substantially justified, (460) the wide spectrum of interpretations of section 523(a)(2)(A) makes it is nearly impossible to show that acredit card debt nondischargeability action was wholly unjustified. One courtrecently noted this when rejecting a prevailing debtor's request for attorneys' fees andcosts:

[A] variety of overlapping theories have emerged in respect of theelements required of a credit card plaintiff to obtain a judgment ofnondischargeability as well as the manner in which those elementsmay be satisfied. The papers submitted by [creditor]'s motion inopposition to [debtor]'s motion cite authority tending to support someof its arguments. In the absence of prior rulings on point by thiscourt, or binding Second Circuit authority, the Court cannot concludethat [creditor]'s position lacked substantial justification within themeaning of section 523(d). (461)

As a consequence, debtors cannot be certain that they will be reimbursed forattorneys' fees even if they successfully defend against a completely nonmeritoriousclaim of nondischargeability. Under the current system, economics force some honest debtors to settle nondischargeability actions, regardlessof the merits. Putting aside the question of fee-shifting, an honest debtor cannot becertain that she will be able to defeat a finding of "implied fraud" that is constructedout of various objective factors.

Thus, even when debtors incurred debt honestly, the confusion on the creditcard nondischargeability standard serves as a collection device for the mostaggressive creditors while the debts of other less aggressive creditors are discharged. A clearer bright-line rule for nondischargeability is needed.

The Bankruptcy Code already contains several bright-line provisions thatestablish lookback periods for activities occurring directly prepetition, such as the 90-day period to void preferential transfers. (462) A lookback period for credit card debtmay be superior to a detailed factual inquiry, which already has proven to be aninadequate legal sorting device. As the current case law demonstrates, the elementsof fraud are handled in a disparate fashion, with some elements ignored or othersconflated because they are so difficult to prove in the credit card usage context. Moral issues surrounding the proliferation and use of credit cards provide anadditional overlay onto an already-difficult analysis, and conflicting value judgmentsmay be playing a large role in the determination of these disputes. In addition,judicial time and resources in the bankruptcy system are at a premium, and case-by-case analyses may be too costly and require other sacrifices. All things considered,a "rough justice" standard that does not require litigation of the underlying principlein each case may be the fairest method to identify debts that should be excepted fromdischarge.

The 30-Day Bright-Line Test. The Commission recommends that debtsincurred within 30 days of bankruptcy be excepted from discharge. If Congressadopts this Recommendation, section 523(a)(2)(C) would be repealed and section523(a)(2)(A) no longer would be available for routine credit card use pursuant to avalid credit card agreement. (463) The proposed approach reaches the debts most likely incurred when the borrower knew she would not repay because she wascontemplating bankruptcy.

The Commission settled specifically on the 30-day period after consideringand debating proposals for both shorter periods and longer periods. The originalRecommendation contained a 15-day lookback period, which some Commissionersand creditors believed was too narrow a window. (464) The Recommendation on which the Commissioners ultimately voted contained the 30-day nondischargeability period. Others recommended longer periods such as 60 days. However, the justification fora time-cleavage approach breaks down as the nondischargeability period is enlarged. Timing creates a sufficiently strong inference that certain credit card debts incurredshortly before a bankruptcy filing were incurred in contemplation of the filing andshould be nondischargeable. The Proposal reflects the view that 30 days is theoutside edge for the length of time that this inference may be supported. Every daythat the nondischargeability period is extended, it becomes less probable that thedebts were incurred in contemplation of bankruptcy and increasingly difficult torationalize the preferential treatment of credit card debts over other unsecured debts. A 60-day lookback period would have had to be presumptive, which would provoke thesame litigation problems facing the current system. Even with a 30-day rule, somedebtors who have used their credit cards within the month before bankruptcy will nothave done so in contemplation of bankruptcy.

This Proposal does not affirmatively disrupt credit granting practices; unlikethe approaches taken by some courts, it does not condition creditors' relief on therigor of their initial scrutiny of borrowers. However, as a consequence of theProposal's design, the bankruptcy system would not provide an additional safeguardfor all improvident lending decisions that lenders might have addressed themselves. As such, while credit card lenders would receive preferential treatment over othercreditors for the last 30 days of credit extended before bankruptcy, the preferencewould not extend further to the creditors' earlier lending decisions.

Competing Considerations. Excepting debts from discharge based on bright-line tests, such as the recommended 30 days, does not isolate only those debtsincurred with ill-intent. Therefore, this approach arguably conflicts with dischargepolicy. The bright-line test may capture the credit card debts of only innocentindividuals, including those with no legal representation or those dealing withemergency situations. However, the proposed 30-day rule would be less prejudicialto honest debtors than many of the rules currently used to determine thedischargeability of credit card debt. Honest debtors would be at less risk of beingforced to settle nondischargeability actions of questionable merit. Even if theproposed test would encompass some debts not culpably incurred and currentlydischargeable, the penalty is limited to the last month's worth of charges. TheProposal represents a compromise: some debts that were innocently incurred beforebankruptcy will be nondischargeable, but the lookback period is clearly limited. Thesolution is not perfect, but no single approach will be wholly satisfactory, either intheory or in practice.

At the same time, a bright-line nondischargeability rule might be perceivedas too permissive towards sophisticated debtors who carefully plan the timing of theirbankruptcy filings. An individual who can wait 30 days to file will avert thepotential nondischargeable status of these debts. (465) To put this consequence in perspective, however, that month's worth of credit card debt merely would be treatedlike all other unsecured debts. Credit card lenders are in a superior position toexpand or limit their risks when they determine their standards for lending unsecureddebt. Bankruptcy cannot guarantee across the board protection against losses for onetype of creditor after the fact.

According to some people, all credit card debts incurred during financialdistress should be excepted from discharge, even if the debtor was making theminimum monthly payments and the charges were incurred within the terms of thecredit card agreement. (466) This approach would give preferential treatment to credit card lenders over all other unsecured lenders. The credit card lender who permits thedebtor to spend $20 on a credit card should not get better treatment in bankruptcythan a neighbor who lends the debtor $20, particularly because credit card lendersalready determined the amount of credit they were willing to risk.

1.4.2 Debts Incurred to Pay Nondischargeable Federal Tax Obligations

Section 523(a)(14) should remain unchanged to except from dischargedebts incurred for federal taxes that would be nondischargeable undersection 523(a)(1).

Credit card debts incurred to pay nondischargeable taxes raise slightlydifferent concerns because Congress already has carved out these debts for specialtreatment. Since the Bankruptcy Reform Act of 1994, the Bankruptcy Code hasexcepted from discharge debts incurred to pay federal taxes "that would benondischargeable pursuant to paragraph (1) of section 523(a)."(467) Currently, this exception to discharge can be used whenever an individual borrows to pay taxes, which wouldinclude taking a cash advance on a credit card or using a check issued by a credit cardcompany. With this limited application, the published case law indicates that section523(a)(14) seldom has been used; an on-line search of the published case law revealsthat this provision has been cited in only a few reported decisions and has providedthe basis for nondischargeability in one case. (468)

The use of credit cards for paying tax liabilities is about to change and thisprovision will take on newfound importance: Congress recently amended the lawsto permit the Internal Revenue Service to accept payment of taxes by credit card andother commercially acceptable means. (469) Thus, the provision would except from discharge any credit card debt directly incurred to pay nondischargeable federal taxes. A lender must establish that the funds were used to pay a nondischargeable federaltax liability, (470) but need not prove intent not to repay. Any tracing problems that might have resulted in the context of cash advances will be minimized wheneverconsumers pay the Internal Revenue Service directly with credit cards. (471) It is reasonable to expect an increased use of this exception to discharge when the IRSaccepts credit card payment directly. To put this provision in the context of theproposed change to section 523(a)(2)(A), section 523(a)(14) would provide anexception to the proposed general rule governing nondischargeability of credit carddebt.

The beneficiaries of this exception are credit card lenders, not thegovernment. If a consumer paid taxes with a credit card and subsequently filed forbankruptcy, the government would not experience a loss even if the credit card debtwere discharged. Like any entity that accepts credit cards, the IRS is not required togive the money back to the credit card company if the debtor defaults on a credit cardobligation. The debtors' failure to pay-whether through bankruptcy or otherwise-isthe loss borne by the credit card issuer, just as the interest a debtor pays on theobligation inures to the benefit of the credit card lender, not the government. Because the tax obligation already has been satisfied, this exception to dischargeallows a credit card lender to collect an unsecured, nonpriority credit card debtpostbankruptcy, without showing any proof of fraudulent intent, merely because thedebtor happened to use that credit card to pay for taxes instead of groceries. Consumers paying taxes on credit cards who pay the debt off over time will bepaying a very high interest rate on their tax payments, which presumably isnondischargeable as well.

However, the provision reinforces the principle that citizens must bearresponsibility for certain tax obligations, regardless of their methods of payment. The exception to discharge for tax debts paid by credit card emphasizes the importantmessage that payment of taxes is an obligation shared by all. In light of the recentchange to permit the IRS to accept credit card payment, it would have been prematurefor the Commission to recommend a change.

1.4.3 Criminal Restitution Orders

Section 523(a)(13) should be expanded to apply to all criminal restitutionorders.

Federal criminal restitution orders cannot be discharged in bankruptcy,according to section 523(a)(13). (472) Congress added this provision through The Violent Crime Control and Law Enforcement Act of 1994. (473) This provision applies to only federal criminal restitution orders and excludes restitution orders issued understate law. According to the United States Supreme Court's decision in Kelly v.Robinson, state criminal restitution orders are nondischargeable under section523(a)(7). (474)

While state restitution orders already are protected under section 523(a)(7),there is no reason to distinguish among restitution orders in section 523(a)(13). Provisions that arbitrarily distinguish between similar debts run counter to a policy-based approach to nondischargeability. Whether federal or nonfederal, criminalrestitution orders are part of criminal convictions that reflect the penal andrehabilitative interests of government entities. Therefore, the Commissionrecommends this change that is wholly consistent with current law and policy. (475)

Some have argued that section 523(a)(13) is unnecessary to make restitutionorders nondischargeable and should be deleted because subsequent courts uniformlyhave applied the holding and reasoning of Kelly v. Robinson to make federal and staterestitution orders nondischargeable under section 523(a)(7), (476) providing two bases for nondischargeability for criminal restitution obligations. Also, because manyrestitution orders involve conduct that gives rise to a nondischargeable debt undersection 523(a)(6) for willful and malicious injury or section 523(a)(2) for fraud,section 523(a)(13) provision duplicates the results of another statutory section aswell.

1.4.4Family Support Obligations

Sections 523(a)(5), (a)(15), and (a)(18) should be combined. The revised523(a)(5) should provide that all debts actually in the nature of support,whether they have been denominated in a prior court order as alimony,maintenance, support, property settlements, or otherwise, are nondischargeable. In addition, debts owed under state law to a state or municipality in the natureof support would be nondischargeable in all chapters.

Many state and federal laws reflect the importance of upholding familysupport obligations. In bankruptcy, obligations owed to support children and formerspouses receive extra protection for important policy reasons. Unlike many othercreditors, children and former spouses requiring support are involuntary creditorswho have no opportunities to offset their credit risks or diversify a loan portfolio toprotect themselves. (477) They are relying on one person who is obligated to pay an amount deemed necessary for their support. Without those payments, they maysuffer serious consequences. Ultimately, they may need governmental assistance tocompensate for the lack of support, or they may be forced into bankruptcythemselves.

The bankruptcy laws reflect the critical importance of family supportobligations through the priority and exception to discharge provisions. (478) However, there may be ways to strengthen and clarify the laws to ensure that the policy goalsare met with less confusion and with less burden on the parties and the courts. Threeseparate sections currently govern the nondischargeability of family supportobligations.

Section 523(a)(5). The primary nondischargeability provision to protectrecipients of support obligations is section 523(a)(5). Under this provision,maintenance and alimony obligations are nondischargeable in all chapters. (479) Federal law governs whether a debt is in the nature of a family support obligation,even if a state domestic relations court did not label the obligation as support. (480) Indetermining nondischargeability, courts sometimes must look beyond the languageof the decree, particularly in a community property state, to determine whether theobligation is actually in the nature of support. (481) Bankruptcy courts and state courts have concurrent jurisdiction to make this determination, but, regardless of what courtis resolving the question, it is clear that federal law governs the determination ofnondischargeability. (482) Thus, if the obligation actually is a support obligation, it should be excepted from discharge under section 523(a)(5) even if it previously hasbeen characterized as a property settlement. (483)

Courts have considered a variety of factors in determining whether anobligation is actually in the nature of support, including the intent of the parties andwhether the provision functioned as support at the time of the divorce. (484) Looking at whether a given debt functions as support enables the court to except fromdischarge a wide range of debts that are not labeled as alimony or child support, suchas credit card debts, (485) or "hold harmless" arrangements to pay other debts incurred during the marriage. (486)

Because both state and federal courts are required to assess whether anobligation is actually in the nature of support for purposes of federalnondischargeability, regardless of what the obligation is labeled in the divorce decreeor property settlement, the fact that a community property state may not have"alimony" per se does not preclude a finding of nondischargeability under section523(a)(5). (487) The circuit courts of appeals have reinforced this point in their opinions interpreting the statute in the context of community property law. Althoughpublished case law suggests that lower courts are in accord with these standards, itis possible that not all courts are in line with this directive. Therefore, theCommission recommends an amendment to section 523(a)(5) to provide expressstatutory language that any debt actually in the nature of support is not dischargeablein any chapter of the Bankruptcy Code in both community property and common lawproperty states.

Section 523(a)(18). Section 523(a)(18) sets forth an additional exception todischarge governing support obligations owed to certain government entities. (488) Aspart of the Personal Responsibility and Work Opportunity Reconciliation Act of1996, Congress added this provision to ensure that a debt in the nature of supportowed to a state cannot be discharged in bankruptcy cases. Section 523(a)(5)(A)already excepts from discharge support obligations that were assigned to a state orpolitical subdivision of a state, and according to Collier on Bankruptcy, there is nolegislative history to explain what appears to be redundant legislation. (489) However,unlike debts covered by section 523(a)(5), section 523(a)(18) is included in thesuperdischarge for debtors who complete Chapter 13 plans. (490) So long as section 523(a)(5) clearly provides that the debts delineated in section 523(a)(18) arenondischargeable, subsection (18) should be deleted. (491) This approach ensured that those debts are nondischargeable in all chapters.

Section 523(a)(15). The Bankruptcy Reform Act of 1994 introduced a newexception to discharge for debts arising out of divorce decrees or separationagreements under certain circ*mstances. (492) This provision apparently was enacted to ensure that some of the aforementioned "hold harmless" and property settlementobligations that are not labeled as "support" are nonetheless nondischargeable whenthe debtor can afford to pay the debt. (493) However, the procedures and requisite tests are cumbersome and can impose significant burdens and litigation costs on thenondebtor spouse. To take advantage of section 523(a)(15), a former spouse mustfile an adversary proceeding seeking to except such obligations from discharge. Inmost cases, this must occur no later than 60 days after the first date set for the section341 meeting of creditors. (494) If the former spouse misses the deadline, an obligation to divide property will be discharged. (495)

Section 523(a)(15) further requires the bankruptcy court to assess the presentfinancial capabilities and needs of both the debtor and nondebtor parties, and tobalance the hardship to the nondebtor against the benefit to the debtor of dischargingthe debt. The provision permits the discharge of these debts if it is shown that thedebtor cannot pay the debt, (496) bringing into play the same "disposable income" analysis that creates disparate results in the required payments to unsecured creditorsin Chapter 13. (497) In addition, the debt might be discharged if the benefit to the debtor of the discharge outweighs the detriment caused by discharge to the nondebtorspouse. (498) The application of this test is not an easy task. (499) The provision is silenton presumptions and burdens of proof. (500) Also unclear is whether the court should assess the debtor's financial condition at the time of the bankruptcy filing, (501) the time of the filing of the adversary proceeding, (502) or the time of the hearing. (503) Any of these choices entails a set of circ*mstances distinct from those at the time of the divorcedecree.

Although there is no indication that Congress intended to affect the broadinterpretation of support obligations of section 523(a)(5), (504) the present set of procedures in section 523(a)(15) for obligations that are not labeled as supportpotentially weaken the protection of ex-spouses and children that Congress affordedthem under section 523(a)(5). Section 523(a)(15) is operative only with respect todebts "not of a kind described in section 523(a)(5)." Where previously a court lookedto the nature of obligations that were not labeled as support under section 523(a)(5)to determine if they actually function as support, a court now might proceed undersection 523(a)(15) for obligations now labeled as support, such as the assumption ofcertain debts in exchange for lower support payments. (505) Not only does this entail the cumbersome balancing and consideration of the relative needs of the parties, but italso necessitates quick action on the part of the nondebtor ex-spouse: missing the 60day filing deadline for obligations that are not obviously support obligations mightforeclose all possibility of preserving nondischargeability. (506) The resulting nondischargeable debt may be smaller than what could have been protected undersection 523(a)(5). Furthermore, any debts that might be excepted from Chapter 7discharge under section 523(a)(15) are dischargeable in Chapter 13 if the debtorcompletes a payment plan. (507) Thus, while well-intentioned, the new section 523(a)(15) in practice has introduced uncertainty into the protective scheme, therebyundermining the protection for family support obligations.

With the recommended change to section 523(a)(5), section 523(a)(15) wouldbecome largely superfluous. As the sole provision governing nondischargeabilityof family obligations, an amended and clarified section 523(a)(5) would provideexplicit direction for all parties on the nondischargeability of support obligations andwould make them uniformly nondischargeable in all chapters. Obligations handledthrough property settlements that truly are not for support, such as business debts thatwere not assumed in exchange for lower support payments, would be dischargeablelike other debts. This consolidation of related provisions would limit the extent towhich bankruptcy courts must intrude into family law issues. Under section523(a)(5), the bankruptcy court simply must characterize the prior state courtjudgment but should not adjudicate support entitlements. Thus, while some litigationremains necessary, court intrusion is kept to its minimum. (508) Moreover, because state courts have concurrent jurisdiction over proceedings under section 523(a)(5), thislitigation can proceed in a state court.

Competing Considerations. Some might prefer that the implementationproblems with section 523(a)(15) be repaired by clarifying the standards andproviding more details, rather than omitting it, so that debtors will remain responsiblefor nonsupport property settlements in some instances. Others would go several stepsfurther and would provide that all property settlements in connection with a divorcedecree, regardless of their content, should be nondischargeable, which would relievethe nondebtor spouse from having to litigate the nondischargeability of an obligationin the bankruptcy court or state court, and correspondingly would relieve the courtsfrom having to undertake any investigation into whether the debt actually was in thenature of support. (509) An inherent assumption of this approach is that the vast majority of property settlements involve some element of support, although this maynot account for situations in which the nondebtor spouse is far better off financiallythan the debtor. (510) The American Academy of Matrimonial Lawyers advocates that property settlements be nondischargeable for five years, while it also endorses aspecific provision to protect attorneys' fees. (511) The notion of eliminating all litigationon family obligations is appealing, but the question of nondischargeability under federalbankruptcy law is one that can be determined only after an individual files forbankruptcy. The Commission's Recommendation reflects a policy choice thatsupport obligations deserve very special protection which should be spelled outclearly in the statute. Whether every obligation that might exist between once-married people should become a nondischargeable debt is a different question.

1.4.5 Dischargeability of Student Loans

Section 523(a)(8) should be repealed.

Until the middle of the 1970s, student loans were not treated differently inbankruptcy than other debts. Since then, the dischargeability of government- andnonprofit- insured educational loans increasingly has been restricted. Student loansinitially were nondischargeable only within the first five years after payment becamedue and could be discharged in Chapter 13 if the debtor completed a three to five yearpayment plan. Now, bankruptcy law excepts from discharge student loans withintheir first seven years of repayment, and, unlike most other nondischargeable debts,current law makes these loans nondischargeable in all chapters. (512) While the Code provides an exception to the rule of nondischargeability if a debtor can affirmativelyprove that repayment of the loans would cause the debtor "undue hardship," thisexception is narrowly construed such that the debtors most in need are least likely tobe able to litigate the issue convincingly or at all. The Commission reviewed theprinciples behind declaring such loans nondischargeable and recommends toCongress that the provision be overturned.

The question at issue in this Proposal is not whether anyone wantsindividuals to discharge their debts, educational loans or otherwise. The question iswhether a debtor overloaded with consumer debts incurred to buy a car, a vacation,or a pizza can resort to bankruptcy but a debtor who borrows to pay for tuition andbooks cannot. Unlike a home mortgage, a credit card debt, a small business loan, oralmost any other type of consumer credit, an educational loan remains the debtor'sobligation until it is paid in full:

Congress placed guaranteed loans in a class with debts for taxes,debts induced by fraud, and debts for compensation of injuries bydrunk drivers. The government guarantees the loans and makes lawsthat treat its guaranteed loans as more obligatory than other loans,defining them to be as compelling as debts arising from turpitude. Students are not criminals, however, and debts owed to the UnitedStates should be no more sacred than other personal obligations. Today young people are induced to indenture themselves by a systemthat ignores the capacity of the debtor to bear the burden. This systemis, moreover, exploited by proprietary schools, colleges, anduniversities, as well as by bankers and other lenders, throughcontracts of adhesion that most students must accept lest they give upthe idea of learning. (513)

The educational loan burden can be even more overwhelming for those who try topay their debts. While the debtor is in Chapter 13, interest continues to compound. If a debtor does not find a way to make all student loan payments in addition to otherChapter 13 obligations, the debtor will face an even more overwhelming loanobligation at the end of the Chapter 13. (514) Yet, this consequence often is unavoidable when most courts interpret the Code to require that all unsecured debts, includingnondischargeable debts, must be paid pro rata. (515) Even if courts permit separate classification or the debtor otherwise pays the principal in full, the debtor mayemerge from a Chapter 13 plan only to be liable for compounded interest that willtake years to repay. (516) The Commission has received letters recounting the details of cases in which a debtor has completed a five year payment plan and paid the principalon educational loans in full, only to face tens of thousands in accrued interest at theend that the debtor was not able or not allowed to pay through the plan. (517) Thebankruptcy system, through its network of exceptions to discharge, seems to penalizeindividuals who seek to educate and improve themselves while it liberates otherindividuals from overwhelming debt incurred for other purposes or through differentmeans. At the same time, the exception may be perceived as unfair to other lenderswho do not lend money for education or make educational loans that are not insuredby the government or nonprofit agencies.

When Congress singled out student loans for different treatment in the mid-1970s, several issues were crucial to the policy discussions. Some people worriedthat borrowers too easily would discard educational debts if permitted. Stories in thepopular press focused on individuals who sought bankruptcy relief to dischargestudent loans in spite of their promising prospects for significant future income. (518) These borrowers purportedly would cost the federal government millions of dollars. Concerned that the perception of abuse, however small in reality, would "discreditthe system and cause disrespect for the law and those charged with itsadministration," the 1973 Report of the Commission on the Bankruptcy Laws of theUnited States recommended that student loans be nondischargeable for five yearsafter repayment commenced. However, the 1970 Commission acknowledged thatstudent loan abuse was more perception than reality. A sweeping recommendationmight prove too burdensome for debtors in serious trouble. Therefore, the 1970Commission recommended a exception: if the debtor could show that the studentloans caused undue hardship for the debtor and dependents, those loans should bedischarged. (519) Congress enacted such a provision in the Education Amendments Actof 1976, (520) which later became section 523(a)(8) of the Bankruptcy Code.

While the debates were haunted by the image of the about-to-be wealthygraduate of medical school or law school, this image was not accepted universally.Many questioned whether there was sufficient evidence of abuse to warrant anexception to discharge for student loans at all. (521) In the House debates, for example, Representative O'Hara stated that excepting student loans from discharge was a"discriminatory remedy for a 'scandal' which exists primarily in the imagination."(522) The House Judiciary Committee did not endorse these restrictions. (523) In taking this position, the House Judiciary Committee cited General Accounting Office datafinding that only a fraction of 1% of all matured student loans were discharged inbankruptcy and that bankruptcy filings constituted only three to four percent ofstudent-loan losses, a rate that compared favorably to the consumer credit industryoverall. (524) When student loans were discharged in bankruptcy, that GAO study found that debtors also had other significant indebtedness, leading to the conclusion thatthose filings represented genuine financial need, not from attempts to find an easyavenue to student debt relief.

Groups such as the American Bankers Association and Consumer BankersAssociation Task Forces on Bankruptcy opposed the 1970s student loannondischargeability legislation that gave government agencies privileged treatmentto collect debts postbankruptcy: "If the social utility of what is exchanged for the debtis to be determinative of dischargeability then the question can be raised of whetherit is proper to discharge medical bills, food bills, etc. This proposed [legislation]simply suggests that if sufficient political pressure can be generated, a special interestgroup can obtain special treatment under the bankruptcy law."(525)

Student loans were dischargeable in Chapter 13 cases under the BankruptcyCode until legislation in 1990. (526) Particularly in courts that permit three-year low percentage plans, a limitless number of individuals arguably could have attemptedto use Chapter 13 to unburden themselves of student debt. However, no empiricalevidence has been discovered showing that students systematically were able to takeadvantage of Chapter 13 to discharge their student debts. According to empiricaldata on cases in 1981, less than 7/10 of 1% of total debt for wage earners in allconsumer cases was for educational loans. (527) Perhaps more significantly, that debt was equally likely to be reported in Chapter 7 (where it was nondischargeable) as inChapter 13 (where it was dischargeable). (528) When debtors attempted to use Chapter 13 solely to discharge significant educational loans, some courts denied confirmationunder the bad faith doctrine if the facts so required. (529)

Although the drafters of the nondischargeability provision may have intendedthat those who truly cannot pay should be relieved of the debt under the unduehardship provision, in practice, nondischargeability has become the broad rule withonly a narrowly construed undue hardship discharge. (530) Many commentators have recounted the vagaries of the undue hardship exception. (531) In many courts, undue hardship requires more than severe financial difficulty; debtors sometimes areexpected to provide affirmative proof of truly extraordinary circ*mstances beyondfinancial inability. (532) It hardly is surprising that some courts see few requests for hardship discharges of educational loans given the pitfalls of the undue hardshipstandard. (533) The borrowers most likely to prevail in many courts are those with the least possibility of being able to litigate the question. The risk of losing is also high. Failure to meet the burden of proof leaves the debtor with the student loan debts andsubstantial litigation expenses. (534)

Moreover, even the seven-year nondischargeability period is the subject ofmuch litigation due to the variety of deferral and forbearance options that manystudent loan grantors provide. (535) The seven-year period is tolled if the borrower requests the deferral, but lenders sometimes argue that a period of nonpaymentretroactively can be deemed a deferral, yielding a longer nondischargeabilityperiod. (536) In addition, a loan consolidation may start the seven-year period anew. (537)

It frequently is argued that student loans must remain presumptivelynondischargeable to ensure that those with promising future income streams remainliable to preserve student loan funding in the future. (538) This view is premised on the notion that if student loans are dischargeable, professional students will flock indroves to the bankruptcy system. As stated previously, the available evidence doesnot support the notion that the bankruptcy system was systematically abused whenstudent loans were more easily dischargeable. Furthermore, empirical evidence doesnot support the oft-cited allegation that changes in bankruptcy lawentitlements-exemptions, dischargeability, or otherwise-affect the rate of filing forbankruptcy to obtain those benefits. (539) The fear that soon-to-be rich professionals would line up for bankruptcy to do away with their student loans remains aquestionable proposition judging by earlier experiences when student loans weredischargeable and by long-term data on influences on bankruptcy filings. (540) Defaultsmay rise or fall as the number of borrowers and size of tuition bills change at alltypes of institutions beyond the ability of students to repay, but this happens to alarge extent irrespective of dischargeability in bankruptcy.

No one questions the fact that insured student loan programs further federalpolicy supporting vocational and higher education. They are significant in helpingstudents obtain access to higher education or technical training. Such programs arefunded on the assumption, in part, that many students simply will be unable to repaythese loans, whether or not they discharge them in bankruptcy:

Consideration of various reform proposals during the 1980s centeredon the recognition that there is a 'subsidy element' to a governmentloan guarantee program. If all loans were repaid, there would be nocost to the government apart from administrative expenses. Were thisthe case, however, there would probably have been no need for theprogram to begin with. Since the objective of a loan guaranteeprogram is to enhance the availability of credit which the privatelending market alone cannot or will not provide, it is reasonable toexpect that there will be defaults, most likely at a higher rate than theprivate lending market experiences. (541)

The government does not refuse to guarantee loans that may be hard to collect. Thepotential difficulty in collection often is what necessitates government insuredprograms. The government inherently has enhanced collection tools, such as accessto social security information, ability to offset against tax refunds, and heightenedwage garnishment ability, but may be less vigilant in its collection efforts than privateinsurers. Although they bear significant distinctions from the G.I. Bill and grantprograms that formerly were prevalent in helping to educate the Americanpopulation, government-guaranteed student loans are the closest approximation tothose types of subsidies. They serve the same functions to help Americans receivean education, a goal that Congress continues to embrace strongly.

The fact that student loans may sometimes be uncollectible does not meanthat the bankruptcy system should encourage any increase in the level of defaults. However, whether or not borrowers can discharge their student loans in bankruptcy,many will continue to default and be unable to repay. In 1991, the GAO reviewednumerous empirical studies to isolate characteristics of the average student loandefaulter. (542) The GAO reported the following defaulter characteristics: they had attended vocational or trade school;(543) they had low incomes, with five studies finding that the majority of defaulters had incomes of $10,000 or less;(544) theborrowers were unemployed at the time of default;(545) they had borrowed small amounts; they had little or no financial support from others; many had minoritybackgrounds; some lacked high school diplomas; many did not complete theprogram for which they obtained the student loans, often attending for one year orless.

The GAO provided an additional explanation of student loan collection:

See Also
Should I Cash Out My Savings Account Before Filing for Bankruptcy?What Debts Are Not Discharged in Bankruptcy: Learn the LimitationsNondischargeable Debt: What It Means, How It WorksIf I file for bankruptcy or make a consumer proposal, will all of my debts be discharged?

Several other problems associated with student loans also make itdifficult to collect. Our February 1997 high-risk series report, forexample, noted that many student borrowers have little or no meansto repay their loans because they attended poor quality proprietaryschools that failed to provide them with marketableskills. Inaddition,wehavealso reported that, in thepast,manystudentloanswere initiatedabsent important controls critical to mitigatingrisksupfront,includingchecks toidentifypriordefaults onthepartof applicants. (546)

The GAO report indirectly illustrates a different kind of abuse that has complicatedthe issues surrounding student loans. Because the loans are guaranteed, some tradeor technical schools enroll people for government guaranteed student loans with littleexplanation of the obligation undertaken and take the tuition dollars withoutproviding any real training of value that leads to employability. Others note anothertype of misuse: the heightened debt burden of students is exacerbated significantlywhen schools are able to raise their tuition to take advantage of the money that willflow in from government-guaranteed loans; for example, one author has noted tuitionat public law schools jumped over 171% between 1978 and 1988. (547)

If student loans could be discharged once again, the government and thelenders would not be powerless to protect themselves. If lenders request family co-signors, there is a significant disincentive to bankruptcy filing unless both the studentand the co-signors are in financial trouble. If a child in a wealthy family seeks toborrow money and discharge it in bankruptcy, that child's family will remain liableon the obligation unless the family is willing to liquidate all property in excess ofexemptions and subject itself to the bankruptcy process as well. Families withmeager means may discharge the debt in bankruptcy, but these are the families mostlikely to have defaulted on the student loan even if the debt were not dischargeable. Making more student loans nondischargeable does not alter the defaulters' inabilityto repay the loans.

The Commission recommends that Congress eliminate section 523(a)(8) sothat most student loans are treated like all other unsecured debts. In so doing, thedischargeability provisions would be consistent with federal policy to encourageeducational endeavors. The Recommendation would also address the numerousapplication problems that have resulted from the current nondischargeabilityprovision. No longer would Chapter 13 debtors who made diligent efforts to repaybe penalized after completing a plan with thousands and thousands in compoundedback due interest. Litigation over "undue hardship" would be eliminated, so that thedischarge of student loans no longer would be denied to those who need it most.

This Recommendation would not change the treatment of Health EducationAssistance Loans. Such loans are available in a specialized profession, with asignificant proportion of the funding devoted to physician training. The presumptionof adequate income to repay such loans is stronger in these cases. (548) Under the Commission's Recommendation, loans for medical education governed by specialfederal legislation, such as the HEAL program, should remain nondischargeableunder the terms provided by that special legislation. Congress could, however, setforth those provisions in section 523(a)(8) in place of the current text, to counterany trend to scatter bankruptcy legislation outside Title 11.

1.4.6 Issue Preclusive Effect of True Defaults

For complaints to establish nondischargeability on grounds set forth insection 523(c), the Bankruptcy Code should clarify that issues that werenot actually litigated and necessary to a prior judgment shall not begiven preclusive effect.

Discharge is a unique feature of the bankruptcy laws. Whether a particulardebt is dischargeable has been a federal question governed by bankruptcy law sinceCongress amended the Bankruptcy Act of 1898 in 1970. (549) As a general matter, Congress delegated to the federal courts the exclusive right to determine thedischargeability of certain debts in bankruptcy, particularly for allegations of fraud,defalcation, or intentional tort. (550) When parties seek the application of an exception to discharge under section 523 of the Bankruptcy Code, courts are obligated toconstrue those sections narrowly, (551) and for good reason: debts excepted from discharge are treated differently than all other debts for overriding policy reasons, notmere fiat. (552)

Although determination of discharge status is a federal question, some factorsthat give rise to a determination of nondischargeability may have been establishedprior to the bankruptcy case. In some cases, creditors and debtors have already beeninvolved in legal actions that may have a bearing on issues that overlap with elementsin a nondischargeability determination. The question of this Recommendation iswhether a prebankruptcy default judgment can make a debt conclusivelynondischargeable in bankruptcy without any presentation of evidence of the debtor'swrongdoing.

A hypothetical fact pattern will help illustrate the problem. A creditor suesan individual to collect a debt. The defendant does not appear at the state courthearing because her employer will not excuse her from work or because she cannotafford an attorney. In the defendant's absence, the judge enters a default judgment. The creditor included a charge of fraud in the order submitted to the court. Later, thedefendant files for bankruptcy. The creditor in the prior lawsuit alleges that the debtis nondischargeable because the default judgment includes a claim of fraud. Whilethe debtor asserts that she did not commit fraud, and that the debt should not betreated differently from her other debts that are being discharged, the creditor statesthat she cannot make that claim because the default judgment refers to fraud andtherefore the issue has been established conclusively.

Under federal issue preclusion doctrine, the debtor would have an opportunityto contest the charge of fraud in the context of nondischargeability because the issuewas never actually litigated in state court. (553) This is consistent with the general rule on issue preclusion set forth in the Restatement (Second) of Judgments:

When an issue of fact or law is actually litigated and determined bya valid and final judgment, and the determination is essential to thejudgment, the determination is conclusive in a subsequent actionbetween the parties, whether on the same or a different claim. (554)

The federal rule and Restatement rule are based on sound policyconsiderations. When parties have actually litigated the issue that triggersnondischargeability, the judicial doctrine of issue preclusion prevents needlesslitigation. (555) Issue preclusion relieves parties of the cost and vexation of multiple lawsuits, conserves judicial resources, and, by preventing inconsistent decisions,encourages reliance on adjudication. (556)

However, not all courts use the same test for issue preclusion. In some statecourts, actual litigation is not a prerequisite to issue preclusion, so that a defaultjudgment can preclude subsequent challenges in a different forum. The issue arisesin bankruptcy because not all bankruptcy courts automatically apply federal issuepreclusion doctrine. Rather, courts give prior judgments the same "full faithand credit" as the state courts from which they were taken. (557) Although this rule has its limits and is inapplicable if the prior action had woefully deficient procedures(558)or if Congress provides a statutory exception, (559) bankruptcy courts are generally free to apply state issue preclusion rules-including preclusion based on a defaultjudgment-to dischargeability proceedings.

If a state court were to consider its judgment's effect on a subsequent federalproceeding invoking unique federal issues, the state court might well determine thatthe federal, not the state, issue preclusion doctrine should apply. However, thispossibility rarely enters into the analysis. Rather, courts consider only the issuepreclusion doctrine of the state court in which the judgment was rendered. In sodoing, the Sixth and Ninth Circuit Courts of Appeals have determined that the issuesof fraud and defalcation were decided conclusively in prior state court defaultjudgments because Florida and California law, which governed the prior proceedingsin those cases, did not require issues to be actually litigated for issue preclusionpurposes. (560) Therefore, although no evidence on fraud or defalcation was presented in the state court hearings on fraud or defalcation, these debts were deemed to benondischargeable in subsequent bankruptcy cases without any litigation on themerits.

The result reached by the Sixth and Ninth Circuits is troubling for severalreasons. It is inconsistent with Congressional intent to except from discharge anarrow class of debt for public policy reasons and generally to treat all creditorsequally. While a bankruptcy court defers to prior state court judgments when theissues relevant to dischargeability have been litigated fully, an issue that was neverlitigated at all provides an insufficient basis on which to make a debtnondischargeable. In instances of true default judgments, completely forgoinglitigation of the grounds for nondischargeability is inconsistent with the exclusivejurisdiction of the federal district and bankruptcy courts over dischargeability actions.Issue preclusion in this context should bar re-litigation-not initial litigation-of issuesthat were actually litigated and decided in a previous action, as federal issuepreclusion doctrine generally demands. (561)

In addition, permitting default judgments to be preclusive in dischargelitigation yields substantial disparities. This problem is illustrated by comparingthree appellate cases in the Ninth Circuit: As mentioned previously, in In reNourbakhsh, the Ninth Circuit held a debt nondischargeable based on a Florida courtdefault judgment. However, in In re Davis, after a district court gave preclusiveeffect to an Arizona default judgment, the Ninth Circuit reversed the district courtbecause Arizona law required actual litigation as a prerequisite to issue preclusion. (562) In a third case, Silva v. Smith's Pacific Shrimp, the prior judgment at issue came froma federal court based on diversity jurisdiction. Because the judgment was based onan unopposed motion for summary judgment, the Ninth Circuit held that it did notsatisfy the requirements for issue preclusion. (563) The rules in the Ninth Circuit alonediffer for default judgments from state courts versus federal courts and from one stateto another. In other words, the geographic location of a prior default judgment hasbecome determinative of whether the debtor will have the opportunity to litigate afederal cause of action, the nondischargeability of an otherwise dischargeable claim.

Permitting default judgments to constitute the basis of nondischargeabilityalso encourages some questionable practices that Congress expressly has sought toavoid. Longstanding concerns about debtor-creditor relations justify theapprehension of judges, scholars, and practitioners about the problem of reliance ondefault judgments. Until 1970, under the Bankruptcy Act of 1898, the discharge ofdebt was not self executing, but rather it was an affirmative defense in subsequentproceedings. Creditors would bring state court actions postbankruptcy that includedallegations of fraud on prepetition debts based on claimed mistakes on financialstatements. Debtors failed to defend themselves in these actions because of "aninability to retain an attorney due to lack of funds" or because of a mistaken relianceon their bankruptcy discharge. (564) This practice significantly undermined the bankruptcy process and the scope of the discharge. (565) In response, in 1970, Congressamended the Bankruptcy Act of 1898 to make the discharge automatic and to requirecreditors to file and litigate certain nondischargeability actions in the context of thebankruptcy itself if they intended to assert them at all. (566) Congress also sought tofurther the bankruptcy judges' expertise in analyzing exceptions to discharge. (567)

The current situation presents the opportunity for a new twist on the problemthat occurred under the Bankruptcy Act. Now, state court actions, which almostinvariably include a fraud count, are begun before the debtor has filed a bankruptcypetition. If the debtor fails to respond, either because of a misunderstanding orbecause the debtor lacks the financial resources to hire an attorney, (568) a defaultjudgment will be entered against the debtor that will have the effect of making thedebt nondischargeable. This has a particularly harsh effect on pro se debtors. (569)

The Bankruptcy Code already recognizes that prior judgments do not alwaysprovide the information necessary to make determinations about dischargeabilitybecause dischargeability raises different questions that necessitate independentdecisions about the nature or character of those judgments. For example, courts mustmake independent determinations of whether a domestic relations obligation isactually a support obligation, regardless of how the parties or a state court havedenominated the legal obligation. (570)

The writings of Professor Stephen Burbank, a noted federal courts scholar,suggest that this Recommendation would not be inconsistent with the full faith andcredit statute: "There is a federal interest in ensuring that legal rules used in theprocess by which rights under federal substantive law are recognized and enforcedare not inimical to a particular scheme of federal substantive rights. This interestexists whether federal or state law provides the process and however the rules arecharacterized. In the case of litigation in the federal courts, the existence of theinterests suffices, under traditional federal common law analysis, to trigger theconclusion that federal law governs."(571) The rule proposed here is consistent with other federal policies.

The primary concern of this Proposal is "true" or "ordinary" defaults, notsituations where a debtor may have participated substantially and extensively in aprior adversary proceeding but then managed to force entry of a default rather thana litigated judgment. As such, this Proposal is not intended to affect courts'determinations of what is "actually litigated" for issue preclusion purposes. (572) Acourt may hear evidence and make its own determination of when a default judgmentis or is not a true default judgment.

Competing Considerations. For those who believe that bankruptcy law mustincorporate as much state law as possible, failure to apply state law preclusionstandards, even in actions that are exclusively federal bankruptcy actions, may seeminappropriate. This concern does not address the possibility that state courts mighthave applied federal preclusion standards in some circ*mstances.

Others do not think this Proposal goes far enough because it does notspecifically require the application of the federal issue preclusion standards. (573) Thismeans that liberal interpretations of actual litigation still could prevent an actualdetermination of fraud or other bases for making a debt nondischargeable.

1.4.7 Vicarious Liability

Section 523(c) should be amended such that intentional action by awrongdoer who is not the debtor cannot be imputed to the debtor.

Some sources of law impose liability without individual culpability. Underpartnership law, partners are liable for partnership debts incurred by any of them inthe ordinary course of business;(574) liability is not premised on the intent of thepartners. (575) Likewise, tort law imposes vicarious liability under the doctrine ofrespondeat superior, again without a showing of intent on the party of the debtor. (576) Similarly, some state laws make parents responsible for the offenses of theirchildren. (577)

By contrast, a nondischargeability finding is based principally on the debtor'sindividual culpable conduct. (578) This is especially true of the more frequently-litigatedcategories of nondischargeable debts in section 523(a) that contain an express orinherent intent requirement, e.g., those for fraud, defalcation, and willful andmalicious injury. Debts are excepted from discharge for public policy reasons todeter intentional conduct and to eliminate the benefits of the debtor's inappropriateactions. The plain language of the nondischargeability provisions indicatesCongressional intention that many nondischargeability provisions are triggeredspecifically by the intention and activity of the debtor, not some other party. Forexample, section 523(a)(6) excepts from discharge those debts "for willful andmalicious injury by the debtor to another entity or to property of another entity." Ifa husband is ignorant of his wife's intentional tort, he may be liable on the underlyingdebt, but he has not acted with any ill intent that would make that debtnondischargeable as to him. Because spouses have no formal agency relationship,it is inappropriate to permit one spouse's intent to be imputed to another for purposesof nondischargeability. (579) For this reason, some courts have rejected vicariousliability as a basis for nondischargeability under section 523(a)(6). (580) Likewise, somecourts have refused to impute liability for actions under section 523(a)(2)(A). (581)

However, courts have not always fully embraced this view. The SupremeCourt held in 1885 that an obligation of an individual partner could be imputed toother partners who benefitted from the fraud. (582) Others have followed this line ofreasoning and have determined that debts are nondischargeable on account of theinnocent debtor's partner or agent's action and intent. (583) This disparity createsconfusion and more litigation in the courts.

In the context of its deliberation on partners as debtors, the Commission firstproposed that partners should not be vicariously liable for intentional acts of otherpartners. (584) Whether the partnership is large and diffuse or small, partners may bewholly unaware of their co-partners' ill-intended activities. The "innocent" debtordoes not necessarily gain from the inappropriate activity of a partner, when, forexample, one partner steals goods entrusted to the partnership.

The Commission voted to extend this preclusion of vicarious liability to othercontexts. Vicarious liability is particularly troubling if implemented to transferliability between spouses or other social relations because the predicate assumptionsfor applying vicarious liability are not present at all between non-agent spouses. Debtors' involvement in a non-profit-seeking social relationship should not be thesole basis for punishing a debtor for the ill-intentioned act of another. This Proposalseeks to minimize uncertainty and to adopt the trend in more recent bankruptcy courtdecisions that the creditor bringing a nondischargeability action must prove that thedebtor had the requisite intent, whether the debtor is the spouse, the employer, or theprincipal of a wrongdoing agent. Of course, the fact of partnership or marriage maybe factually relevant in litigation over an exception to discharge. To the extent thatthe debtor's own actions are sufficient to meet the applicable standard ofnondischargeability, then the debt caused by those actions may be excepted fromdischarge. This Proposal merely seeks to eliminate an automatic imputation ofliability based on the debtor's status as a spouse or partner.

Competing Considerations. Some might argue that the discharge exceptionsreflect competing social policy choices based on the nature of the debt itself, not justprotecting the "honest but unfortunate" debtor, thus there may be justifiable reasonsto acknowledge vicarious liability in bankruptcy dischargeability litigation for trueagency relationships. (585) However, even under this approach, spouses in typical consumer nondischargeability cases would not be vicariously liable because spousesdo not have a formal agency or partnership relationship.

In imputing a partner's fraud to the debtor, some courts have emphasized thatpartners have a duty to ensure that partnership affairs are conducted with integrityand the partners accept these obligations by participating in the partnership. In effect,partners are made guarantors for the fraudulent activities of other partners. When theCommission considered this question directly in the context of dealing withpartnerships in bankruptcy, it rejected this policy conclusion.

1.4.8 Effect of Lack of Notice on Time to Bring Objection to Discharge

Creditors that did not receive notice of a bankruptcy should get anextension of time to file an objection to or seek revocation of a discharge.

If a creditor does not receive notice of a bankruptcy case until after theapplicable deadline for filing a nondischargeability action, the Bankruptcy Code mayexcept that debt from discharge. (586) Creditors should not be prejudiced by a lack ofnotice. Likewise, debtors should not have incentives to omit certain creditors fromthe bankruptcy schedules. The Bankruptcy Code does not provide creditors withparallel protection with respect to objections to the debtor's general discharge undersection 727(c). (587) If notice is not provided to a creditor with information that mayprovide grounds for the denial of the debtor's discharge, that creditor may be time-barred in pursuing the objection. The Federal Rules of Bankruptcy Procedureauthorize extensions of the time to object to discharge only if the creditor makes anextension motion within the allotted time, (588) thus a creditor omitted from the schedules and unapprised of the bankruptcy until afterwards is unable to object to thedischarge. Parties can seek revocation within a year after the discharge, but thegrounds for revocation are somewhat more circ*mscribed, and again, the Codecontains no extensions for lack of notice. (589)

One of the key policies underlying the Bankruptcy Code is that only debtorswho have acted honestly will be entitled to a discharge under section 727. (590) To thisend, the statute expressly authorizes parties in interest to bring relevant informationto the court's attention that might indicate that the debtor's discharge should bedenied. Although their debts may be excepted from discharge if they did not receivenotice of the bankruptcy, creditors with pertinent information cannot perform thisbroader monitoring function if they are not aware of the bankruptcy proceeding. Acreditor omitted from the schedules should have a reasonable period of time afterreceiving notice of bankruptcy to file an objection to discharge or a motion to revokedischarge.

Some people might argue that this amendment is unnecessary. The objection-filing deadline (60 days after the first date scheduled for the section 341 meeting)surpasses the average tenure of Chapter 7 individual bankruptcy cases. In addition,the statute already affords a one-year post-discharge period to seek revocation, whichprovides an adequate time frame in most cases. The legitimacy of the bankruptcyprocess is premised on adequate notice and disclosure. This Recommendation shouldencourage debtors and their attorneys to be as forthright as possible in listingcreditors and in providing accurate information.

1.4.9 Settlement and Dismissal of Objections to Discharge

Section 727 should be amended to provide that (a) any complaintobjecting to discharge may be dismissed on motion of the plaintiff onlyafter giving notice to the United States trustee, the case trustee, and allcreditors entitled to notice, advising them of an opportunity to substituteas plaintiff in the action; (b) any motion to dismiss a complaint objectingto discharge must be accompanied by an affidavit of the moving partydisclosing all consideration given or promised to be given by the debtorin connection with dismissal of the complaint; and (c) if the debtor hasgiven or promised to give consideration in connection with dismissal ofthe complaint, the complaint may not be dismissed unless theconsideration benefits the estate generally.

Debtors are presumptively eligible for a general discharge of debt undersection 727 of the Bankruptcy Code. The Code authorizes creditors, as well as theU.S. trustee and case trustees, to file adversary complaints objecting to a debtor'sdischarge. (591) This serves a legitimate function to help ensure that only honest debtorsdischarge their debts. However, a troubling situation arises if a creditor brings anobjection to discharge and then settles or dismisses the complaint in exchange for thedebtor's agreement to reaffirm a debt or to concede the nondischargeability of thedebt on other grounds. This may indicate that the original objection was meritlessand was brought only to yield a benefit to the creditor, or it may mean that adishonest and undeserving debtor will get a general discharge by making a deal withthe one creditor who discovered the dishonesty. (592)

The effect of an objection to the debtor's discharge goes beyond the plaintiffand the debtor; the ability of the complaining creditor to prove that the debtor isunworthy of a bankruptcy discharge significantly affects the rights of other creditorsto pursue collection of their debts. For this reason, several courts have characterizeda complaining creditor as a "trustee" of that action for the benefit of all creditors. (593) As such, the creditor "may not abdicate that responsibility or use that position to itsown advantage by settling the litigation on terms which will allow it to receive aprivate benefit solely for itself."(594)

The Proposal would build upon the basic concept already set forth in theBankruptcy Rules that "a complaint objecting to the debtor's discharge shall not bedismissed at the plaintiff's instance without notice to the trustee, the United Statestrustee, and such other persons as the court may direct, and only on order of the courtcontaining terms and conditions which the court deems proper."(595) The 1983 Advisory Committee Note explains that the rule-makers intended to authorize thecourt to impose conditions on dismissal of a complaint objecting to a discharge,which "raises special concerns because the plaintiff may have been induced todismiss by an advantage given or promised by the debtor or someone acting in hisinterest."(596) This rule works in conjunction with some courts' local rules or ordersthat already require parties to file affidavits that nothing has been promised to theplaintiffs in consideration of the withdrawal of the objection. (597)

A legitimate objection to discharge should not be dismissed on the basis ofconsideration flowing only to the creditor who filed the action, notwithstanding theinterests of other creditors. Moreover, debtors should not be able to "purchase arepose from objections to discharge" given the severity of the charges that wouldsupport such an objection. (598) This Recommendation would permit creditors who did not institute a section 727 action within the 60-day limit to continue thetimely-brought action when the original plaintiff declines to go further. (599) Of course,not all settlements or dismissals of objections to discharge are problematic;(600) thisRecommendation simply would help the court obtain the relevant facts to determinewhether the settlement or dismissal should be approved and to allow other creditorsto become substitute plaintiffs.

If the Commission's Recommendation to limit the availability ofreaffirmations were adopted, fewer reaffirmation agreements could be extracted usingsection 727, leading some to conclude that the instant Proposal is less necessary. However, this Proposal strengthens the integrity of the system both in structure andin practice. It prevents less scrupulous creditors from using section 727 allegationsas an avenue to obtain preferential payments.

Notes:

⁴⁰¹Local Loan Co. v. Hunt, 292 U.S. 234 (1934); Goldberg Sec. Inc. v. Scarlata, 979 F.2d 521 (7th Cir. 1992). Creditors therefore are expected to prove each element of an exception todischarge by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279 (1991). See generallyMargaret Howard, A Theory of Discharge in Consumer Bankruptcy, 48 OHIO ST. L.J. 1047, 1085-87(1987) Return to text

⁴⁰²See, e.g., Schweig v. Hunter, 780 F.2d 1577, 1579 (11th Cir. 1986); In re Christensen, 193 B.R. 963, 967 (N.D. Ill. 1996).Return to text

⁴⁰³Grogan v. Garner, 498 U.S. 279 (1991).Return to text

⁴⁰⁴See Thul v. Ophaug, 827 F.2d 340 (8th Cir. 1987).Return to text

⁴⁰⁵See William C. Whitford, Changing Definitions of Fresh Start in U.S. Bankruptcy Law, 20 J. CONSUMER POLICY 179, 185-85 (1997); Letter from Hon. Samuel L. Bufford, Bankruptcy Judge- C.D. Cal. (April 15, 1997) (section 523 has lost its coherence and should be reworked).Return to text

⁴⁰⁶See 11 U.S.C. § 523(a)(2)(B) (1994).Return to text

⁴⁰⁷Another nondischargeability provision, section 523(a)(2)(C), deals specifically with luxury goods purchased on credit cards on the eve of bankruptcy. This section provides:

(C) for purposes of subparagraph (A) of this paragraph, consumer debtsowed to a single creditor and aggregating more than $1,000 for "luxury goods orservices" incurred by an individual debtor on or within 60 days before the order forrelief under this title, or cash advances aggregating more than $1,000 that areextensions of consumer credit under an open end credit plan obtained by anindividual debtor on or with 60 days before the order for relief under this title, arepresumed to be nondischargeable: "luxury goods or services" do not include goodsor services reasonably acquired for the support or maintenance of the debtor or adependent of the debtor; an extension of consumer credit under an open end creditplan is to be defined for purposes of this subparagraph as it is defined in theConsumer Credit Protection Act[.]

11 U.S.C. § 523(a)(2)(C) (1994).Return to text

⁴⁰⁸See, e.g., AT&T Universal Card Servs. Corp. v. Feld, 203 B.R. 360 (Bankr. E.D. Pa. 1996); AT&T Universal Card Serv. Corp. v. Akdogan, 204 B.R. 90 (Bankr. E.D.N.Y. 1997)("Misrepresentation and reliance in the fraud context are anchored on a direct nexus or relationshipbetween a debtor and a creditor. Here, as in so many other credit card nondischargeability actions,there was little, if anything, in the nature of direct, purposeful contact between the credit card issuer(AT&T) and the credit card holder (the debtor) either at the inception or over the course of therelationship between the parties"). See also Citibank (S. Dakota), N.A. v. Eashai, 87 F.3d 1082 (9thCir. 1996) (credit card debts different than those arising from traditional two-party credittransactions). Return to text

⁴⁰⁹See American Express Travel Related Servs. Co. v. Hashemi, 104F.3d1122 (9th Cir. 1996), cert. denied, 117S.Ct.1824 (1997); Anastas v. American Servs. Bank, 94 F.3d 1280 (9th Cir. 1996); Eashai, 87 F.3d at 1082.Return to text

⁴¹⁰See, e.g., Hashemi, 104 F.3d at 1125. Return to text

⁴¹¹See Field v. Mans, 116 S. Ct. 437, 444 (1995); Mayer v. Spanel Int'l, Ltd., 51 F.3d 670 (7th Cir.), cert. denied, 116 S. Ct. 563 (1995).Return to text

⁴¹²See, e.g., Mercantile Bank v. Hoyle, 183 B.R. 635 (Bankr. D. Kan. 1995); Chase Manhattan Bank v. Weiss, 139 B.R. 928 (Bankr. D.S.D. 1992). Return to text

⁴¹³"The purchase of goods with a credit card constitutes an implied representation by the purchaser that he has both the means and intent to repay for the goods purchased." AT&T UniversalCard Servs. v. Ramirez, 184 B.R. 859, 861 (Bankr. S.D. Fla. 1995); Household Credit Servs. v.Walters, 208 B.R. 651, 653 (Bankr. W.D. La. 1997) (use of card is representation that consumer hasintent and present ability to make payment); see also Norwest Bank (Des Moines, N.A.) Card Servs.Div. v. Stewart, 91 B.R. 489 (Bankr. S.D. Iowa 1988), citing Comerica Bank Midwest v.Kouloumbris, 69 B.R. 229 (N.D. Ill. 1986); In re Buford, 25 B.R. 477 (Bankr. S.D.N.Y. 1982).Return to text

⁴¹⁴"Seldom do the courts concern themselves with the debtors' ability to make the minimum monthly payment." GM Card v. Cox, 182 B.R. 626, 633 (Bankr. D. Mass. 1995) (emphasis added). Return to text

⁴¹⁵First U.S.A. Bank v. Hunter (In re Hunter), 210 B.R. 212 (Bankr. M.D. Fla. 1997), citing Barnett Bank of Pinellas County v. Tinney, 188 B.R. 1015, 1020 (Bankr. M.D. Fla. 1995). Return to text

⁴¹⁶"To hold, as some courts have, that objective inability to pay, coupled with an implicit representation to the contrary at the time the card is used, establishes the deceit element of thenondischargeability cause of action would be to make the debtor a guarantor of his own financialcondition. Such a burden is not imposed by the statute." F.C.C. Nat'l Bank v. Cacciatore, 209 B.R.609, 617 (Bankr. E.D.N.Y. 1997); Anastas, 94 F.3d at 1285; American Express Travel Related Servs.v. Christensen, 193 B.R. 863, 866 (N.D. Ill. 1996); Feld, 203 B.R. at 366 ("each use of the card,accompanied by the cardholder's signed acknowledgment of additional indebtedness incurredpursuant to the card agreement, is a reaffirmation of the intent to repay"); AT&T Universal CardServs. Corp. v. Chinchilla, 202 B.R. 1010 (Bankr. S.D. Fla. 1996) (intent-not ability-to repay, isrelevant inquiry); Mercantile Bank of Illinois v. Williamson, 181 B.R. 403, 406 (Bankr. W.D. Mo.1995); Citicorp Credit Serv. v. Hinman, 120 B.R. 1018 (Bankr. D.N.D. 1990); Sears Roebuck & Co.v. Faulk, 69 B.R. 743 (Bankr. N.D. Ind. 1986); Chase Manhattan Bank v. Carpenter, 53 B.R. 724(Bankr. N.D. Ga. 1985).Return to text

⁴¹⁷Cox, 182 B.R. at 634; see also Comerica Bank Midwest v. Kouloumbris, 69 B.R. 229, 231 (N.D. Ill. 1986) (because debtor may have intended to pay for purchases when charged, courtcannot presume that use of credit card constituted misrepresentation); AT&T Universal Card Servs.Corp. v. Alvi, 191 B.R. 724 (Bankr. N.D. Ill. 1996).Return to text

⁴¹⁸Cox, 182 B.R. at 634-36.Return to text

⁴¹⁹AT&T Universal Card Serv. Corp. v. Nguyen, 208 B.R. 258, 260 (D. Mass. 1997), citing Commonwealth v. Drew, 36 Mass. 178, 185 (1837). However, the Cox analysis has been met withdisfavor by the district courts in the district where this decision was issued. See AT&T UniversalCard Servs. Corp. v. Pakdaman, 210 B.R. 886 (D. Mass. 1997) (rejecting Cox analysis; whilerecognizing that the application of traditional elements of misrepresentation to the credit card area istricky, this court must conclude that Cox strikes the balance too harshly against the creditor");Nguyen, 208 B.R. at 261 (rejecting Cox approach as being fundamentally unfair to creditors andcontrary to section 523(a)(2)).Return to text

⁴²⁰Alvi, 191 B.R. at 732, citing Williams v. United States, 458 U.S. 279 (1982). See Goldberg Sec. Inc. v. Scarlata, 979 F.2d 521 (7th Cir. 1992) (applying Williams analysis tobankruptcy nondischargeability action);In re Horwitz, 100 B.R. 395, 398 (Bankr. N.D. Ill.1989)(same); see also Bank One Columbus, N.A. v. McDaniel 202 B.R. 74, 78 (Bankr. N.D. Tex. 1996)(agreeing with conclusion in Alvi regarding representations).Return to text

⁴²¹See Alvi, 191 B.R. at 732, n.14. Return to text

⁴²²See Neal v. Clark, 95 U.S. 704, 709 (1877) (fraud means actual or positive fraud, not fraud implied in law); In re Welch, 208 B.R. 107 (S.D.N.Y. 1997) (regardless of what method courtsapply to determine nondischargeability of credit card debt, creditor must establish that debtor intendedto deceive creditor at time charges were incurred).Return to text

⁴²³Field v. Mans, 116 S. Ct. 437, 442 (1995).Return to text

⁴²⁴See, e.g., Hashemi, 104 F.3d at 1126, n.2; see also Eashai, 87 F.3d at 1087-88 (courtadopted the twelve factor test set forth in Citibank S. Dakota v. Dougherty, 84 B.R. 653, 657 (B.A.P.9th Cir. 1988)).Return to text

⁴²⁵See Dougherty, 84 B.R. at 657. Return to text

⁴²⁶See Mercantile Bank of Illinois v. Williamson, 181 B.R. 403, 406 (Bankr. W.D. Mo. 1995) (finding that debt was dischargeable); General Elec. Capital Corp. v. Janecek, 183 B.R. 571,575 (Bankr. D. Neb. 1995) (insolvency can be considered, but is not determinative in assessingdebtor's intent to deceive).Return to text

⁴²⁷See, e.g., American Express Travel Related Servs. Co. v. Hashemi, 104 F.3d 1112, 1126 (9th Cir. 1996) (using factors to determine that $60,000 worth of credit card charges on six week European vacationon eve of bankruptcy was not dischargeable), cert. denied, 117 S. Ct. 1824 (1997).Return to text

⁴²⁸See, e.g., FCC Nat'l Bank v. Berz, 173 B.R. 159 (Bankr. N.D. Ill. 1994). Return to text

⁴²⁹AT & T Universal Card Servs. v. Ramirez, 184 B.R. 859, 861 (Bankr. S.D. Fla. 1995); Southtrust Bank of Alabama v. Moody, 203 B.R. 771 (Bankr. M.D. Fla. 1996) ("It should not takea rocket scientist to figure out that even if [debtor] lived 1000 years she would still not be able torepay the charges she ran up on her credit cards"), citing American Express Travel Related Servs.,Inc. v. Dorsey (In re Dorsey), 120 B.R. 592, 594 (Bankr. M.D. Fla. 1990); Mercantile Bank v. Hoyle,183 B.R. 635, 638 (Bankr. D. Kan. 1995); Household Card Servs./VISA v. Vermillion, 136 B.R. 225,226 (Bankr. W.D. Mo. 1992). Cf. Stewart, 91 B.R. at 495 (insolvency alone does not establish intentto deceive); AT & T Universal Card Servs. v. Alvi (In re Alvi), 191 B.R. 724, 733 (Bankr. N.D. Ill.1996); AT & T Universal Card Servs. Corp. v. Chinchilla, 202 B.R. 1010, 1016 (Bankr. S.D. Fla.1996) (lack of ability to pay is insufficient basis on which to infer intent to deceive). Return to text

⁴³⁰A closely related approach is to use objective factors to find "constructive fraud." See Strawbridge & Clothier v. Caivarelli, 16 B.R. 369 (Bankr. E.D. Pa. 1982); Mercantile Trust Co. Nat'lAssoc. v. Pozucek, 73 B.R. 110 (Bankr. N.D. Ill. 1987). Return to text

⁴³¹See, e.g., Sears, Roebuck & Co. v. Taylor (In re Taylor), 211 B.R. 1006 (Bankr. M.D. 1997) (although court can review litany of factors, ultimate determination turns on subjective intent); AT & T Universal Card Servs. Corp. v. Feld (In re Feld), 203 B.R. 360, 367 (Bankr. E.D. Pa. 1996)(dischargeability will not turn on reasonableness of debtor's expectations of ability to repay); AT&TUniversal Servs. v. Totina, 198 B.R. 673, 679 (Bankr. E.D. La. 1996); Chase Manhattan Bank v.Murphy, 190 B.R. 327, 333 (Bankr. N.D. Ill. 1995).Return to text

⁴³²Chevy Chase Bank, FSB v. Briese, 196 B.R. 440, 451 (Bankr. W.D. Wis. 1996).Return to text

⁴³³See Anastas v. American Sav. Bank (In re Anastas), 94 F.3d 1280, 1285 (9^th Cir. 1996), citing 124 CONG. REC. H11089 (Sept. 28, 1978) (Statement of Rep. Edwards) ("subparagraph (A) is intended to codify current case law . . . which interprets 'fraud' to mean actual rather than fraudimplied in law");Alvi, 191 B.R. at 733; First Fed. of Jacksonville v. Landen, 95 B.R. 826 (Bankr.M.D. Fla. 1989) (debtor's honest but questionable relief that he would be successful at gambling andbe able to repay his debts defeats finding of intent to deceive).Return to text

⁴³⁴See Anastas v. American Sav. Bank (In re Anastas), 94 F.3d at 1285; Feld, 203 B.R. at 367 (factors may be helpful, but not controlling, in determining whether debtor had subjective intent to repay). See also Comerica Bank Midwest v. Kouloumbris, 69 B.R. 229, 231 (N.D. Ill. 1986).Return to text

⁴³⁵See Chinchilla, 202 B.R. at 1015.Return to text

⁴³⁶Field v. Mans, 116 S. Ct. 437, 444 (1995); P&S X-Ray Co. v. Dawes, 189 B.R. 714 (Bankr. N.D. Ill. 1995); Irwin v. O'Bryan, 190 B.R. 290 (Bankr. E.D. Ky. 1995).Return to text

⁴³⁷The courts do not agree on whether each credit card transaction should be considered a separate contract or whether they are part of a continuing contract, a distinction that may haveimplications on the outcome of the case. Cf. Anastas, 94 F.3d at 1285 (each transaction is separatecontract), with Cox, 182 B.R. at 636 (continuing contract), and Feld, 203 B.R. at 367, n.7 (same).Return to text

⁴³⁸See, e.g., AT&T Universal Card Servs. Corp. v. Burdge, 198 B.R. 773 (Bankr. 9th Cir. 1996); Colonial Nat'l Bank U.S.A. v. Levinthal, 194 B.R. 26, 28 (Bankr. S.D.N.Y. 1996).Return to text

⁴³⁹Anastas, 94 F.3d at 1286, quoted in Hashemi, 104 F.3d at 1126.Return to text

⁴⁴⁰See, e.g., Feld, 203 B.R. at 368-369; In re Christensen, 193 B.R. 963, 967 (N.D. Ill. 1996); F.C.C. Nat'l Bank v. Willis, 190 B.R. 866 (Bankr. W.D. Mo. 1996), aff'd, 200 B.R. 868 (W.D. Mo. 1996). Return to text

⁴⁴¹See, e.g., Christensen, 193 B.R. at 867;F.C.C. Nat'l Bank v. Cacciatore (In re Cacciatore), 209 B.R. 609, 614 (Bankr. E.D.N.Y. 1997) (court "will not ignore the element ofreliance simply because it may be difficult for credit card companies to prove"); Sears, Roebuck &Co. v. Hernandez, 208 B.R. 872, 880 (Bankr. W.D. Tex. 1997) (rejecting implied reliance); AT&TUniversal Card Servs. v. Richards, 196 B.R. 181, 182 (Bankr. E.D. Ark. 1996). Alvi, 191 B.R. at 731;F.C.C. Nat'l Bank v. Willis (In re Willis), 190 B.R. 866, 869 (Bankr. W.D. Mo. 1996).Return to text

⁴⁴²AT & T Universal Card Servs. Corp. v Akdogan, 204 B.R. 90, 98 (Bankr. E.D.N.Y. 1997) (granting debtor's motion for summary judgment on nondischargeability complaint due to lackof proof of justifiable reliance). The court in Akdogan cited Alvi, Manufacturer's Hanover Trust Co.v. Ward, 857 F.2d 1082 (6th Cir. 1988), and First Card v. Leonard, 158 B.R. 839 (Bankr. D. Colo.1993), in support of its decision. The Akdogan court found it noteworthy that the creditor "did notrequest any information relating to the debtor's expenses, assets, nature of employment or business,health, home ownership, credit references or general financial condition," nor did the creditor requirethe debtor to supply the basic requested information before issuing the debtor the credit card. Id. at92.Return to text

⁴⁴³Briese, 196 B.R. at 453. Return to text

⁴⁴⁴See, e.g., Household Credit Servs., Inc. v. Walters, 208 B.R. 651, 654 (Bankr. W.D. La. 1997) (looking first at whether lender justifiably relied on any credit information when originallyissuing card; pre-approved, unsolicited cards do not indicate justifiable reliance); Bank OneColumbus v. McDaniel (In re McDaniel), 202 B.R. 74, 79 (Bankr. N.D. Tex. 1996) (referring tocredit issuer's practice as "commercial entrapment"), citing Mercantile Bank v. Hiemer, 184 B.R. 345(Bankr. D. Neb. 1995).Return to text

⁴⁴⁵See, e.g., Cacciatore, 209 B.R. at 616 (lender did not justifiably rely when it granted $5,000 line of credit to 21 year old student that listed no employer or place of business); Akdokan, 204 B.R. at 97.Return to text

⁴⁴⁶First Nat'l Bank of Mobile v. Roddenberry, 701 F.2d 927 (11th Cir. 1983), cited in Cox, 182 B.R. at 631. Cf. Feld, 203 B.R. at 367, n.6 ("fact that creditors anticipate loss does not mean that they should be saddled with losses resulting from fraud"), citing Briese, 186 B.R. at 449. Return to text

⁴⁴⁷See, e.g., Sears, Roebuck & Co. v. Taylor, 211 B.R. 1006 (Bankr. M.D. Fla. 1997) (stating that Roddenberry remains good law); AT&T Universal Card Servs. Corp. v. Harris (In re Harris), 210 B.R. 617 (Bankr. M.D. Fla. 1997) (under Roddenberry, creditor can only prevail onallegations of actual fraud, not false pretenses or false representation if creditor failed to revokeprivileges); First Card Servs., Inc. v. Herndon, 193 B.R. 595 (M.D. Fla. 1996) (upholding summaryjudgment to dismiss); AT&T Universal Card Services Corp. v. Stansel, 203 B.R. 339 (Bankr M.D.Fla. 1996) (under Roddenberry, court cannot hold debts nondischargeable when debtor exceededcredit limit but creditor failed to revoke credit privileges); AT&T Universal Card Servs. Corp. v.Berry, 197 B.R. 382, 383 (Bankr. M.D. Fla. 1996). See also Manufacturer's Hanover Trust Co. v.Ward (In re Ward), 857 F.2d 1082 (6th Cir. 1988); Comerica Bank-Midwest v. Kouloumbris, 69 B.R.229, 231 (N.D. Ill. 1986).Return to text

⁴⁴⁸Beneficial of Missouri, Inc. v. Shurbier, 134 B.R. 922 (Bankr. W.D. Mo. 1991) (noting that reliance may be part and parcel to ongoing relationship between credit card issuer and user inopen-ended credit relationship, but this is distinguishable from discrete loan transaction). Return to text

⁴⁴⁹The present provisions of section 523(a)(2) work fine in the context of fraud in an application for a credit card or instances of actual fraud that happen to involve a credit card, such asusing some one else's card. Return to text

⁴⁵⁰AT&T Universal Card Servs. v. Wong, 207 B.R. 822, 828, n.4 (Bankr. E.D. Pa. 1997).Return to text

⁴⁵¹See Hon. Leif M. Clark, Taking Responsibility: A Creditor's Duty, Am. Bankr. Inst. J. 35 (Feb. 1996) (reporting on growing practice of creditors threatening to file nondischargeabilityactions); Statement of Charles A. Docter to National Bankruptcy Review Commission, "AttackingCredit Card Industry Abuse of Nondischargeability Provisions of the Bankruptcy Code" (May 16,1996). The ability to settle these matters before filing an adversary proceeding may lead to low actualpercentages of dischargeability proceedings filed. Return to text

⁴⁵²In re Bermingham, 201 B.R. 808 (Bankr. W.D. Mo. 1996) (court refusing to enter consent judgment of nondischargeability); see also Letter from Hon. James F. Queenan, BankruptcyJudge - D. Mass. (May 7, 1997) ("for most debtors, the mere threat of a trial, with its attendantexpense, is enough to pressure a settlement"). See generally Marc Galanter, Why the "Haves" Comeout Ahead: Speculations on the Limits of Legal Change, 9 L. & Soc'y Rev. 95 (1974).Return to text

⁴⁵³See Albert B. Crenshaw, Creditors Take Harder Line on Personal Bankruptcies, WASH. POST, Feb. 16, 1997, H01. Return to text

⁴⁵⁴Id., citing David Lynn, Docter, Docter & Lynn, Washington D.C. (stating that the debtor might "easily burn through several thousand dollars in attorneys' fees" disputing a debt for a $100 television set).Return to text

⁴⁵⁵See Albert B. Crenshaw, Creditors Take Harder Line on Personal Bankruptcies, WASH. POST, Feb. 16, 1997, H01 (quoting representative of Visa USA, Inc. stating that it is VISA's objective to encourage issuers to pursue debtors who can pay). One bank representative has calculated that theactual percentage of dischargeability proceedings filed in Chapters 7 and 11 cases was 3.76% in 1993and 4.05% in 1996. See Letter from Raymond Bell, Bankruptcy Manager, NationsBank CardServices Recovery Department (December 13, 1996). However, the numbers may be increasing. According to some sources, AT&T Universal Card Services had filed only 3 adversaries in 1995,which increased to 47 in the same district in 1996. Reportedly, "AT&T sued 2,700 debtors for fraud[in 1996] and expects to sue an additional 3,300 this year [1997]." Apparently, 98% of AT&T's creditcard cases are settled out of court, with 80-90% in the lender's favor. Prof. Marianne B. Culhane &Prof. Michaela M. White, Preliminary Results of the Bankruptcy Reaffirmation Project 18 (Sept. 25,1997), citing Memorandum to Charles Smith from Bankruptcy Court - S.D. Iowa on AdversaryInformation on AT&T (Dec. 31, 1996). Return to text

⁴⁵⁶Lisa Fickenscher, Banks Heavy-Handed in Attacks on Bankruptcy Claims, Critics Say, AM. BANKER 1 (Jan. 10, 1997). Not all creditors file a high number of nondischargeability actions. For example, NationsBank reports that its nondischargeability adversary proceeding filing rate breaksdown to approximately 10 nondischargeability actions per month. See Letter from Raymond Bell,Bankruptcy Manager, NationsBank Card Services Recovery Department (Dec. 13, 1996). Return to text

⁴⁵⁷Debra Sparks, Got an AT&T Credit Card? Don't Go Bankrupt; The Company Is Quick To Charge Down-and-Out Debtors with Fraud. Too Quick? BUS. WEEK (Sept. 15, 1997). Return to text

⁴⁵⁸See, e.g., In re Chinchilla, 202 B.R. 1010 (Bankr. S.D. Fl. 1996) (sanctioning creditor that dismissed case during trial for failure to conduct even minimal investigation of cause of actionbefore bringing adversary proceeding); In re Williamson, 181 B.R. 403 (Bankr. W.D. Mo. 1995); Inre Ramirez, 184 B.R. 859 (Bankr. S.D. Fla. 1995). See also Lisa Fickenscher, Don't Come to CourtWithout a Solid Case, Judge Warns Card Issuers, Am. Banker (January 10, 1997) (reporting onJudge Robert Mark's ruling in Chinchilla case).Return to text

⁴⁵⁹See, e.g., U.S. Bankr. Court S.D. Fla. Local Rule 788. According to Chief Judge Jay Cristol of the Southern District of Florida, the rule was established to ensure that lenders filedcolorable claims. Lisa Fickenscher, Banks Heavy-Handed in Attacks on Bankruptcy Claims, CriticsSay, AM. BANKER (January 10, 1997) (reporting that Eastern District of Michigan has adopted similarlocal rule).Return to text

⁴⁶⁰11 U.S.C. § 523(d) (1994).Return to text

⁴⁶¹Cacciatore, 209 B.R. at 618.Return to text

⁴⁶²See 11 U.S.C. § 547(b) (1994).Return to text

⁴⁶³The provision would be similar in method-but broader in scope and more definitive-to section 523(a)(2)(C) dealing with luxury goods. Sears, Roebuck & Co. v. Hernandez (In reHernandez), 208 B.R. 872, 881 (Bankr. W.D. Tex. 1997) citing S. Rep. No. 98-65, at 58 (1985),Senate Report Accompanying section 445, Omnibus Bankruptcy Improvements Act of 1983. "[O]pinions dealing with the term "luxury" as used in this statute have "considered whether undercirc*mstances of each particular case the purchases or transactions were 'extravagant,' 'indulgent,'or 'nonessential.'" Hernandez, 208 B.R. at 880, citing Carroll & Sain v. Vernon, 192 B.R. 165, 170(Bankr. N.D. Ill. 1996), General Motors Acceptance Corp. v. McDonald, 129 B.R. 279 (Bankr. M.D.Fla. 1991); Sears Roebuck & Co. v. Faulk, 69 B.R. 743 (Bankr. N.D. Ind. 1986).Return to text

⁴⁶⁴Letter from Karen S. Williams, Senior Counsel, NationsBank Corp. to Brady C.Williamson, Consumer Bankruptcy Proposal #7 - Alternative Recommendation (August 25, 1997)(Noting that originally proposed 15 day lookback period is too short and recommending lookbackperiod of 60 days, and also recommending that creditors should be able to rebut presumption whenclear and convincing evidence exists to show that the debtor incurred debts in specific contemplationof bankruptcy); Letter from Theresa C. Scardino to Brady C. Williamson, Proposal #7:Dischargeability of Credit Card Debt, (August 20, 1997) (opposing 15 day lookback period).Return to text

⁴⁶⁵See Electronic Mail from Dani Robinson, Commonwealth Central Credit Union (September 17, 1997) (debtors' counsel "would simply wait the 30 day period before filing the case")Return to text

⁴⁶⁶See Letter from Mark A. Cronin to Hon Edith Hollan Jones, Re: Proposed Draft on Credit Card Nondischargeability (July 17, 1997) (referring to rejection of previous proposal on credit card nondischargeability and endorsing codification of "implied representation" approach). Return to text

⁴⁶⁷11 U.S.C. § 523(a)(14) (1994) (excepting from discharge "debts incurred to pay a tax to the United States that would be nondischargeable pursuant to paragraph (1)").Return to text

⁴⁶⁸In re Chrusz, 196 B.R. 221 (Bankr. D.N.H. 1996). See MNBA America v. Parkhurst, 202 B.R. 816 (Bankr. N.D.N.Y. 1996), in which section 523(a)(14) provided additional grounds for nondischargeability to a credit card issuer already pursuing a section 523(a)(2) claim against a pro sedebtor. Return to text

⁴⁶⁹Taxpayer Relief Act, Pub. L. No. 105-34, 105th Cong. (August 5, 1997).Return to text

⁴⁷⁰See In re Chrusz, 196 B.R. 221 (Bankr. D.N.H. 1996) (access check that was first deposited into account and then used as part of funds to pay IRS was nondischargeable debt).Return to text

⁴⁷¹Tracing problems will not be eliminated because questions may arise regarding the application of payments to a credit card account on which a borrower charged taxes and otherexpenses as well. Return to text

⁴⁷²11 U.S.C. § 523(a)(13) (1994) (excepting from discharge "any payment of an order of restitution issued under title 18, United States Code"). See also 11 U.S.C. § 1328(a)(3)(excepting restitution or criminal fine from Chapter 13 superdischarge).Return to text

⁴⁷³Violent Crime Control and Law Enforcement Act of 1994, Pub. L. No. 103-322, 108 Stat. 1796, 2135 (1994). Return to text

⁴⁷⁴Kelly v. Robinson, 479 U.S. 36, 50 (1986) (section "523(a)(7) preserves from discharge any condition a state criminal court imposes as part of a criminal sentence"); In re Gelb, 187 B.R. 87 (Bankr. E.D.N.Y. 1995) (restitution order nondischargeable under section 523(a)(7)). Section523(a)(7) excepts from discharge a debt "to the extent such debt is for a fine, penalty, or forfeiturepayable to and for the benefit of a governmental unit, and is not compensation for actual pecuniaryloss, other than a tax penalty-(A) relating to a tax of a kind not specified in paragraph (1) of thissubsection; or (B) imposed with respect to a transaction or event that occurred before three yearsbefore the date of the filing of the petition."Return to text

⁴⁷⁵A conforming change to section 1328(a) might be necessary as well.Return to text

⁴⁷⁶See In re Gelb, 187 B.R. 87, 90 (Bankr. E.D.N.Y. 1995) (collecting citations).Return to text

⁴⁷⁷See Shine v. Shine, 802 F.2d 583, 585-88 (1st Cir. 1986) (there is strong policy interest in protecting ex-spouses and children from the loss of alimony, support and maintenance owed bydebtor who has filed for bankruptcy). Return to text

⁴⁷⁸11 U.S.C. §§ 523(a)(5), (a)(15), (a)(18), § 1328(a) (1994) (excepting family support obligations from Chapter 13 superdischarge. The Bankruptcy Reform Act of 1994 further advancedthe policy of requiring payment of support obligations by according them priority in payment overother unsecured claims. 11 U.S.C. § 507(a)(7) (1994). Return to text

⁴⁷⁹Section 523(a)(5) provides as follows:

A discharge . . . does not discharge an individual debtor from any debt -

(5) to a spouse, former spouse, or child of the debtor, for alimony to, maintenance for, orsupport of such spouse or child, in connection with a separation agreement, divorce decreeor other order of a court of record, determination made in accordance with State or territoriallaw by a governmental unit, or property settlement agreement, but not to the extent that -

(A) such debt is assigned to another entity, voluntarily, by operation of law, orotherwise (other than debts assigned pursuant to section 408(a)(3) of the SocialSecurity Act, or any such debt which has been assigned to the Federal Governmentor to a State or any political subdivision of such state); or

(B) such debt includes a liability designated as alimony, maintenance, or support,unless such liability is actually in the nature of alimony, maintenance, or support.

11 U.S.C. § 523 (a)(5) (1994).Return to text

⁴⁸⁰H.R. REP. NO. 95-595, at 364 (1977) ("What constitutes alimony, maintenance, or support, will be determined under the bankruptcy laws, not State law."); S. REP. NO. 95-989, at 79(1978) (same). In fact, this is true even if the obligation was denominated as part of a propertydivision by the nonbankruptcy court. See In re Swate, 99 F.3d 1282 (5th Cir. 1996); Shaver v.Shaver, 736 F.2d 1314 (9th Cir. 1984). See generally HENRY SOMMER AND HON. DEE MCGAROTY,COLLIER FAMILY LAW AND THE BANKRUPTCY CODE, Ch. 6 (1991).Return to text

⁴⁸¹See, e.g., In re Brody, 3 F.3d 35 (2d Cir. 1993); In re Goin, 808 F.2d 1391 (10th Cir.1987).Return to text

⁴⁸²Shaver v. Shaver, 736 F.2d 1314 (9th Cir. 1984).Return to text

⁴⁸³See, e.g., Williams v. Williams, 703 F.2d 1055, 1057 (8th Cir. 1983).Return to text

⁴⁸⁴See In re Young, 35 F.3d 499 (10th Cir. 1994) (intent and function tests); In reGianakas, 917 F.2d 759 (3d Cir. 1990) (considering substance as well as language of decree, parties'financial condition when agreement was made, and function served by obligation).Return to text

⁴⁸⁵See, e.g,. Martin v. Martin, 832 P.2d 390 (Nev. 1992) (assumption of credit card debtswas in exchange for lowering amount expressly provided as child support and thus wasnondischargeable); In re Borzillo, 130 B.R. 438 (Bankr. E.D. Pa. 1991).Return to text

⁴⁸⁶In re Coil, 680 F.2d 1170 (7th Cir. 1982) (hold harmless agreement for marital debtsnondischargeable); In re Haas, 129 B.R. 531 (Bankr. N.D. Ill. 1989) (obligation to pay marital debtsawarded in place of maintenance, thus nondischargeable); Return to text

⁴⁸⁷See, e.g., In re Swate, 99 F.3d 1282, 1285 (5th Cir. 1996) ("Whether a particularobligation constitutes alimony, maintenance, or support within the meaning of this section is a matterof federal bankruptcy law, not state law") citing In re Joseph, 16 F.3d 86, 87 (5th Cir. 1994) (citation omitted); In re Dennis, 25 F.3d 274, 277-79 (5th Cir.1994) ("dischargeability of a debt is determinedby the substance of the liability rather than its form"); Jones v. Jones, 9 F.3d 878 (10th Cir. 1993)citing Yeates v. Yeates (In re Yeates), 807 F.2d 874, 878 (10th Cir. 1986) ("a debt could be in the'nature of support under section 523(a)(5) even though it would not legally qualify as alimony orsupport under state law"); Friedkin v. Sternberg, 85 F.3d 1400 (9th Cir. 1996); Kritt v. Kritt, 190 B.R.382, 387 (B.A.P. 9th Cir. 1995) (community property division was in nature of support and thusnondischargeable under section 523(a)(5)); Johnson v. Arcelus, 162 B.R. 130 (Bankr. S.D. Tex.1993) (because federal law determines whether divorce related claims are "support obligations,"community property division was support obligation for nondischargeability purposes); and Semrowv. Robinson, 122 B.R. 502 (Bankr. W.D. Tex. (1990) (same). Return to text

⁴⁸⁸Section 523(a)(18) provides as follows: A discharge . . . . does not discharge anindividual debtor from any debt - owed under State law to a State or municipality that is -

(A) in the nature of support, and

(B) enforceable under part D of title IV of the Social Security Act (42 U.S.C. 601et seq.).

11 U.S.C. § 523 (a)(18) (1994). Return to text

⁴⁸⁹4 COLLIER ON BANKRUPTCY Ý 523.24, 523-109 (Lawrence P. King et. al eds, 15th ed. 1996).Return to text

⁴⁹⁰11 U.S.C. § 1328(a) (1994).Return to text

⁴⁹¹See Memorandum from Karen Cordry, Bankruptcy Counsel, National Association of Attorneys General, Comments on May 30 Draft of Dischargeability Proposal, at 8 (June 17, 1997)(speaking for herself and not on behalf of N.A.A.G., agreeing with Memorandum of Professor Morriset al regarding the elimination of section 523(a)(18)).Return to text

⁴⁹²Section 523(a)(15) provides as follows: A discharge . . . does not discharge anindividual debtor from any debt -

(15) not of the kind described in paragraph (5) that is incurred by the debtor in the courseof a divorce or separation or in connection with a separation agreement, divorce decree orother order of a court or record, a determination made in accordance with State or territoriallaw by a governmental unit unless -

(A) the debtor does not have the ability to pay such debt from income or propertyof the debtor not reasonably necessary to be expended for the maintenance orsupport of the debtor or a dependent of the debtor and, if the debtor is engaged ina business, for the payment of expenditures necessary for the continuation,preservation, and operation of such business; or

(B) discharging such debt would result in a benefit to the debtor that outweighs thedetrimental consequences to a spouse, former spouse, or child of the debtor.

11 U.S.C. §523(a)(15) (1994). Return to text

⁴⁹³"In some instances, divorcing spouses have agreed to make payments of marital debts, holding the other spouse harmless from those debts, in exchange for a reduction in alimony payments. In other cases, spouses have agreed to lower alimony payments based on a larger property settlement. If such "hold harmless" and property settlement obligations are not found to be in the nature ofalimony, maintenance, or support, they are dischargeable under current law. The nondebtor spousemay be saddled with substantial debt and little or no alimony or support. This subsection will makesuch obligations nondischargeable in cases where the debtor has the ability to pay them and thedetriment to the nondebtor spouse from their nonpayment outweighs the benefit to the debtor ofdischarging such debts." 140 CONG. REC. H10,752-01 (daily ed. Oct. 4, 1994). Return to text

⁴⁹⁴See 11 U.S.C. § 523(c) (1994). Fed. R. Bankr. P. 4007 (1995).Return to text

⁴⁹⁵See, e.g., In re Cannon, 203 B.R. 768 (Bankr. M.D. Fla. 1996). Because this provisionis not cross-referenced in section 523(a)(3), a lack of notice to an ex-spouse can be fatal to anyattempt to render the debt nondischargeable. Return to text

⁴⁹⁶See, e.g., In re Slover, 191 B.R. 886 (Bankr. E.D. Okla. 1996); In re Florio, 187 B.R. 654(Bankr. W.D. Mo. 1995);In re Wiley, 198 B.R. 1007 (Bankr. S.D. Fla. 1996). Return to text

⁴⁹⁷See 11 U.S.C. § 1325(b) (1994). Because of the inconsistencies and subjective analysesinherent in the Chapter 13 disposable income test, the Commission's Chapter 13 discussion containsa Recommendation to replace the Chapter 13 disposable income test. Return to text

⁴⁹⁸Whether there is a presumption built into this discharge is subject to some dispute. Compare In re Woodworth, 187 B.R. 174 (Bankr. N.D. Ohio 1995) (balancing test favors discharge)with In re Marquis, 203 B.R. 844 (Bankr. D. Me. 1997) (balancing test favors nondischargeability).Return to text

⁴⁹⁹See, e.g., In re Schmitt, 197 B.R. 312, 317 (Bankr. W.D. Ark. 1996) (balancing testimposes "impossibly amorphous standard").Return to text

⁵⁰⁰"The opinions of the majority of reported cases--approximately twenty-eight (Majority Group)--reveal that this group of courts allocate to the debtor the burdens of proof for section 523(a)(15)(A) and (B) for Ability to Pay and Detriment. The second group (the Bifurcated Group),based on reported decisions consists of only three courts, allocates the burden of proof for Detrimentto the former spouse/spouse and for the Ability to Pay to the debtor. The third category of courts(Minority Group)--five reported cases-- places the burden of proof for all of section 523(a)(15),including Ability to Pay and Detriment, on the former spouse/spouse." Stone v. Stone, 199 B.R. 753(Bankr. N.D. Ala.1996) (citing authorities allocating burden of proving "ability to pay" and"detriment" under section 523(a)(15)(A)). See also Jodoin v. Samayoa, 209 B.R. 132 (B.A.P. 9thCir. 1997) (debtor had burdens of proof as to both inability to pay" and "detriment" tests). Return to text

⁵⁰¹See, e.g., Gamble v. Gamble, 196 B.R. 54 (Bankr. N.D. Tex. 1996).Return to text

⁵⁰²See, e.g., In re Hill, 184 B.R. 750 (Bankr. N.D. Ill. 1995).Return to text

⁵⁰³See, e.g., In re Campbell, 198 B.R. 467 (Bankr. D.S.C. 1996); In re Dressler, 194 B.R. 290 (Bankr. D. R.I. 1996); In re Gantz, 192 B.R. 932 (Bankr. N.D. Ill. 1996).Return to text

⁵⁰⁴See, e.g., Macy v. Macy, 114 F.3d 1, 2 (1st Cir. 1997) (Congress did not intend to apply section 523(a)(15) to debts that were, prior to the Bankruptcy Reform Act, considered to benondischargeable under section 523(a)(5)).Return to text

⁵⁰⁵"A judge, facing a close question about whether a particular debt really is in the nature of support, may have a tendency to err in favor of finding nonsupport, since this finding still allowsthe judge to consider the relative needs of the parties under § 523(a)(15)." Memorandum from Hon.Samuel L. Bufford, Prof. Margaret Howard, Prof. Jeffery W. Morris, Hon. Eugene R. Wedoff, Discharge and Dischargeability in Consumer Bankruptcy (May 30, 1997). Return to text

⁵⁰⁶"[I]t behooves a creditor who is owed a debt that arises out of a divorce decree or separation agreement to seek a determination of nondischargeability under section 523(a)(15) , as wellas a determination of nondischargeability under section 523(a)(5), in case there is any question aboutthe nature of the debt." COLLIER FAMILY LAW Ý 6/07A[2] (1997). Return to text

⁵⁰⁷See 11 U.S.C. § 1328 (1994).Return to text

⁵⁰⁸In re Harrell, 754 F.2d 902, 906 (11th Cir.1985) ("The statutory language suggests a simple inquiry as to whether the obligation can legitimately be characterized as support, that is,whether it is in the nature of support.").Return to text

⁵⁰⁹See Memorandum from Hon. Edith H. Jones and Prof. Richard E. Flint (August 20, 1997) (recommending that the section 523(a)(5) exception to discharge apply to all debts to a spouse,former spouse, or child of the debtor for any debt in connection with or incurred by the debtor in thecourse of a separation agreement, divorce decree, any modifications thereof, including propertysettlement agreements and hold harmless agreements).Return to text

⁵¹⁰See, e.g., Taylor v. Taylor, 199 B.R. 37 (N.D. Ill. 1996) (nondebtor spouse had income of almost three million dollars in three years preceding bankruptcy case).Return to text

⁵¹¹See Letter from W. J. Giles, III, Chair, Bankruptcy Committee of the American Academy of Matrimonial Lawyers, Sioux City, IA to Brady C. Williamson (May 20, 1997) (proposingamendment to make property settlements, in addition to attorneys' fees, absolutely nondischargeablefor five years after entry of settlements).Return to text

⁵¹²11 U.S.C. § 1328(a)(2) (1994). For more information on the dischargeability of debts in Chapter 13, please see the subsection on the "superdischarge" in this chapter. Return to text

⁵¹³Arthur Ryman, Contract Obligation: A Discussion of Morality, Bankruptcy, and Student Debt, 42 DRAKE L. REV. 205, 219 (1993); Margaret Howard, A Theory of Discharge in ConsumerBankruptcy, 48 OHIO ST. L.J. 1047, 1085-87 (1987) (it is inconsistent with fresh start policy to haveexception to discharge for student loans). Return to text

⁵¹⁴See Leeper v. Penna. Higher Education Assistance Agency, 49 F.3d 98 (3d Cir. 1995) (creditors can accrue postpetition interest on nondischargeable debt while bankruptcy is pending);Electronic Mail Memorandum from Hon. Leif M. Clark, (October 18, 1996) (explaining problem ofinterest buildup on nondischargeable student loans throughout Chapter 13 case); Leeper v. Penna.Higher Educ. Assistance, 49 F.3d 98 (3d Cir. 1995) (interest continues to accrue during Chapter 13and is nondischargeable); In re Sullivan, 195 B.R. 649 (Bankr. W.D. Tex. 1996); In re Ridder, 171B.R. 345 (Bankr. W.D. Wis. 1994); In re Shelbayah, 165 B.R. 332 (Bankr. N.D. Ga. 1994).Return to text

⁵¹⁵Compare Groves v. LaBarge, 39 F.3d 212 (8th Cir. 1994) (nondischargeability, in itself,of student loan debt is insufficient to warrant separate classification under section 1322(b)(1)); In reSperna, 173 B.R. 654 (B.A.P. 9th Cir. 1994); McCullough v. Brown, 162 B.R. 506 (N.D. Ill. 1994);with In re Tucker, 159 B.R. 325 (Bankr. D. Mont. 1993) (separate classification permitted); In reForeman, 136 B.R. 532 (Bankr. S.D. Iowa 1992). See generally William Houston Brown &Katherine L. Evans, A Comparison of Classification and Treatment of Family Support Obligationsand Student Loans: A Case Analysis, 24 MEMPHIS ST. UNIV. L. REV. 623, 650 (1994) (advocatingcase by case totality of circ*mstances, rather than "ironclad," approach to student loan classificationin chapter 13 plans).Return to text

⁵¹⁶See In re Wagner, 200 B.R. 160 (Bankr. N.D. Ohio 1996); In re Jordan, 146 B.R. 31 (D. Colo . 1992). Return to text

⁵¹⁷See, e.g., Electronic Mail from David L. Gibbs, Student Loan Dischargeability (June 26, 1997) (noting that vast array of decisions on treatment of student loan interest provided basis for judge and trustee position to preclude collection of interest during plan but to permit it to accrue).Return to text

⁵¹⁸See Hearings on H.R. REP. NO. 95-595, 95th Cong. 159 (1977) (statement of Ronald J. Iverson, Executive Director, Vt. Student Assistance Corp. reporting on several cases where studentloans comprised majority of debt discharged in bankruptcy). But see Kurt Wiese, DischargingStudent Loans in Bankruptcy: The Bankruptcy Court Tests of 'Undue Hardship,' 26 ARIZ. L. REV.445, 449 (1984) (alleged student loan discharge problem was created by media).Return to text

⁵¹⁹COMMISSION ON THE BANKRUPTCY LAWS OF THE UNITED STATES, REPORT OF THECOMMISSION ON THE BANKRUPTCY LAWS OF THE UNITED STATES, H.R. DOC. NO. 137, Part II, 140(1973). Return to text

⁵²⁰Education Amendments of 1976, Pub. L. No. 94-482, § 127(a), codified at 20 U.S.C. § 1087-3 (1976) (repealed 1978). Return to text

⁵²¹See Hearings on H.R. 31 and H.R. 32 Before the Subcomm. on Civil and Constitutional Rights of the Comm. on the Judiciary, 94th Cong., pt. 2, at 1096 (1976) (Rep. Don Edwardsexpressing concern over lack of evidence of significant abuse in light of legitimate purposes ofbankruptcy law).Return to text

⁵²²H.R. REP. NO. 95-595, at 148 (1977).Return to text

⁵²³See H.R. REP. NO. 595, at 132 (1977). Return to text

⁵²⁴Id.Return to text

⁵²⁵H.R. REP. NO. 95-595, at 150 (1978).Return to text

⁵²⁶See GENERAL ACCOUNTING OFFICE, STUDENT LOANS: CHARACTERISTICS OF DEFAULTED BORROWERS IN THE STAFFORD STUDENT LOAN PROGRAM 7 (April 1991). Return to text

⁵²⁷TERESA A. SULLIVAN, ELIZABETH WARREN, AND JAY LAWRENCE WESTBROOK, AS WEFORGIVE OUR DEBTORS BANKRUPTCY AND CONSUMER CREDIT IN AMERICA 275, Table 14.1 Amountsof Debt Owed to Creditors, by Secured and Unsecured Status, for Total Sample, Pure Wage Earnersand Ever Self-Employed (1989).Return to text

⁵²⁸Id., at 265, n.11.Return to text

⁵²⁹See, e.g., In re Doersam, 849 F.2d 237, 240 (6th Cir. 1988) (denying confirmation forbad faith of debtor when 81% of unsecured debt was student loan debt, and debtor filed forbankruptcy six weeks before graduation); In re Stewart, 109 B.R. 998 (D. Kan. 1990) (reversing forbankruptcy court to determine whether confirmation should have been denied for bad faith attemptto discharge student loans through de minimus Chapter 13 payment plan, and also when debtorsexpenses increased in amount roughly coinciding with income increase). See also letter from Hon.Samuel L. Bufford, Bankruptcy Judge, C.D. Cal., NBRC Student Loans (Oct. 3, 1997). In JudgeBufford's experience with approximately 60,000 consumer cases, of which 22,000 were Chapter 13s,he as seen only about five involving unneedy debtors attempting to use bankruptcy only to dischargestudent loans. Judge Bufford denied confirmation of their Chapter 13 plans for bad faith. Id.Return to text

⁵³⁰See In re Pelkowski, 990 F.2d 737 (3rd Cir 1993) (purpose of exception was to protectloan program and prevent abuse, and "Congress has revealed an intent to limit the dischargeabilityof educational loan debt, and we can construe the provision no more narrowly than the language andlegislative history allow"). Brunner v. New York State Higher Education Services Corp., 831 F.2d395 (2d Cir. 1987) (applying 3 part test: 1) in light of debtor's current level of income and expenses,whether minimal standard of living could be maintained for debtor and dependents if debtor had torepay student loans; 2) additional circ*mstances that might suggest that debtor's current financialcondition would likely continue for significant portion of repayment period; 3) whether debtor hadmade good faith attempt to repay the student loans). Although debtor in Brunner could not find jobin field, had been on welfare for 4 months, and greatest annual income in preceding decade was$9,000, the educational loans were nondischargeable because she was healthy, intelligent and had nodependents, so she would be able to pay if she found work). See also Pennsylvania Higher Educ.Assistance Agency v. Faish, 72 F.3d 298(3rd Cir. 1995)(using Brunner test,$33,000 debt notdischargeable for debtor earning $27,000 who could not find job in her field, did not own car, hadhealth problems, and was supporting 11 year old son with no child support, and had been makingpayments for two years); In re Roberson, 999 F.2d 1132 (7th Cir. 1993) (using Brunner test, debtdischarged where debtor had no income, apartment with no toilet or kitchen, debts exceeding $34,000,and $7000 liquid assets). Return to text

⁵³¹See Jeffrey L. Zackerman, Discharging Student Loans in Bankruptcy: The Need for aUniform 'Undue Hardship' Test, 65 U. Cin. L. Rev. 1997) (parties have no certainty as to meaningof undue hardship test; recommending nationwide adoption of Second Circuit Brunner test so thatdebts will be dischargeable if debtor unable to maintain minimal standard of living while payingloans, if debtor made good faith attempt to repay, and consideration of additional circ*mstances);Robert F. Salvin, Student Loans, Bankruptcy, and the Fresh Start Policy: Must Debtors beImpoverished to Discharge Educational Loans?, 71 TULANE L. REV. 139 (1996) (reviewing disputesin the case law and concluding undue hardship should be found to exist for any debtor who will notbe able to maintain a middle-class lifestyle and while simultaneously repaying student-loan debt);Thad Collins Forging Middle Ground: Revision of Student Loan Debts in Bankruptcy as an Impetusto Amend 11 U.S.C. § 523(a)(8), 75 IOWA L. REV. 733, 738 (1990); Darrell Dunham & Ronald A.Buch, "Educational Debts under the Bankruptcy Code," 22 MEMPHIS ST. U. L. REV. 679 (1992); Jerome M. Organ, 'Good Faith' and the Discharge of Educational Loans in Chapter 13: Forginga Judicial Consensus, 38 VAND. L. REV. 1087, 1088- 92 (1985); Kurt Wiese, Discharging StudentLoans in Bankruptcy: The Bankruptcy Court Tests of 'Undue Hardship,' 26 ARIZ. L. REV. 445, 449(1984); Lawrence Kalevitch, Educational Loans in Bankruptcy, 1982 N. ILL. U. L. REV. 325; Ted D.Ayres & Dianne R. Sanger, The Bankruptcy Reform Act and Student Loans: Unraveling New Knots, 9 J.C. & U.L. 361, 368 (1982-83) Janice E. Kosel, Running the Gauntlet of 'Undue Hardship' - TheDischarge of Student Loans in Bankruptcy, 11 GOLDEN GATE U. L. REV. 457, 464 (1981);Alan M.Ahart, Discharging Student Loans in Bankruptcy, 52 AM. BANKR. L.J. 201, 206 (1978).Return to text

⁵³²See, e.g., In re Koch, 144 B.R. 959 (Bankr. W.D. Pa. 1992) (debtor must show that hesuffers from truly severe and uniquely difficult circ*mstances and that he can pay none of loan);Inre Stebbins-Hopf, 176 B.R. 784 (Bankr. W.D. Tex. 1994)(student loans nondischargeable wheredebtor chose to provide financial help to family members since moral obligations do not take priorityover legal obligations, debtor could work, and her financial problems were not permanent).Return to text

⁵³³See Pennsylvania Higher Educ. Assistance Agency v. Faish, 72 F.3d 298 (3rd Cir.1995)(acknowledging difficulty for debtor to present evidence of undue hardship since courts do nottake unified approach and litigants don't know applicable standards). Return to text

⁵³⁴See, e.g., Electronic Mail from David L. Gibbs, Student Loan Dischargeability, (June26, 1997) (client spent $2,000 to seek hardship discharge and failed).Return to text

⁵³⁵The nondischargeability period was extended from five to seven years in 1988, bringingmore debtors potentially in the purview of this test.Return to text

⁵³⁶See, e g., In re Huber, 169 B.R. 82 (Bankr. W.D.N.Y. 1994) (lender cannot buy itselflonger dischargeability period by unilateral or retroactive "suspension" of payments); In re Flynn, 190B.R. 139 (Bankr. D.N.H. 1995);In re Chisari, 183 B.R. 963 (Bankr. M.D. Fla. 1995).Return to text

⁵³⁷In re Hesselgrave, 177 B.R. 681 (Bankr. D. Or. 1995); Hiatt v. Indiana State StudentAssistance Comm'n, 36 F.3d 21 (7th Cir 1994). See Letter from Laura J. Walker, Cable, Benedict,& Haagensen, Portland OR (May 9, 1997) (citing cases holding that refinancing triggers new sevenyear nondischargeability period and suggesting that this may be contrary to Congressional intent).Return to text

⁵³⁸See Letter from Marshall S. Smith, Acting Deputy Secretary, United States Departmentof Education (July 29, 1997) (opposing Proposal to eliminate section 523(a)(8)). "Congress' primarylegislative intent in enacting section 523(a)(8) was to maintain the solvency of education lendingprograms in order to achieve the goal of promoting access to higher education." Letter from ErnestT. Freeman, President and Chief Executive Officer, The Education Resources Institute (September18, 1997).Return to text

⁵³⁹See, e.g., Ian Domowitz & Thomas L. Eovaldi, THE IMPACT OF THE BANKRUPTCYREFORM ACT OF 1978 ON CONSUMER BANKRUPTCY," 2 J. L. & ECON. 803, 805 (1993) ("Code cannotbe established as the cause of any major increase in the number of nonbusiness bankruptcies"); KIMJ. KOWALEWSKI, PERSONAL BANKRUPTCY: THEORY AND EVIDENCE, FEDERAL RESERVE BANK OFCLEVELAND ECONOMIC REVIEW 1-29 (1982); CHARLES A. LUCKETT, PERSONAL BANKRUPTCY (1988);TERESA A. SULLIVAN, ELIZABETH WARREN, JAY L. WESTBROOK, AS WE FORGIVE OUR DEBTORS;BANKRUPTCY AND CONSUMER CREDIT IN AMERICA (1989). See also Ian Domowitz & Elie Tamer,Two Hundred Years of Bankruptcy: A Tale of Legislation and Economic Fluctuations, 37(Unpublished Manuscript) (May 1997) (changes in law to restrict consumer options would have nosubstantial effect on consumer filings). Return to text

⁵⁴⁰Id. See also Electronic mail from Wendell Sherk to the National Bankruptcy ReviewCommission (July 2, 1997) (noting that he rarely sees anyone trying to dispose of student loans whowas successful because of his or her education, and concluding that the change should not create anyreal public relations backlash but will help a lot of people who were never given any real benefits). In fact, law school graduates who file for bankruptcy to discharge their student loans run a significantrisk of being denied admission to the bar, a significant nonbankruptcy law deterrent to filing forbankruptcy and discharging educational loans. See, e.g., In re Anonymous, 549 N.E.2d 472 (N.Y.(1989) (application for admission to bar properly denied when applicant lacked financialresponsibility that bar thought was necessary for attorneys); In re Application of Taylor, 647 P.2d 462(Or. 1982) (applicant for bar admission lacked good moral character where applicant had dischargedstudent loans, among other allegations). But see Board of Law Examiners of the State of Texas v.Stevens, 850 S.W.2d 558 (Tex. App. 1992) (application for bar admission should not have beendenied for lack of moral character where his actions would not hurt future clients; applicant hadsevere financial difficulties arising partly from his failure to pay taxes).Return to text

⁵⁴¹UNITED STATES GENERAL ACCOUNTING OFFICE, OFFICE OF THE GENERAL COUNSEL,PRINCIPLES OF FEDERAL APPROPRIATIONS LAW, 1992 WL 700432, 11 GAO-RB pt. B. sec. 2 (2d Ed.1992) (discussing Federal Credit Reform Act of 1990).Return to text

⁵⁴²GENERAL ACCOUNTING OFFICE, STUDENT LOANS; CHARACTERISTICS OF DEFAULTEDBORROWERS IN THE STAFFORD STUDENT LOAN PROGRAM (April 1991). Return to text

⁵⁴³Default rate by students at vocational or trade schools ranged from 29-62%. Id. at 13.Return to text

⁵⁴⁴Id. at 14. Three studies found that 75% had incomes of $15,000 or less.Return to text

⁵⁴⁵In the two studies that identified this factor, 37% and 51% of defaulters wereunemployed at time of default. Id. at 21. Return to text

⁵⁴⁶UNITED STATES GENERAL ACCOUNTING OFFICE, DEBT COLLECTION - IMPROVEDREPORTING NEEDED ON BILLIONS OF DOLLARS IN DELINQUENT DEBT AND AGENCY COLLECTIONPERFORMANCE, REPORT TO THE CHAIRMAN, COMMITTEE ON THE BUDGET, HOUSE OF REPRESENTATIVES,1997WL358072 GAO/AIMD 97-48 (Fed. Doc. Clearing House June 2, 1997) citing High-RiskSeries: Student Financial Aid (GAO/HR-97-20SET, Feb. 1997). Delinquent studentloansare harderto collect than the other types ofloans discussed inthis report for several reasons. First, unlike thehousing loans, student loans are unsecured, leaving the government and private lender with nocollateral. Second, for the loans on which Educationitselfis trying to collect, delinquent cases arenot received until both lenders and the guaranty agencies have attempted collection, a process whichtypically lasts at least 4 years after the debt became delinquent. Third, it is more difficult to locate andcontact borrowers who frequently relocate after attending post secondary schools, experience namechanges in the event of marriage, and, in general, tend to have more frequent changes in residences." Id. Return to text

⁵⁴⁷Arthur Ryman, Contract Obligation: A Discussion of Morality, Bankruptcy, and Student Debt, 42 DRAKE L. REV. 205, 221 n.100 (1993).Return to text

⁵⁴⁸Even HEAL loans are dischargeable seven years after the first date that repayment ofloan is required, excluding any suspension period, and earlier if continued liability would be"unconscionable." See 42 U.S.C. § 292f(g) (1994). Nothing in this Recommendation would changethat provision. But see In re Tanksi, 195 B.R. 408 (Bankr. E.D. Wis. 1996) (HEAL loans undersecond filing are governed by section 523(a)(8)). See Letter from Thomas P. Schneider, United StatesAttorney, Eastern District of Wisconsin to Brady C. Williamson, (April 2, 1997) (advocating deletionof reference to HEAL loans in section 523(b)).Return to text

⁵⁴⁹Grogan v. Garner, 498 U.S. 279, 284 (1991), citing S. Rep. No. 91-1173, at 2-3 (1970); H.R. REP. NO. 91-1502, at 1 (1970), reprinted in U.S.C.C.A.N. 4156. Return to text

⁵⁵⁰Brown v. Felsen, 442 U.S. 127, 138 (1979). Return to text

⁵⁵¹See, e.g., Schweig v. Hunter, 780 F.2d 1577, 1579 (11th Cir. 1986); Manufacturer'sHanover Trust Co. v. Ward , 857 F.2d 1082, 1083 (6th Cir. 1988).Return to text

⁵⁵²See Thul v. Ophaug, 827 F.2d 340 (8th Cir. 1987). Some exceptions to discharge, suchas those for certain taxes and alimony, are justified by other public policy reasons, e.g., to protect thepublic fisc. Because these exceptions do not expressly require litigation in the bankruptcy court andare of a different nature, they are not amenable to being the subject of issue preclusion problems.Return to text

⁵⁵³See, e.g., Allen v. McCurry, 449 U.S. 90, 94 (1980), citing Montana v. United States,440 U.S. 147, 153 (1979); Klingman v. Levinson 831 F.2d 1292, 1295 (7th Cir. 1987).Return to text

⁵⁵⁴RESTATEMENT (SECOND) OF JUDGMENTS § 27 (1982).Return to text

⁵⁵⁵Grogan v. Garner, 498 U.S. 279, 285, n.11 (1991); Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 (1979). Return to text

⁵⁵⁶Montana v. United States, 440 U.S. 147 (1979).Return to text

⁵⁵⁷28 U.S.C. § 1738 (1994). Matsush*ta Elec. Indus. Co., Ltd. v. Epstein, 116 S. Ct. 873,877 (1996). The Full Faith and Credit Clause of the United States Constitution, Article IV, section1, applies only to state recognition of other states' judgments. Return to text

⁵⁵⁸It ordinarily is a violation of due process for a judgment to be binding on a litigant whowas not a party or a privy and therefore has never had an opportunity to be heard. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 327 n.7 (1979), citing Blonder-Tongue Laboratories, Inc. v. Universityof Illinois Foundation, 402 U.S. 313, 329 (1971). Applying a slightly broader exception than the dueprocess standard, the Supreme Court also has "previously recognized that the judicially createddoctrine of collateral estoppel does not apply when the party against whom the earlier decision isasserted did not have a 'full and fair' opportunity to litigate." Kremer v. Chemical Construction, 456U.S. 461, 480-481 (1982). "Redetermination is warranted if there is reason to doubt the quality,extensiveness, or fairness of procedures followed in prior litigation." Id., citing Montana v. UnitedStates, 440 U.S. 147, 164 (1979). Return to text

⁵⁵⁹For example, the first habeas corpus statute rendered state court proceedings null andvoid that were inconsistent with the decision of a federal habeas court. Allen v. McCurry, 449 U.S.90, 98 n.12 (1980), quoting Act of Feb. 5, 1867, ch. 28., s 1, 14 Stat. 385, 386, codified as amendedat 28 U.S.C. § 2254 (1994).Return to text

⁵⁶⁰See, e.g., Bay Area Factors v. Calvert, 105 F.3d 315 (6th Cir. 1997) (precludingrelitigation of fraud after California court default judgment that contained no specific findings offraud); Gayden v. Nourbakhsh, 67 F.3d 798 (9th Cir. 1995) (precluding relitigation of fraud afterFlorida court default judgment that contained finding of fraud). But see Stephen J. Burbank,Interjurisdictional Preclusion, Full Faith and Credit and Federal Common Law: A GeneralApproach, 71 CORNELL L. REV. 733, 737 (1986) ("Once one recognizes that the full faith and creditstatute states or chooses only a domestic referent and not domestic state preclusion law, it is notapparent why a general approach to federal common law should not also accommodate problemsconcerning the preclusive effects of state judicial proceedings"). Return to text

⁵⁶¹Gober v. Terra + Corp., 100 F.3d 1195, 1199 n.2 (5th Cir. 1996), citing RESTATEMENT(SECOND) OF JUDGMENTS, Introductory Note to ch. 1 (1982).Return to text

⁵⁶²Feltor v. Davis (In re Davis), 108 F.3d 337 (9th Cir. 1994). Return to text

⁵⁶³190 B.R. 889 (B.A.P. 9th Cir. 1995) (unopposed motion for summary judgment inWashington case does not prevent subsequent litigation). Return to text

⁵⁶⁴H.R. REP. NO. 91-1502, at 1 (1970).Return to text

⁵⁶⁵Id. at 3.Return to text

⁵⁶⁶"The 1970 amendments took jurisdiction over certain dischargeability exceptions,including the exception for fraud, away from the state courts and vested jurisdiction exclusively inthe bankruptcy courts." Grogan v. Garner, 498 U.S. 279 284, n. 10 (1991), citing Brown v. Felsen,442 U.S. at 135-136; S. REP. NO. 91-1173, at 2-3 (1970); H.R. REP. NO. 91-1502, at 1 (1970), 1970U.S.C.C.A.N. 4156. Return to text

⁵⁶⁷H.R. REP. NO. 91-1502, at 2 (1970). See generally Jon T. Alexander, Comment, IssuePreclusion, Full Faith and Credit, and Default Judgments: A Dilemma For the Bankruptcy Courts, 44 UCLA L. REV. 159, 173 (1996).Return to text

⁵⁶⁸"I cannot help but believe that the broad reading of the 'actually litigated' requirementis a trap for unwary and innocent debtors that cannot afford counsel. I suspect that many of thesedebtors do not contest liability because they admit that they owe the money (albeit not because of anyfraud)." Letter from Hon. Edward D. Jellen, Chief Bankruptcy Judge, N.D. Cal. to Elizabeth Warren,2 (February 5, 1997). Return to text

⁵⁶⁹See Memorandum from Wayne Johnson, Consumer Bankruptcy Issues, 3 (July 25, 1996).Return to text

⁵⁷⁰11 U.S.C. §523(a)(5) (1994).Return to text

⁵⁷¹Stephen J. Burbank, Interjurisdictional Preclusion, Full Faith and Credit and FederalCommon Law: A General Approach, 71 CORNELL L. REV. 733, 737 (1986) (concluding that contraryto Supreme Court's interpretation, Full Faith and Credit statute does not choose domestic preclusionlaw of rendering state, but rather it requires application in interjurisdictional cases of law that courtsof rendering state should apply). "Under traditional federal common law analysis a court must stillbe alert to the possibility that application of state law, borrowed as federal law, will thwart thepurposes of, or otherwise interfere with, federal substantive law. In that event, the offending state lawrule is displaced, because federal sources require otherwise than that it apply." Id., at 765. Return to text

⁵⁷²Pahlavi v. Ansari, 113 F.3d 17 (4th Cir. 1997) (although default judgment ultimatelyentered, issue of defalcation actually litigated); Gober v. Terra + Corp., 100 F.3d 1195, 1199-1200(5th Cir. 1996) (parties actively litigated for two years before debtor failed to attend hearing thatyielded default judgment, which satisfied Texas' requirement that issue be actually litigated andessential to judgment); Bush v. Balfour Beatty Bahamas, Ltd., 62 F.3d 1319 (11th Cir. 1995); In reDaily, 47 F.3d 365, 368-69 (9th Cir.1995) (party who deliberately precludes resolution of factualissues through normal adjudicative procedures may be bound, in subsequent, related proceedingsinvolving same parties and issues, by prior judicial determination reached without completion ofusual process of adjudication). Return to text

⁵⁷³See Letter from Christopher S. Moffitt, NBRC Recommendations Concerning IssuePreclusion (September 11, 1997) (noting that Fourth Circuit law has weakened "actual litigation"standard and uses elastic standard as to what constitutes valid binding judgment of court, thusadvocating use of federal issue preclusion standards, per se prohibition of default judgment, summaryjudgment, or consent judgment).Return to text

⁵⁷⁴UNIFORM PARTNERSHIP ACT § 15 (1992).Return to text

⁵⁷⁵Id. §13.Return to text

⁵⁷⁶In re Rex, 150 B.R. 505 (Bankr. D. Mass. 1993) (no vicarious liability for section 523(a)(6) action).Return to text

⁵⁷⁷See, e.g., Deroche v. Miller, 196 B.R. 334, 336 (Bankr. E.D. La. 1996) (refusing toimpute liability even though Louisiana Civil Code made parents answerable for offenses orquasi-offenses committed by their children); Jones v. Whiteacre, 93 B.R. 584, 585 (Bankr. N.D. Ohio1988) (refusing to impute child's intent to parents).Return to text

⁵⁷⁸Neal v. Clark, 95 U.S. 704 (1877).Return to text

⁵⁷⁹Steven H. Resnicoff, Is it Morally Wrong to Depend on the Honesty of Your Partner orSpouse? Bankruptcy Dischargeability of Vicarious Debt, 42 CASE W. RES. L. REV. 147 (1992).Return to text

⁵⁸⁰Columbia Farms Distribution, Inc. v. Maltais, 202 B.R. 807 (Bankr. D. Mass. 1996)(nondischargeability of debt under section 523(a)(6) cannot be grounded on imputation to debtor ofacts of another); Deroche v. Miller, 196 B.R. 334, 336 (Bankr. E.D. La. 1996) ("plain meaning testrequires that the debtor must have been the one who caused the willful and malicious injury. Imputedliability is insufficient [for section 523(a)(6)]," thus not applying vicarious liability to debtor for actof her child), citing United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241 (1989). "Thestatute is not concerned with liability which, as here, is vicariously imposed upon a debtor under thedoctrine of respondeat superior solely by reason of the intentional and malicious conduct of thedebtor's agent or servant." In re Rex, 150 B.R. 505, 506 (Bankr. D. Mass. 1993) (debt notdischargeable under section 523(a)(6) for acts of debtor's agent, and finding decisions on point to beconsistent with this holding); Giuliano v. Albano, 143 B.R. 323 (Bankr. D. Conn. 1992) (rejectingvicarious liability for willful and malicious injury based on actions of bouncer at debtor's restaurantbecause nothing in language or legislative history of section 523(a)(6) suggests that common lawnotions of vicarious or imputed liability on agency theory are appended to statutory exceptions todischarge). Return to text

⁵⁸¹See Neal v. Clark, 95 U.S. 704 (1877) (debt is dischargeable, even if dishonestlyincurred, if the debtor did not participate in the dishonest actions); Aetna Casualty and Surety Co. v.Markarian, 208 B.R. 249 (Bankr. 1st Cir. 1997) (portions of judgment debt attributable tocodefendants' wrongdoing not included in nondischargeable debt under section 523(a)(2)(A)). Seealso Walker v. Citizens State Bank, 726 F.2d 452, 454 (8th Cir.1984) (fraud not imputed todebtor/principal spouse unless debtor knew or should have known of fraud, or was recklesslyindifferent to agent's act).Return to text

⁵⁸²Strang v. Bradner, 114 U.S. 555, 561 (1885) (partners legally obligated for each others'misrepresentations, and thus resulting debts nondischargeable for all partners, especially benefittingfrom "fruits of the fraudulent conduct").Return to text

⁵⁸³See McIntyre v. Kavanaugh, 242 U.S. 138, 139 (1916) (interpreting predecessor tosection 523(a) that did not include the words "by the debtor"); BancBoston Mortgage Corp. v.Ledford, 970 F.2d 1556 (6th Cir. 1992) (fraud can be imputed toinnocent partner for purposes of section 523(a)(2)(A) because debtor is liable under Tennesseeagency law for actions taken by other partners in ordinary course of business) cert. denied 507 U.S. 916 (1993); Luce v. First Equip.Leasing Corp., 960 F.2d 1277, 1282 (5th Cir. 1992) (imputing liability under section 523(a)(2)(A),following Strang v. Bradner and prior lower court decisions); Impulsora Del Territorio Sur v.Cecchini, 780 F.2d 1440 (9th Cir.1986) (imputing knowledge and intent of blameworthypartner toinnocent debtor-partner on account of partnership law under section 523(a)(6)); Moore v. Gill, 181B.R. 666 (Bankr. N.D. Ga. 1995); Eppard v. Sestito, 136 B.R. 602 (Bankr. D. Mass.1992) (exceptingfrom discharge under section 523(a)(2)(A) debt where misrepresentation was made by the debtor'spartner); Lail v. Weaver, 174 B.R. 85 (Bankr. E.D. Tenn.1994) (under Tennessee law, falserepresentation of joint venturers should be imputed to debtor); Oetker v. Bullington, 167 B.R. 157(Bankr. W.D. Mo. 1994) (nondischargeability for section 523(a)(6) can be based on imputed intentfrom other partners).Return to text

⁵⁸⁴See Recommendation 2.3.25 on the vicarious liability of partners.Return to text

⁵⁸⁵See, e.g., Lawrence Ponoroff, Vicarious Thrills: The Case for Application of AgencyRules in Bankruptcy Dischargeability Litigation, 70 TUL. L. REV. 2515 (1996).Return to text

⁵⁸⁶ 11 U.S.C. § 523(a)(3) (1994). Judd v. Wolfe, 78 F.3d 110 (3rd Cir. 1996) (debtor losesthe benefit of 60 day time bar to nondischargeability actions, but provision does not provideindependent basis for nondischargeability); cf. Faden v. Insurance Company of North America, 96F.3d 792 (5th Cir. 1996) (failure to schedule debt provides independent basis for excepting obligationfrom discharge, but debtor should be allowed to amend schedules to add and discharge debt, absentbad faith or prejudice).Return to text

⁵⁸⁷Complaints objecting to a Chapter 7 debtor's discharge must be filed no later than 60days after the first date set for the section 341 meeting. FED. R. BANKR. P. 4004(a) (1994). Lack ofnotice does not provide an exception, under current law, from the deadline to file an objection todischarge. Id. Return to text

⁵⁸⁸FED. R. BANKR. P. 4004(b) (1994).Return to text

⁵⁸⁹11 U.S.C. § 727(e) (1994).Return to text

⁵⁹⁰See In re Yonikus, 974 F.2d 901, 904 (7th Cir. 1992) (affirming revocation of dischargeunder 11 U.S.C. S 727(d)(2) because "[d]ebtors have an absolute duty to report whatever intereststhey hold in property.").Return to text

⁵⁹¹"The trustee, a creditor, or the United States trustee may object to the granting of adischarge under subsection (a) of this section." 11 U.S.C. § 727(c)(1) (1994). Return to text

⁵⁹²But see 18 U.S.C. § 152 (criminalizing concealment of assets, false oaths and claims,and bribery).Return to text

⁵⁹³In re Lindsey 208 B.R. 169 (Bankr. E.D. Ark. 1997), citing In re Taylor, 190 B.R. 413,416 (Bankr. D. Colo.1995) and Hage v. Joseph (In re Joseph), 121 B.R. 679, 682 (Bankr. N.D.N.Y.1990). Return to text

⁵⁹⁴In re Smith, 207 B.R. 177, 178 (Bankr. N.D. Ind. 1997) (regardless of lack of objectionsof other parties, if successful prosecution of section 727 proceeding will benefit entire creditor body, action may not be settled in return for private benefit). Return to text

⁵⁹⁵FED. R. BANKR. P. 7041 (1995).Return to text

⁵⁹⁶FED. R. BANKR. P. 7041, Advisory Committee Note (1983). Return to text

⁵⁹⁷In re Smith, 207 B.R. 177, 179 (Bankr. N.D. Ind. 1997).Return to text

⁵⁹⁸In re Moore, 50 B.R. 661 (Bankr. E.D. Tenn.1985). Return to text

⁵⁹⁹See In re Lindsey, 208 B.R. 169 (Bankr. E.D. Ark. 1997); In re Nicolosi, 86 B.R. 882,888 (Bankr. W.D. La. 1988) (questioning whether "there can ever be a compromise of an objectionto discharge that would involve receipt of compensation or remuneration by a creditor").Return to text

⁶⁰⁰In re Mavrode, 205 B.R. 716, 719 (Bankr. D.N.J. 1997) (citing "majority view" thatsettlements of section 727 complaints are not prohibited per se, but should be settled in limitedcirc*mstances where there is no impropriety and there is no harm to other creditors).Return to text