§ 160.6     Exceptions to Hardship Discharge before BAPCPA
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 160.6, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

Discharge before completion of payments under the plan is more narrow than the discharge after all payments.1 A hardship discharge relieves the debtor of only “unsecured debts provided for by the plan or disallowed under section 502.”2 Secured debts are not discharged. In addition, hardship discharge does not discharge debts described in any of the subsections of § 523(a).3

[2]

For example, hardship discharge under § 1328(b) does not discharge a Chapter 13 debtor from taxes entitled to priority under § 507(a)(8) because such taxes are excepted from discharge by § 523(a)(1)(A).4 Debts for fraud, misrepresentation, willful and malicious misconduct and defalcation in a fiduciary capacity—the so-called fraud exceptions to discharge in § 523(a)(2), (4) and (6)—are nondischargeable before completion of payments.5 Long-term debts provided for under § 1322(b)(5)6 are not discharged. A hardship discharge will not be much help to a debtor whose plan has not yet paid secured claims.7

[3]

Except as just stated, unsecured debts provided for by the plan or disallowed under § 502 are dischargeable at hardship discharge under § 1328(c). These are essentially the same words used in § 1328(a) to describe the discharge of debts at the completion of payments under the plan;8 courts can reasonably look to § 1328(a) cases for guidance when the debtor seeks to discharge unsecured debt before the completion of payments under the plan under § 1328(c).

[4]

Congress inadvertently created some uncertainty about the hardship discharge of criminal restitution when it amended the Code in 1990. As explained above,9 in 1986, in Kelly v. Robinson,10 the Supreme Court held that criminal restitution was a nondischargeable debt in a Chapter 7 case under § 523(a)(7). Four years later, in Pennsylvania Department of Public Welfare v. Davenport,11 the Supreme Court held that criminal restitution was a dischargeable debt in a Chapter 13 case after completion of all payments. Congress responded immediately by amending § 1328(a) to except from discharge after completion of all payments restitution included in a sentence on the debtor’s conviction of a crime.12 Congress did not add an exception for restitution to § 1328(c), which lists the exceptions to hardship discharge. There are canons of statutory construction to support the argument that restitution is dischargeable in a Chapter 13 case when the debtor seeks a discharge in advance of the completion of payments under the plan and nondischargeable when the debtor completes payment under the plan. This could not have been intended by Congress. Historically, the hardship discharge has been more restrictive than the discharge at completion of all payments under a plan.

[5]

Section 1328(c) does contain an exception to the hardship discharge for any debt “of a kind specified in § 523(a) of this title.”13 Restitution is not specifically identified in § 523(a), but in Kelly, the Supreme Court found restitution nondischargeable somewhere in § 523(a)(7). But for the Supreme Court’s later decision in Davenport, the cross-reference to § 523(a) in § 1328(c)(2) would comfortably include an exception to hardship discharge for restitution consistent with Kelly. However, Davenport renders Kelly questionable authority for this outcome in a Chapter 13 case. Justice Marshall (somewhat inaccurately?) stated in Davenport: “The exception to discharge relied on in Kelly [§ 523(a)(7)] does not extend to Chapter 13.”14

[6]

It is likely that courts will confine Justice Marshall’s comments about § 523(a)(7) in Davenport to the full-payment discharge contemplated by the court. When the dischargeability of restitution is presented in the hardship discharge context, because all of the subsections of § 523(a) are exceptions to the hardship discharge in a Chapter 13 case, Kelly’s discovery of a restitution exception in § 523(a)(7) should control.15

[7]

Unfortunately, the dischargeability of restitution before the completion of payments in a Chapter 13 case does not end with analysis of § 523(a)(7) and the Supreme Court’s decisions in Kelly and Davenport. In the Violent Crime Control and Law Enforcement Act of 1994, Congress added a new exception to discharge in § 523(a)(13) “for any payment of an order of restitution issued under title 18, United States Code.”16 This new exception to discharge is effective in Chapter 13 cases filed after September 13, 1994, at hardship discharge under § 1328(c)(2).

[8]

It is odd that Congress enacted § 523(a)(13). Apparently, somebody in Washington was concerned that the Supreme Court’s interpretation of § 523(a)(7) in Kelly was not sufficient statutory coverage of the nondischargeability of restitution in bankruptcy. Are §§ 523(a)(7) and 523(a)(13) redundant or overlapping to the extent that each is an exception to discharge for federal criminal restitution? After the enactment of § 523(a)(13), is § 523(a)(7) properly confined to state restitution or, better, restitution other than under title 18 of the United States Code?

[9]

Both § 523(a)(7) and § 523(a)(13) apply to render restitution nondischargeable at hardship discharge in a Chapter 13 case. But notice that §§ 523(a)(7) and 523(a)(13) are not worded the same. There are conditions and “exceptions to the exception” in § 523(a)(7) that do not appear in § 523(a)(13). To be nondischargeable under § 523(a)(7), the debt for a fine, penalty or forfeiture must be “payable to and for the benefit of a governmental unit.”17 Also, the debt must not be “compensation for actual pecuniary loss.”18 When the Supreme Court read restitution into § 523(a)(7) in Kelly, it found that criminal restitution was “not compensation for actual pecuniary loss” and that restitution was “payable to and for the benefit of a governmental unit,” though it might actually be paid to the victim of a crime. On different facts, not every restitution order will meet the condition and the exception in § 523(a)(7).19 State laws with respect to victim compensation differ. Orders of state courts that look like restitution are even more diverse. It may be important to know whether the restitution to which a debtor is obligated will be measured against § 523(a)(7) or the (narrower?) class described in § 523(a)(13).

[10]

It is conceivable that courts will interpret the specific new exception to discharge for federal restitution in § 523(a)(13) as evidence that Congress intended that only restitution under title 18 is an exception to hardship discharge in Chapter 13 cases filed after September 13, 1994. This is not a likely construction because there is no mention in the Violent Crime Control and Law Enforcement Act of 1994 or in its legislative history that § 523(a)(13) would restrict the kinds of restitution that are nondischargeable in bankruptcy cases, nor is there any indication that Congress intended to overrule the Supreme Court’s extrapolation of § 523(a)(7) in Kelly.

[11]

The dischargeability of criminal fines at hardship discharge in a Chapter 13 case presents an even more convoluted picture. Section 523(a)(7) has always provided an exception to discharge for a “fine.” As discussed above,20 before the Supreme Court’s decisions in Kelly and Davenport, some courts had concluded that criminal fines were not debts and thus were not subject to discharge in bankruptcy. Kelly and Davenport recognized that criminal fines are debts and are excepted from discharge in an individual Chapter 7 case by § 523(a)(7). Because § 523(a)(7) also applies at hardship discharge in a Chapter 13 case under § 1328(c)(2), criminal fines are not dischargeable in a Chapter 13 case before the completion of payments under a plan.

[12]

In 1984, before the Supreme Court decided Kelly or Davenport, Congress acted to specifically except federal criminal fines from discharge in bankruptcy. The Comprehensive Crime Control Act of 1984 enacted 18 U.S.C. § 3613(f), which provides, “no discharge of debts pursuant to a bankruptcy proceeding shall render a lien under this section unenforceable or discharge liability to pay a fine.”21 This exception to discharge for federal criminal fines was effective on November 1, 1987, and applies in all Chapter 13 cases.

[13]

Congress acted again in 1994 by amending § 1328(a)(3) to except “criminal fines included in a sentence on the debtor’s conviction of a crime” from discharge upon completion of payments under a Chapter 13 plan.22 Although the 1994 amendments to § 1328(a)(3) are only applicable at the completion of payments, the use of different words in three different sections of federal law to describe the nondischargeability of criminal fines in Chapter 13 cases creates problems of statutory construction at hardship discharge.

[14]

Do § 523(a)(7) and 18 U.S.C. § 3613(f) overlap at hardship discharge in a Chapter 13 case? Is § 523(a)(7) limited to fines other than the federal criminal fines dealt with by 18 U.S.C. § 3613(f)? There are conditions and exceptions to the nondischargeability of fines in § 523(a)(7) that are not applicable to the nondischargeability of federal criminal fines under 18 U.S.C. § 3613(f).

[15]

And there are conditions and exceptions to the nondischargeability of criminal fines under § 523(a)(7) applicable at hardship discharge but not applicable at completion of payments under the plan. For example, does it make any sense that state criminal fines found to be “compensatory” might be dischargeable before the completion of payments under the plan because of §§ 1328(c)(2) and 523(a)(7), but nondischargeable if included in a sentence on the debtor’s conviction of a crime in a Chapter 13 case in which the debtor completes payments and is entitled to discharge under § 1328(a)(3)?

[16]

The Bankruptcy Reform Act of 1994 added several other new exceptions to discharge in § 523(a) that apply at hardship discharge in a Chapter 13 case. The 1994 Act added new exceptions for debt incurred to pay a tax to the United States that would be otherwise nondischargeable23 and for fees or assessments that become due after the petition with respect to condominium or cooperative housing interests of the debtor.24

[17]

One new exception was aimed at § 523(a) but missed its mark. The 1994 Act created an exception to discharge for debts incurred “in the course of a divorce or separation or in connection with a separation agreement, divorce decree . . . ,” other than a debt for alimony, maintenance or support described in § 523(a)(5).25 This new exception is located in the Code by the 1994 Act as follows: “(e) Exception to Discharge—Section 523 of title 11, United States Code, as amended by section 221, is amended by adding at the end the following: (15) . . . .”26 It can be speculated that Congress intended to add this new exception to discharge to § 523(a). However, the description in the statute is otherwise—this new exception to discharge was appended to the end of § 523.

[18]

The significance of this “mistake” is not lost on Chapter 13 practitioners. Before the completion of payments under a Chapter 13 plan, § 1328(c) describes the exceptions to discharge to include any debt “of a kind specified in section 523(a) of this title.”27 The new exception for debts incurred in the course of a divorce or separation landed in the wrong place to be an exception to hardship discharge under § 1328(c)(2). Will the courts correct the poor marksmanship? In a Historical and Statutory Note at the end of § 523 in editions of the U.S. Code after 1994, the codifiers have placed this new exception to discharge in § 523(a)(15) based on “probable intent of Congress.” If the courts agree with the codifiers and relocate § 523(15) as § 523[(a)](15), the debt described in this new section will be an exception to hardship discharge in Chapter 13 cases filed after October 22, 1994.

[19]

The 1994 Act also amended § 523(c) to identify new § 523[(a)](15) as an exception to discharge that must be timely raised and litigated in the bankruptcy court else it is lost.28 Section 523[(a)](15) should be treated the same as the “fraud” exceptions to discharge in § 523(a)(2), (4) and (6)—a complaint objecting to discharge must be filed at hardship discharge in a Chapter 13 case within the time fixed by Bankruptcy Rule 4007(d).29 If a timely complaint under § 523[(a)](15) is not filed, the new exception is lost and the debt is dischargeable.


 

1  See § 157.1  Broadest Discharge Available and § 157.2  BAPCPA Shrank the Discharge.

 

2  11 U.S.C. § 1328(c) (emphasis added).

 

3  11 U.S.C. § 1328(c)(2). See Belk Ctr., Inc. v. Smith, 50 B.R. 573 (Bankr. M.D.N.C. 1985); In re Smith, 8 B.R. 543 (Bankr. D. Utah 1981); Overland Park Dodge, Inc. v. Graff, 7 B.R. 426 (Bankr. D. Kan. 1980).

 

4  Anderson v. IRS (In re Anderson), 228 B.R. 844, 847 (Bankr. W.D. Va. 1998) (Hardship discharge in prior Chapter 13 case did not discharge claim for § 941 withholding taxes notwithstanding that IRS failed to file a proof of claim. “The clear and unambiguous language of § 507(a)(8)(C) made applicable to a discharge received under § 1328(b) through § 523(a), denies discharge of the Plaintiff’s liability for 941 withholding taxes in this case.” The IRS’s failure to file a proof of claim might result in discharge of the § 941 taxes if the debtor’s discharge was a full-payment discharge under § 1328(a); but “[s]ection 1328(c)(2) limits the scope of the Plaintiff’s discharge and specifically captures the indebtedness which IRS seeks to collect in this case.”); Putnam v. United States, 131 B.R. 52 (Bankr. W.D. Va. 1991).

 

5  See, e.g., Western Sur. Co. v. Dauterman (In re Dauterman), 156 B.R. 976 (Bankr. N.D. Ohio 1993) (At hardship discharge under § 1328(b), debtors’ defalcation as co-guardians of an estate is an exception to discharge under § 523(a)(4). The amount that is nondischargeable is the entire amount of the creditor’s claim minus any payments received pursuant to the confirmed plan.).

 

6  See §§ 115.1 [ Curing Default, Waiving Default, Maintaining Payments and Combinations ] § 78.4  Curing Default, Waiving Default, Maintaining Payments and Combinations, 129.1 [ Overview: General Rules for Saving Debtor’s Home ] § 81.1  Overview: General Rules for Saving Debtor’s Home, 155.2 [ Long-Term Debts ] § 88.9  Long-Term Debts, 171.1 [ Curing Default and Maintaining Payments on Unsecured Debt ] § 101.4  Curing Default and Maintaining Payments on Unsecured Debt and 351.1 [ Long-Term Debts ] § 158.7  Long-Term Debts.

 

7  See In re Driscoll, 57 B.R. 322 (Bankr. W.D. Wis. 1986).

 

8  See §§ 344.1 [ Broadest Discharge Available ] § 157.1  Broadest Discharge Available and 349.1 [ Claims Not Provided for by the Plan or Disallowed under § 502 ] § 158.5  Claims Not Provided for by the Plan or Disallowed under § 502.

 

9  See § 348.1 [ Criminal Restitution and Criminal Fines ] § 158.4  Criminal Restitution and Criminal Fines.

 

10  479 U.S. 36, 107 S. Ct. 353, 93 L. Ed. 2d 216 (1986).

 

11  495 U.S. 552, 110 S. Ct. 2126, 109 L. Ed. 2d 588 (1990).

 

12  See Pub. L. No. 101-581, § 3, 104 Stat. 2865 (Nov. 15, 1990), reenacted as Pub. L. No. 101-647, § 3103, 104 Stat. 4789, 4916 (Nov. 29, 1990), discussed in § 348.1 [ Criminal Restitution and Criminal Fines ] § 158.4  Criminal Restitution and Criminal Fines.

 

13  11 U.S.C. § 1328(c)(2).

 

14  495 U.S. at 555.

 

15  See Travelers Ins. Co. v. Barth (In re Barth), 211 B.R. 945, 950–51 (Bankr. D. Kan. 1997) (State-imposed criminal restitution as a condition for probation is an exception to hardship discharge. “By referring to all of § 523(a), section 1328(c)(2) makes § 523(a)(7) an operative exception to hardship discharges . . . . The proper focus is § 1328(c) and whether the doctrine of Kelly v. Robinson, 479 U.S. 36 [107 S. Ct. 353, 93 L. Ed. 2d 216 (1986),] . . . applies to this case through that section. . . . The essence of the Court’s holding is that under 11 U.S.C. § 523(a)(7), restitution is a fine or penalty payable to and for the benefit of a governmental unit that is excepted from discharge. . . . [T]his Court concludes the payments required by the restitution order imposed in the state court criminal prosecution are not discharged by the hardship discharge.”).

 

16  11 U.S.C. § 523(a)(13), as amended by Violent Crime Control and Law Enforcement Act of 1994, Pub. L. No. 103-322, § 320934, 108 Stat. 1796, 2135 (1994).

 

17  11 U.S.C. § 523(a)(7).

 

18  11 U.S.C. § 523(a)(7).

 

19  See, e.g., In re Towers, 162 F.3d 952 (7th Cir. 1998) (Restitution order under Illinois Consumer Fraud and Deceptive Business Practices Act is “payable to” but not “for the benefit of” the state and thus is dischargeable under § 523(a)(7).).

 

20  See § 348.1 [ Criminal Restitution and Criminal Fines ] § 158.4  Criminal Restitution and Criminal Fines.

 

21  18 U.S.C. § 3613(f), as enacted by Comprehensive Crime Control Act of 1984, Pub. L. No. 98-473, 98 Stat. 1837, 2005 (1984).

 

22  11 U.S.C. § 1328(a)(3), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 302, 108 Stat. 4106 (1994). See § 348.1 [ Criminal Restitution and Criminal Fines ] § 158.4  Criminal Restitution and Criminal Fines.

 

23  11 U.S.C. § 523(a)(14), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 221, 108 Stat. 4106 (1994).

 

24  11 U.S.C. § 523(a)(16), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 309, 108 Stat. 4106 (1994).

 

25  Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 304(e), 108 Stat. 4106 (1994).

 

26  Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 304(e), 108 Stat. 4106 (1994).

 

27  11 U.S.C. § 1328(c)(2) (emphasis added).

 

28  See 11 U.S.C. § 523(c)(1), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 302(e)(2), 108 Stat. 4106 (1994).

 

29  See § 343.1 [ Timing and Procedure for Discharge and Objecting to Discharge ] § 156.1  Timing and Procedure for Discharge and Objecting to Discharge.